Investing strategies that chase share price momentum have performed exceptionally well in the UK this year but some of them are doing even better in Europe. While it’s still early days to be drawing concrete conclusions from our recently-launched European screens, strategies that take a lead from rising prices are undoubtedly producing some excellent early returns. With a handful of refinements, we used one of these strategies as the starting point for finding UK and European stocks on the move but at prices that may be worth a closer look.
Momentum screens such as Earnings Upgrades, Earnings Surprises and Price Momentum all share the same investing concept which is that stocks that have recently risen in price or earnings expectations will often keep rising in the near term. Researchers believe this phenomenon is largely caused by investors being slow (or deliberately cautious) about bidding up share prices following good news. This so-called ‘anchoring’ effect is notably at work when it comes to companies that are trading close to their 52-week high share prices. For investors in these stocks, the 52-week high often becomes a psychological ceiling and even on good news, they (and the market) can take several months to ratchet up what they believe a share should really be worth. According to a study by George and Hwang, buying stocks that are at a 52-week high can be a highly profitable strategy.
In the UK, Stockopedia’s 52-Week High portfolio has produced an admirable 19.2% return in 2013 and over the past three months it’s up by an impressive 11.8%. But in Europe, the same strategy has delivered a stunning three-month gain of 21.9%, outpacing its FTSE Eurofirst 300 benchmark by 15.5%. Dig in to the drivers of that performance and you’ll find a couple of exceptional individual performances, including Swedish computer game developer Starbreeze (STAR), which has seen its price rise by 381% since it was bought in to the portfolio three months ago.
So what about the current crop of 52-week high momentum candidates? Well, for investors that like the concept but may be fearful about tackling a list of unfamiliar European names, there are some refinements that can be made to this screen to give some added comfort about the companies on offer and, crucially, whether they also retain attractive valuations. As we’ve written about before, blending value and momentum can be a hugely profitable tactic, so we ‘forked’ the 52-week high screen to make a couple of changes, including stripping out financial stocks and upping the market cap threshold to £50 million. We also added Stockopedia’s powerful valuation tool - ValueRank - which rates shares for cheapness based on six common value measures, scores them on each and then gives an overall composite rank of between 1 and 100 (you can read more about that here).
Based on these rules - and sorted for ValueRank - the top three companies on the list are all retailers, with Home Retail (LON:HOME) , the UK-quoted owner of Argos and Homebase, among them. French DIY and garden centre chain Mr Bricolage (MRB) tops the list with a ValueRank of 99 and a share price that’s just a shade off its 52-week high at €10.24. Net profits at Mr Bricolage fell by 36% to €11.3 million in 2012 and the first half of this year has also been weak as a result of difficult conditions in its home market. Even so, the shares seem to have responded to the company’s plans to roll out a web-to-store (or click-and-collect) service this year, as well as progress on restructuring its store base and cutting debt.
Another high scoring French retailer - albeit with a substantial foothold in the UK - is Damartex (ALDAR), which makes and sells clothing and homeware mainly for the senior market. The group’s UK head office in Yorkshire (and home of the Damart thermal underwear brand) employs around 580 people and this month paid £25 million for another UK retailer serving the age 50-plus market, Coopers of Stortford. At the same time the group announced a 10% improvement in net income last year to €13.2 million which, together with the new acquisition, helped to push its share price to a high of €21.1. In recent months brokers have warmed to the company’s outlook and upgraded their earnings forecasts for next year accordingly (see chart).
Elsewhere on the list is Finnish food company Atria (ATRAV), which last year sold €1.3 billion of processed meats, convenience foods and branded products to customers across the Nordic, Russian and Baltic regions. Shares in the company have risen by 16% to a near 52-week high of €8.15 since late July when it released interim results showing improving sales and operating profits this year. At the time it said that operating profits were expected to come in ahead of last year’s figure of €30.2 million. Like many of the top qualifying stocks on this screen, Atria’s momentum indicators are strong across the board, with its price strength outpacing the market for at least a year now (see chart). Nevertheless, with a ValueRank of 92, it still appears to be cheaply valued on our measures.
Finally, we’ve picked out Danish infrastructure engineering group Per Aarsleff (PAALB), which has seen a rise in its OMX Copenhagen-quoted shares of 60% to DKK 673 so far this year. Despite that, the company’s ValueRank of 92 suggests there could be more to explore here. Pre-tax profits came in at DKK 166 million (c.£18.7 million) last year and it recently said it was on course to hit DKK 180 million in 2013 (dropping from previous guidance of DKK 200m). The company boasts an impressive nine out of nine on the Piotroski F-Score of improving balance sheet strength, which on its own is a key indicator in the search for value shares with the potential to outperform. Brokers agree, with several EPS upgrades this year.
A heady mix of momentum and value
While momentum strategies have proved to be big winners this year - certainly in the UK and so it appears in Europe - the addition of a powerful value measure in the form of the ValueRank is a useful twist for investors mindful of simply chasing rising prices. Indeed, looking for cheap stocks that the market is waking up to is reminiscent of strategies such as Josef Lakonishok’s value and momentum approach, which itself has performed extremely well in 2013. While European companies require careful research by investors, the results we’re seeing from this blend of momentum and value suggest the work might be worth it. Subscribers can see the full results of the forked screen here.
To screen the market for value and momentum stocks in the UK and Europe or to create your own strategies using Stockopedia’s tools, why not take a free trial?
Filed Under: Momentum Investing,