For investors looking for UK growth shares with the wind in their sails, borrowing ideas from an American fund manager comparatively unknown on this side of the pond may seem strange. But check the recent performance of a Stockopedia strategy designed to mimic the style of renowned fund manager Richard Driehaus, and you’ll find some exceptional recent returns. His blend of earnings growth and share price momentum has hit a sweet spot in recent months and offers a potentially lucrative way to play the market and track down potential growth stars.
Driehaus is a ‘buy high, sell higher’ momentum master who matches small and mid-cap stocks with a track record for earnings growth and positive earnings ‘surprises’ with share prices that are already on the move. His fund firm Driehaus Capital Partners reportedly delivered compound annual returns of 30% during the 12 years after it was started in 1980 and that helped to earn him a place in Barron’s ‘All-Century’ team of the most influential fund managers of the 20th Century.
Companies with improving earnings growth rates are central to the Driehaus philosophy; he’s less concerned about high price-to-earnings ratios and balance sheet debt if sales and earnings look set to grow. Likewise, he’s relaxed about stocks where share prices have already begun to move, interpreting this ‘warming’ investor sentiment as a positive sign. You can read more about the specifics of the strategy here.
In many respects this combination of earnings growth and momentum is similar to the approach of another US investing legend, Bill O’Neill. Stockopedia’s model of O’Neill’s 9-point CAN SLIM strategy has actually outperformed Driehaus over the past year (40.3% versus 25.0%) but a surge by the Driehaus strategy over the past three months (up by 26.1%) is particularly eye-catching. It’s a return that has been been boosted by several strong individual stock performances from the likes of oilfield surveying company Thalassa Hldg (LON:THAL), food and engineering group Carrs Milling Industries (LON:CRM) and agricultural feed additives business Anpario (LON:ANP).
Digging deeper for growth and momentum
It’s worth noting that the Driehaus strategy pairs up two investing approaches that have been on fire in 2013. Momentum strategies have produced some exceptional returns since the start of the year while growth strategies - as we reported in our Q3 strategies update - emerged over the summer as strong performers. But investors interested in exploring these areas don’t necessarily need to rely on the thinking of one or two gurus for more ideas - although the performances are a useful benchmark. By using Stockopedia’s own StockRank screening recipes, it’s easily possible to rank the entire market for those stocks with the best combination of GrowthRank and MomentumRank characteristics.
In this case, we use the Mid-Cap Growth + Momentum Recipe, which tracks down stocks in the top 20% of the market for both categories with market caps of between £350 million to £2.5 billion. The screen ranks shares for ‘growth’ based on five forecast and historic measures, scores them on each and then gives an overall composite rank of between 1 and 100. The same goes for ‘momentum’, except here the ranking is based on price trends, forecast upgrades and earnings surprises. (you can read more about StockRanks here).
Among the stocks currently ranked highest on the list is AIM-quoted fund management group Polar Capital Holdings (LON:POLR), which last year saw assets under management grow by 42% to US$7.2bn and pre-tax profits rise by 59% to £15.3 million, beating consensus expectations (see chart). So far this year its shares have risen by 109% to 436p with brokers consistently upgrading their 2014 earnings forecasts. Elsewhere on the the list, industry giant Jupiter Fund Management (LON:JUP) is another asset manager scoring highly in the growth and momentum stakes.
Also achieving strong rankings is International Personal Finance (LON:IPF), a home credit business serving short term loans to customers across several countries in Eastern Europe as well as Mexico. With the exception of 2009, IPF has increased its EPS every year since 2007 and is forecast to do the same next year, with brokers once again upgrading their forecasts. The company is is currently implementing plans to speed up growth and expand geographically, with plans to begin operating in Lithuania (now underway) and Bulgaria this year. Shares in IPF have seen some exceptional momentum this year (see chart), rising by 63% to 609p.
Elsewhere, on the growth and momentum list is construction consultancy WS Atkins (LON:ATK), video search and advertising business Blinkx (LON:BLNX) and housebuilder Redrow (LON:RDW). With an impressive growth rank of 99/100, Redrow boasts among other items a compound annual growth rate in EPS over the past three years of 197%. Like other construction companies its shares have been buoyed this year (up 42% to 236p), helped in part by improving sentiment towards the sector and the stimulating effects of the government’s Help to Buy mortgage scheme for first time buyers.
More ways to find Growth stocks
In our analysis of top performing investing models over the summer it was clear the while momentum strategies were continuing to deliver some blistering returns, growth strategies were beginning to blossom in the current conditions. We could (or should) have predicted then that the growth-momentum combination that underpins Richard Driehaus’s strategy would soon shine, and so it is. But with so many metrics that can potentially point to a great growth stock, the use of our powerful StockRanks could be an ideal option for investors that want a wide range of tools at their disposal in the search for the next growth star.
As always, quantitative screening strategies offer a useful starting point, but it's always important to Do Your Own Research.
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