Redde Northgate: further share price troubles ahead?

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 Redde Northgate (LON:REDD) as an example. The Company is engaged in the light commercial vehicle hire business in the United Kingdom, Ireland and Spain

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 Redde Northgate yields a pretty poor Momentum Rank of 12. This is a negative for Redde Northgate so care should be taken if you are considering buying into this stock.

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 Redde Northgate that you can find out about here.