How to avoid momentum traps in high profile growth stocks

Wednesday, Sep 20 2017 by
How to avoid momentum traps in high profile growth stocks

The long spell of strong momentum that swept a number of fast growing stocks to racy (and possibly stretched) valuations has eased off recently. Popular names that set the pace in the market have seen their prices slip back. Among them are companies like Hotel Chocolat, Purplebricks, Fevertree Drinks, Frontier Developments and Joules and even IQE to name a few. All this prompted our own Paul Scott this week to question whether the momentum trade was actually over.

Timing market trends is notoriously difficult, of course. What we’ve seen from prices could be the market blowing off steam, a change in trends or the start of a wider correction. But whatever it is, it’s likely that this momentum wobble in go-go growth stocks will be worrying some investors - especially those that have bought them recently.

So it’s worth taking a step back and exploring why some growth shares are so good at grabbing investor attention - and why that means it’s important to know what sort of investment profile they really have, and how it can change.

Resisting the temptation of high profile shares

Most investors get their ideas from a handful of sources. We’ve previously discussed the risks of some of them, such as internet bulletin boards and broker recommendations.

But arguably there’s a much broader behaviour-driven problem faced by investors when it comes to sifting through ideas. Essentially, there’s a risk of being attracted to buying shares that are high profile and in the news a lot.

Now that sounds terribly simplistic and it’s likely to be laughed off by a few readers ! But the evidence from research by some influential names in behavioural finance suggests that this is exactly what happens.

Back in 2007, Brad Barber and Terrance Odean wrote a paper on how individual investors tend to be net buyers of attention-grabbing shares. They classed these stocks as those that were in the news, experiencing abnormal trading volumes and experiencing extreme one-day returns.  By looking at trading data from brokerages, they showed that investors were often net buyers of shares on ‘high-attention’ days.

Barber and Odean blamed this behaviour on the fact that, faced with potentially thousands of stocks, the average investor automatically slims down the list to those that have caught their…

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As per our Terms of Use, Stockopedia is a financial news & data site, discussion forum and content aggregator. Our site should be used for educational & informational purposes only. We do not provide investment advice, recommendations or views as to whether an investment or strategy is suited to the investment needs of a specific individual. You should make your own decisions and seek independent professional advice before doing so. Remember: Shares can go down as well as up. Past performance is not a guide to future performance & investors may not get back the amount invested. ?>

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Purplebricks Group plc is a United Kingdom-based company engaged in the business of estate agency. The Company operates through the division of providing services relating to the sale of properties. The Company uses technology in the process of selling, buying or letting of properties. The Company operates in the United Kingdom. more »

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Joules Group PLC is engaged in the design and sale of lifestyle clothing, related accessories and a homeware range, through the multi-channel business structure embracing retail stores, e-commerce, county shows and events and wholesale. The Company has three segments: Retail, Wholesale and Other. The Retail segment includes sales and costs relevant to Stores, E-commerce, Shows and Franchises. The Wholesale segment includes sales and costs relevant to the sale of products to other retail businesses or distributors for onward sale to their customer. The Other segment includes income from licensing. The Company's products include womenswear, menswear, Little Joule, Baby Joule, Wellies and homeware. The Company operates 97 the United Kingdom and Republic of Ireland stores (including five concessions) and three franchise stores. Joules branded products are sold through selected wholesale partners, primarily in the United Kingdom, North America and Germany. more »

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Hotel Chocolat Group plc is a chocolate company. The Company is engaged in manufacturing and retailing of chocolate in the United Kingdom and overseas. The Company operates in three areas: the United Kingdom, Europe and Rest of World. The Company offers chocolates under the brand, Hotel Chocolat. The Company sells its chocolate direct to customers though subscription, online and its approximately 83 stores. The Company's product ranges include self purchase, gift and occasion, rare and vintage, and other. Its product types include boxed chocolates, luxury boxed chocolates slabs and batons, enrobed fruit and nuts, chocolate hampers, ribbon bags, wine and spirits, hot chocolate and cocoa cuisine. Its chocolate types include dark, milk, white, bean to bar, boozy, caramel, cocoa gin, coffee, fruity, marzipan, mint, nut, patisserie, praline and truffles. The Company owns a cocoa plantation in Saint Lucia called the Rabot Estate. more »

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30 Comments on this Article show/hide all

Peter Craven 20th Sep '17 11 of 30

Hello Graham,

I provided feedback to Stockopedia following my two week trial regarding the desirability of a stock selection framework based on a stock screening tool which was flexible, fully customisable by the user and which generated a single overall investability metric. Please see as reproduced below the info I forwarded to Stockopedia on 30-Aug-2017.

Stockopedia Feedback, Share Selection Framework. 30-Aug-2017.


Stock market investment is not a precise science. Share selection is challenging for fund managers and private investors alike. Accordingly, most private investors "Leave it to the experts" and use the services of fund managers. However, investing in funds has its own set of problems and challenges.

