Relative Strength Alert: can the Whitbread (LON:WTB) share price keep its good run going?

Whitbread (LON:WTB) has been busy buying back its own shares with the proceeds from its sale of UK success story Costa to Coca-Cola. Looking at its one-year share price chart, it's fair to say that this has so far proven to be a popular strategy:

But with a Whitbread (LON:WTB) forecast P/E ratio of more than 20 times versus a compound annual growth rate in earnings per share of 7.4% over the past five years, can this strong share price performance continue? 

The strong relative strength of Whitbread's (LON:WTB) share price

Over the past year, the Whitbread share price has risen by 24.9%. This return is even better when judged against the tepid performance of the FTSE All-Share index, which has actually fallen over the past year, which means that stock prices fell on average over that period. This means that the hospitality company's shares have a 1-year relative strength of 25.6%.

But can this run continue?

Why relative strength really matters

There is a reason why relative strength is such a crucial tool for so many technical traders and investors: research has found that price trends often persist.

Leading momentum experts Narasimhan Jegadeesh and Sheridan Titman concluded from their own studies that stocks with the strongest price strength tend to keep up the pace for anywhere up to one year.

This phenomenon is largely down to investor behavior. 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. 

With regards to Whitbread, we know that the share buyback programme is worth some £2.5bn and the group has so far bought back £224m of stock, suggesting this positive share price driver is set to continue for some time yet.

What does this mean for potential investors?

Whitbread is currently among the stocks with the strongest six-month and one-year relative price strength in the market. But momentum on its own is no guarantee of future returns. 

To get a better idea about whether this momentum will continue, it's worth doing some investigation yourself. Indeed, we've identified some areas of concern with Whitbread that you can find out about here.