Finding stocks that have both positive share price momentum and improving financial health trends is a great way of finding pockets of quality and momentum in the stock market. A simple and effective starting point in this search might be to set up a screen that identifies high Piotroski F-Score stocks with positive one-year relative strengths. If we set the screen to only show F-Scores of 7 out of 9 or higher and an RS 1y of 0% or higher, we get a host of promising candidates to investigate.
I want to see if Frontier Developments (LON:FDEV) qualifies for this screen, but first a brief explanation of the theory that backs this kind of screen up.
Frontier Developments’s F-Score: identifying fundamental momentum
Perhaps the biggest appeal of the F-Score is that it captures a stock’s fundamental momentum in a single number that it is easily comparable across companies.
The Score itself is a simple but effective checklist: nine rules that a company either passes or fails, making for a score of between zero and nine. These checks are grouped under three headings: profitability, leverage and liquidity, and operating efficiency. Six of them record year-on-year changes in various financial health measures, meaning that, compared to other measures, the F-Score tells us more about the direction in which a company’s financial state is moving.
Frontier Developments passes this test, with an F-Score of 8.
Frontier Developments’s one-year relative strength: measuring technical momentum
Relative strength gives an instant measure of how a stock has performed in comparison with a benchmark. Anything above 0 means that a company’s share price has outperformed the benchmark over a certain time frame.
Using Stockopedia’s financial data, we see that Frontier Developments has a one-year relative strength of 3.55%. This means Frontier Developments also passes this screen’s technical momentum check.
Frontier Developments displays some promising early signs of quality and momentum, but we can do more research into these factors. If you head over to the group’s StockReport, you can use the Quality Rank and Momentum Rank to see how Frontier Developments compares against every other company in the market.
Studies indicate that combining factors such as Value, Quality and Momentum is a more effective way of outperforming the market over longer time frames. That’s why we have constructed our StockReports to give an instant impression of how well exposed Frontier Developments (LON:FDEV) is to these three factors. We go into greater detail on factor investing in this video.
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