Relative Strength Alert: Will the Goodwin (LON:GDWN) share price keep rising?

Goodwin (LON:GDWN) is an adventurous small-cap stock in the Industrial Machinery & Equipment industry. It has a market cap of £208.8m.

What makes this engineering company interesting right now is the chairman's bullish tone in its half-year update, which talked of a growing order backlog and the potential for 'substantial orders that will allow the Group activity level to take a step forward.'

That said, the group's shares have nearly doubled to 2870p since hitting multi-year lows in 2017 and the Goodwin share price now trades on a forecast P/E ratio of 21.8x. So are they expensive despite improving prospects?

Has the Goodwin (LON:GDWN) share price outperformed?

Over the past year, the Goodwin share price has risen by 69.6%, 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 went up slightly over the past year, meaning Goodwin's shares have a 1-year relative strength of 66.6%.

Why relative strength really matters

Relative strength is a crucial input to many stock screens, and 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. This is largely down to two key behavioural factors:

• 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. 

What does this mean for potential investors?

Goodwin 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 Goodwin that you can find out about here.