3 breakout sectors for momentum investors

Thursday, Nov 01 2012 by
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3 breakout sectors for momentum investors

London markets have enjoyed a rocky but undeniable mini bull run since early June, with the FTSE 100 now a good 600 points ahead of where it was five months ago. While many investors are understandably wary of reading too much into short term market movements like these, it's still worth tracking which companies and sectors have been benefitting from the advance. 

Tracking individual companies that are displaying strong relative price strength in the market and perhaps even trading at (or close to) their 52 week highs has been shown to be a useful buy or sell indicator. The momentum concept was originally observed in a 1993 paper by Jegadeesh and Titman, and you can read more about the phenomenon here. In recent weeks we have looked at various shares that are enjoying strong price strength, including housebuilders, oil companies and bargain Piotroski stocks and why they could still have further to run. 

Sector momentum rocks 

While it's worth monitoring which stocks that are racing ahead of the pack, a powerful twist on the concept of momentum (and arguably an even  more successful trading strategy) is to look at which sectors are leading the momentum charge. This was the focus of an influential 1999 study by Moskowitz and Grinblatt, which found that industry momentum investment strategies, which buy stocks from past winning industries and sell stocks from past losing industries, can be highly profitable. Moreover, they found that industry momentum almost always subsumes individual stock momentum – meaning that once you control for industry momentum, regular stock momentum is much less important. 

It was a similar story in a 2011 study by Hong, Jordan and Liu, which found that a trading strategy using the 52-week high effect (where stocks at or near their 1-year price highs often go on to trade higher) was considerably enhanced by focusing on sectors rather than individual stocks. 

So how can investors use these findings in practice? At Stockopedia we track the 52 week high screen and among the most interesting patterns that emerges from the 50-strong universe of companies are the hot sectors on the move. Not only does this screen give you a feel for the industries that are in favour among investors but the stock breakdown reveals the types of companies that are leading the pack in each one. Right now, consumer cyclicals, financials and industrials make up the lion’s share of qualifying stocks. 

1. Consumer cyclicals 

Despite their vulnerability to economic conditions and consumer confidence, consumer cyclicals such as pub groups and retailers have performed robustly this year. Commentators on both sides of the Atlantic have pointed to decent growth rates and reasonably strong dividend yields as reasons why investors have remained keen on these types of stocks. 

Among the big retailers, Mothercare (LON:MTC), Marks and Spencer (LON:MKS) and Next (LON:NXT) all currently qualify for the 52-week high screen. Mothercare is the best performer, helped in no small part by an upbeat trading update in October, which signalled that efforts to breathe life into sales could be paying off. At the smaller end, PR group Next Fifteen Communications (LON:NFC) had been among the steepest risers but that performance was slashed on news of a “complex fraud” in its Bite North America business. Elsewhere, newspaper distributor Smiths (LON:SMIN) and restaurant operator Restaurant (LON:RTN) also make the list. 

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2. Financials 

Banks were blitzed in the 2008/09 economic meltdown and most have yet to make up the lost ground. Despite reputations and share prices lying in tatters, financial stocks have nevertheless been on the move of late. Big banks are largely absent from the 52 week high screen, with better performances recorded by some of the smaller players. Arbuthnot Banking (LON:ARBB) has been on a strong run since the turn of the year, when it opened at 338p. It currently trades at 646p as investor have continued to warm to an ongoing overhaul of its operations, including a stronger emphasis on its retail banking business. Consumer credit and motor finance business S and U (LON:SUS) appears on the list, as do investment banking firms Numis (LON:NUM) and Brewin Dolphin Holdings (LON:BRW). 

3. Industrials 

Economic uncertainty has had a mixed impact on London listed industrials groups. Weak activity and uncertainty surrounding the Euro Zone haven’t helped, but the companies on the 52 week high screen are obviously doing well despite this. The largest of the industrials to make it on to the 52 week high screen is precision engineering company Renishaw (LON:RSW), which has seen its shares jump by 327p to 1770p in five months. Elsewhere, a handful of other FTSE 250 stocks also appear, including Speedy Hire (LON:SDY) and De La Rue (LON:DLAR), plus the notable AIM-quoted performer Judges Scientific (LON:JDG). In the case of scientific instrument maker Judges, the shares have actually been on a steady upward trend since mid-2009. A couple of acquisitions and another year of record results have provided extra impetus, driving the shares from 656p to 862p since May. 

