Most fund managers will tell you they want to buy high-quality companies. After all, who wants a poorly run business with dismal prospects and a shrinking market share? But quality comes at a price and, for periods, the comfort of quality can be overvalued.
Quality is easily recognisable and measurable, using metrics such as a high return on equity (RoE) or a high return on invested capital (ROIC). This has led to it becoming a prized factor for many investors. It is not the whole story though.
A high-quality company can be a poor investment if expectations are too high, while a temporarily unloved company can become a strong investment if expectations are too low.
We believe the fund manager’s job is not simply to identify quality, but to judge when the market is mispricing it and when a special situation exists that could create a timely buying opportunity.
When quality isn’t enough
Take Rightmove, for example. The property portal has the highest RoE and ROIC in the FTSE 350 index. From this, you might infer it is a fantastic company.
Yet despite displaying all the hallmarks of quality, Rightmove’s share price has plummeted since the summer of 2025, settling close to where it sat a decade ago. Not such a fantastic investment, then.
But we think it could be, which is why we added Rightmove to our portfolio in May.
Rightmove’s recent share price weakness has multiple sources. In November 2025, the company announced plans to accelerate its investment in artificial intelligence (AI), to transform its app and search capabilities.
It has also allocated more resources to research and development. These investments led to an uncharacteristic reduction in short-term margin guidance.
Then in February 2026, many software-as-a-service (SaaS) stocks de-rated sharply due to fears that AI would disrupt their business models. Even though Rightmove is different in many ways to these stock market peers, it was not immune to the selling pressure.
And like several other businesses caught up in the ‘SaaS-pocalypse’, Rightmove had the problem of a high starting valuation. In August 2025, its shares traded above 25x one-year forward earnings, which was around their 10-year average. Today, they trade on 13.3x, a steep discount to history.
Despite its recent troubles, Rightmove has not lost any of its competitive advantages. Sellers want to be listed on Rightmove because that is where buyers are looking. Buyers visit the site because it is where all the properties for sale are listed. This virtuous circle, or network effect, enables Rightmove to dominate online traffic for estate agent property listings.
These dynamics give Rightmove considerable pricing power, allowing it to increase listing fees for estate agents every year. This helps to explain Rightmove’s high price-to-earnings (P/E) multiple for most of the past decade and why we are confident in its ability to recover.
The market’s concern is that AI could change how people search for homes. That may be true at the margin. But in our view, AI does not remove the attraction of having the deepest pool of property listings, estate-agent relationships and buyer traffic. If anything, better search tools could make Rightmove’s platform more useful, not less.
Different industry, same problem
Another ‘quality darling’, RELX, has been on a similar journey. Its price-to-earnings (P/E) halved in less than nine months before we bought it at a valuation of 15x in February 2026.
RELX provides data and information tools for insurance, scientific and legal professionals. The business-critical nature of its information has created high barriers to entry, allowing for consistent price growth, driven by new product development.
More recently, the threat of AI agents has brought RELX’s growth potential into question and challenged the terminal value of the business.
Yet RELX continues to deliver strong growth in revenue, profits and new sales. The business is improving its existing products and launching new ones at a faster pace.
We think future results will dispel fears over competition and new product launches, while AI integration should enhance revenue growth. We see considerable upside as a result and expect RELX’s shares to regain their previous P/E rating of more than 20x.
The life cycle of a special situation
In the long run, there is nothing wrong with buying quality companies. But you still have to be discerning. To build a more complete picture, we analyse other powerful factors such as growth, momentum and (especially) value.
Over time, valuations act like gravity on share prices. Higher valuations and lofty expectations tend to weigh them down eventually. And if the narrative changes, share prices can become vulnerable to a new perspective.
This is when the ‘special situations’ opportunities emerge. The life cycle of a special situation has three stages.
Rehabilitation comes first. This is the early stage of a turnaround, where an issue has been identified – often by a new management team – and a plan is made to fix it. This is the riskiest stage. We would initiate only a small position at this point.
Then the stock moves into the recovery phase, which is all about improving margins and taking out costs. We increase our position size when we see evidence the turnaround is working.
The final part of the life cycle is revitalisation, which involves reaping the benefits of all the hard work. By now, margins have improved and the share price has re-rated upwards as more investors recognise the company’s earnings potential.
We believe we are picking up Rightmove at the recovery stage. After a period of reinvestment, we expect margins to recover. If AI fears turn out to be unfounded, we will wait for a re-rating and then take profits, before recycling the capital into nascent opportunities.
Ultimately, our main argument against focusing on business quality alone is that it ignores an indisputable fact of investing – a good company only makes a good investment if you pay the right price for it.
Henry Flockhart is fund manager of Artemis UK Special Situations. The views expressed above should not be taken as investment advice.