Metro Bank: could the share price drop lower?

Momentum is sticky and persists for longer than investors tend to anticipate. The downside of this is that stocks with recent negative momentum are likely to continue heading down. 

This holds true on average, although there are, of course, exceptions. Trends reverse from time to time, but more often they stay the same - hence the name.

The conservatism bias is the idea that people are slow to revise their expectations when presented with new information. That means that when the market finds a stock plumbing new lows or missing broker estimates it can sometimes undervalue this development. The rational investor can take advantage of this mispricing. Stockopedia’s Momentum Rank is a convenient way of summarising the momentum attributes of a stock - let’s use Metro Bank (LON:MTRO) as an example. Metro Bank is a deposit-taking and lending bank, focused on retail and small and medium size commercial customers.

How to spot Momentum opportunities

The Momentum Rank is inspired by the latest research into momentum from leading academics (including Jegadeesh and Titman, George and Hwang, and Seung-Chan Park) and is based on a composite of proven Price and Estimate Momentum metrics (you find out more here).

Each company in the market is ranked from 1 to 100 for each of these momentum ratios and a composite score is calculated as a weighted average of all valid values. Applying this to Metro Bank yields a pretty poor Momentum Rank of 4. This is a negative for Metro Bank, so care should be taken if you are considering buying into this stock. The low Momentum Rank is evident when viewing its share price performance for the past 2 years – but we factor in other variables when producing this score.

What does this mean for potential investors?

Some of the best quality stocks in the market have defensible models that can deliver high levels of shareholder returns over the long term. But there are no guarantees and it's important to do your own research. Indeed, we've identified some areas of concern with Metro Bank Holdings that you can find out about here.