Why Taiga Building Products could be well placed to recover from volatility

Research shows that quality and value are two powerful drivers of stock market profits. After the economic turmoil and  market volatility  we' ve seen in 2020, it' s possible that  these two factors could have an influence on the  Taiga Building Products  (TSE:TBL)  share price.

For contrarian investors looking for shares that are being overlooked by the market, quality and value are vital clues. Academic studies  show that good quality, cheaply priced shares can deliver outperformance on average over time.  So it' s no surprise that these rules are used by  some of the world' s most respected  investors - from  Joel Greenblatt  to  Warren Buffett.

The  Taiga Building Products share price  has moved by 17.9% over the past three months and it&rsquo s currently trading at 1.25. But what' s interesting about this share is its potential  exposure to those influential profit drivers of  high quality  and a  relatively cheap valuation.
 

Good quality stocks are loved by the market because they' re more likely to be solid, dependable businesses. Profitability is important, but so is the firm' s financial strength. A track record of improving finances is essential.

One of the quality metrics for  Taiga Building Products  is that it passes  8  of the  9  financial tests in the Piotroski F-Score. The  F-Score  is a world-class accounting-based checklist for finding stocks with an improving financial health trend. A good F-Score suggests that the company has strong signs of quality.

Fair price

While quality is important, no-one wants to overpay for a stock, so an appealing valuation is vital too. With a weaker economy, earnings forecasts are unclear right across the market. But there are some valuation measures that can help, and one of them is the Earnings Yield.

Earnings Yield  compares a company' s profit with its market valuation (worked out by dividing its operating profit by its enterprise value). It gives you a total value of the stock (including its cash and debt), which makes it easier to compare different stocks. As a percentage, the higher the Earnings Yield, the better value the share.

A rule of thumb for a reasonable Earnings Yield might be 5%, and the Earnings Yield for  Taiga Building Products  is currently 16.2%.

In summary, good quality and relatively cheap valuations are pointers to those stocks that are some of the most appealing to  contrarian value investors. It' s among these shares that genuine mis-pricing can be found. Once the market recognises that these quality firms are on sale, those prices often rebound.