What does it all mean? 

So how do these findings tally with wider thinking in the market? Matt Hudson, whose Cazenove UK Equity Income fund is among the top performing institutional growth funds so far in 2012 is heavily focused on consumer cyclicals, financials and industrials. In his latest note to investors, Hudson said financials and consumer cyclicals remained the core focus for his new investments and while industrials looked vulnerable in the short term, the UK market overall still offers “a range of attractively valued opportunities and with well covered yields and with real growth”. 

Given the volatility in the market, anyone watching the 52 week high screen will see quite a lot of movement of stocks in and out on a daily basis. Amidst that flurry of names, it's well worth keeping a close eye on the sectors which crop up again and again  – most recently, that's been consumer cyclicals, financials and industrials. How is your portfolio positioned with respect to those sectors? The research suggests that playing the momentum effect is as much about sector weighting as anything else. 

 


Filed Under: Momentum Investing,
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Mothercare plc is a retailer, franchisor and wholesaler of products for mothers-to-be, babies and children under the Mothercare and Early Learning Centre brands. It has two segments: UK and the International business. The UK consists of the United Kingdom store and wholesale operations, catalogue and Web sales. The International business consists of franchise and wholesale revenues outside the United Kingdom. It offers products for mothers-to-be, babies and children up to the age of eight. It offers maternity and children’s clothing, furniture and home furnishings, bedding, feeding, bathing, travel equipment and toys. It sells its products through multi-channel retail and wholesale operations in the United Kingdom and through franchise operations across its international markets in the Middle East and Africa, Europe, Asia and Latin America. more »

Share Price (Full)
172p
Change
-4.8  -2.7%
P/E (fwd)
19.9
Yield (fwd)
n/a
Mkt Cap (£m)
290.3

Marks and Spencer Group plc is a United Kingdom retailer. The Company is the holding company of the Marks & Spencer Group of companies. Marks & Spencer is the United Kingdom’s clothing retailer with 731 stores across the country. The Company sells food, homeware and clothing and womenswear, lingerie and menswear. It offers clothing and home products, as well as foods, sourced from around 2,000 suppliers globally. As of March 31, 2012, the Company’s products were sold through 731 United Kingdom stores and 387 internationally. It has 387 stores in 43 territories across Europe, the Middle East and Asia. The Company has over 703 stores across the United Kingdom in high streets and retail parks, as well as stations, airports and other locations ranging from out-of-town and flagship stores of over 100,000 square feet, to Simply Food stores of around 7,000 square feet. more »

Share Price (Full)
476p
Change
13.5  2.9%
P/E (fwd)
13.6
Yield (fwd)
3.9
Mkt Cap (£m)
7,784

Next plc is a United Kingdom-based retailer offering clothing, footwear and accessories. The Company operates its business through four operating segments: NEXT Retail, a chain of more than 500 stores in the United Kingdom and Eire; NEXT Directory, a home shopping catalogue; NEXT International Retail, with almost 200 mainly franchised stores globally, and NEXT Sourcing, which is engaged in the design, sourcing, buying, merchandising and quality control of NEXT products. Lipsy designs and sells its own branded younger women's fashion products. more »

Share Price (Full)
6495p
Change
-65.0  -1.0%
P/E (fwd)
15.0
Yield (fwd)
4.6
Mkt Cap (£m)
9,929



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About Ben Hobson

Ben Hobson

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Strategies Editor at Stockopedia. Writer, Editor & Investment Strategies Analysis. Test driving and telling the world about the awesome stock market investing tools and resources at Stockopedia. Helping Stockopedia subscribers take control, invest with confidence, beat the market and sleep soundly at night. more »



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