Smith & Nephew (LON:SN.) cover image
172 Reads (3 mins read)

How will the Smith & Nephew PLC (LON:SN.) share price react to Osiris acquisition news?

12th Mar '19 by Ben Hobson

Smith & Nephew (LON:SN.) has announced plans to buy US firm Osiris Therapeutics Inc in a $660 million deal. The move follows reports in February that the British medical devices group was in talks to buy another US firm, NuVasive in a potential $3 billion move.

Last month Smith & Nephew reported flat full year figures for 2018 but said that new acquisitions were a key part of a five-pronged value-creation strategy over the medium term. Osiris is expected to give it a greater foothold in the regenerative medicine market.

For investors, the question now is how Smith & Nephew's share price will respond.

Finding stocks that can break-out and move higher on news updates is a tactic used by some of the world’s most successful traders. But it’s not a black-box strategy…

Indeed, knowing the factors that drive relative strength in share prices can help you find profitable momentum trades, too. Let's look at Smith & Nephew (LON:SN.) as an example of how this can potentially work...


How has the Smith & Nephew (LON:SN.) share price performed?

Smith & Nephew is a conservative, large cap in the Medical Equipment, Supplies & Distribution industry and it has a market cap of £12,791m.

Over the past year, the Smith & Nephew share price has risen by 9.84%, which sounds pretty good.

But it’s important to put this in context and look at the market trend. After all, in a rising market where prices are up across the board, that gain might not be as remarkable as it seems.

As it turns out, the FTSE All-Share index actually fell over the past year, which means that stock prices fell on average over that period. So Smith & Nephew has actually done better than it seems. Its shares have a 1-year relative strength of 12.5%.

Why relative strength really matters

Relative strength is a crucial tool in the armoury of technical traders and investors. It’s an instant measure of how a stock has performed in comparison with a benchmark.

And while there are no certainties about which way a stock will move next, research shows that price trends often persist.

Studies by Narasimhan Jegadeesh and Sheridan Titman, who are leading experts on momentum, show that stocks with the strongest price strength tend to keep up the pace for anywhere up to one year.

But what causes this?

The answer is that investor behaviour plays a big role. Academics point to two key drivers:

  • Under-reaction - prices are slow to move up because investors are hesitant to bid prices higher in stocks that have already been on a strong run.
  • Delayed over-reaction - investors chasing rising prices attract the attention of other investors, who follow them into those trades, pushing prices higher and higher.

So the answer is that momentum in stocks with strong relative strength is at least partly caused by a virtuous circle of human emotion. Investors have to constantly re-price these improving shares in their own minds.

It won’t always happen - and it might take some time - but when momentum takes over, it can push prices higher and higher.

Next steps

Smith & Nephew is currently among the stocks with the strongest six-month and one-year relative price strength in the market. A look at its StockReport could offer more insight into what’s driving the momentum in its share price - and whether that might continue.

To find more stocks like Smith & Nephew, you'll need to equip yourself with professional-grade data and screening tools. This kind of information has traditionally been closely guarded by professional fund managers. But our team of financial analysts have carefully constructed this screen - Stockopedia’s Price Momentum - which gives you everything you need. So why not come and take a look?

Share this article
As per our Terms of Use, Stockopedia is a financial news & data site, discussion forum and content aggregator. Our site should be used for educational & informational purposes only. We do not provide investment advice, recommendations or views as to whether an investment or strategy is suited to the investment needs of a specific individual. You should make your own decisions and seek independent professional advice before doing so. Remember: Shares can go down as well as up. Past performance is not a guide to future performance & investors may not get back the amount invested.
Share Price
Change Today
Smith & Nephew ( )

Stockopedia is here to help individual investors beat the markets by being the very best in stock analysis, research & community. Take a 30 day free trial of our extensive multi-award winning service and find out why more than ten thousand global investors can't live without it.

© Stockopedia 2020, Refinitiv, Share Data Services.
This site cannot substitute for professional investment advice or independent factual verification. To use it, you must accept our Terms of Use, Privacy and Disclaimer policies.