Will the Croda International (LON:CRDA) share price keep going higher?

Croda International (LON:CRDA) recently reported its full-year results for 2018 - and, with revenues up 1% to £1.39B and net income before extraordinary items increased 4% to £238.5M, the question is now how will the market respond to another year of growth?

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. I’m going to use Croda International as an example of how this can work.

How has the Croda International (LON:CRDA) share price performed?

Croda International is a conservative, large cap in the Specialty Chemicals industry and it has a market cap of £6,519m.

Over the past year, the Croda International share price has risen by 11.8%, 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 is up slightly over the past year, after a tough second half of 2018. So Croda International has actually done better than it seems. Its shares have a 1-year relative strength of 10.3%.

Read on to find out what the evidence shows may happen next...

Why relative strength really matters

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. They hypothesised that this is down to two behavioural biases:

• 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?

Croda International 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 Croda International that you can find out about here.