Which fund or funds to choose. For example how is the private investor to know if an "Asian Emerging Markets" fund is a better investment proposition than a "UK Income" fund? Fund managers don't know either. That is why they ask the private investor has to choose from the available funds on offer. In reality the investor wants to invest in an "International Maximum Compound Yield" fund. Suprisingly no such fund exists.

How can a fund be researched when the prospective investor has no visibility of the constituent stocks? Fund charges are typically 0.85% to 1.25% PA. A £500,000 portfolio will attract an eye watering annual fee of £5,000 if the annual charge is set at 1.00% per annum. This is fine if the fund typically returns a compound annual yield (Capital gain plus dividends reinvested) of 12% or more but even in this scenario the compound yield is tarnished by the 1.00% fund manager charge.

Investing in Shares, My Initial Approach.

It takes considerable experience and significant amounts of time to learn how to research shares with good potential for an investment portfolio. I carried out a quick and dirty analysis of prospect shares when I first put my share portfolio togerther. My target was FTSE 350 companies i thought would have sustainable demand for their products and services, and, keep paying a reasonable dividend.

My initial approach had limited success and most of the selected companies shares performed well and returned a compound yield approaching 10% per annum. However, two of the shares I chose, Tesco (TSCO) and Drax (DRX), turned out to be dogs and lead to significant capital losses.

Share Selection Framework.

As time passed I began to realise that a structured approach using a reusable framework was required as a basis to select shares. The same methodology is also needed for deselecting underperforming shares in a portfolio. The idea behind using an analysis framework is to produce a permanent rolling record for each share assessed.

In the abscence of any available stock screen web based utilities which produce an overall investibility score I use spreadsheets as a platform to carry out a two part analysis. The first part is an assessment of each individual share and production of some basic metrics. The second part is to compare and generated further derived metrics for every individual share which has been assessed.

Overall Investability Score, Context and Application. - My method produces an overall investability score of each individual share. The contributing share selection metrics and weightings can all be changed to enable the correlation between each criteria and the overall investability scores to be adjusted to meet the investors requirements.

An overall investability score for an individual share is not a panacea!

The investor must also carrry out "Due Diligence" on all prospect shares by downloading and reading the most recent company results. Some company web sites are more "Investor Friendy" than others but all provide useful information. Presentations, results archives, dividend histories, financial calendars and so on. In my experience a quality company always has a quality web site. Examples; BP, Shell, Rio Tinto, Unilever to name but a few.

The key questions the investor wants answered are what are prospects for the company I may invest in and where is the growth coming from?

Company Share Selection Framework Part 1, Individual Shere Assessment. - Comprises an initial setting up activity and assessment followed by data updates and rolling assessment carried out at about 1 month intervals or as needed.

• Download entire dividend history and analyse.
• Download entire share price history.
• Download latest broker, (Strong Buy, Buy, Neutral, Sell and Strong Sell), consensus recommendations from at lease 5 sources. Analyse and produce average score metric.
• Download dividend forecasts from at least 4 sources to assess forecast dividend increases and foreward dividend yield prospects.
• Compute historical compound (Capital and dividend Income) gain between any two dates using dividend and share price history base data. This produces a momentum indicator yielding a compound gain which can be crudely estimated as the capital gain plus dividend yield.
• Compute share price difference from 1 year maximum as a value indicator.

Company Share Selection Framework Part 2, Compare and Generated Further Metrics For Each Individual Share. - Comprises generating and overall investibility score. All share selection metrics and weightings fully adjustable.

Screening Criteria. Dividend Yield (1 Year Rolling).
Screening Criteria. Year 1 & Year 2 Forecast Dividend Increase.
Screening Criteria. Share Price Difference From 1 Year Max.
Metric 1. Dividend Yield.
Metric 2. Forecast Dividend Increase.
Metric 3. Broker Consensus.
Metric 4. Share Price Difference From1 Year Max.
Metrics 1-4 Sum. Total Score.

I do not have the resource or database capabilities to assess merits of fincancial indicators such as PE Ratio, PEG Ratio, EPS, Debt Ratios, Balance numbers and so on.

Stockopedia Feedback.

Prior to my Stockopedia 2 week trial I used the Stockopedia's resources to download the dividend history of many FTSE 350 companies to corroborate and extend the information I had obtained from individual company web sites.

Stockopedia has an excellent set of financial data and technical analysis indicators for a very large number of companies. In fact there is so much data available for each company that, frankly, the investor is swamped with information. Much of the overall Rank, Value, Growth, Quality, Momentum is of little value in making a determination regarding the investibility of a particular share.

For example take the Stockopedia metrics for Royal Mail Group (RMG). This share has near zero dividend growth prospects and very low broker scores. Yet on Tuesday, 15-Aug-2017 Stockopedia indicated a "Stock Rank" of 96 and the other metrics as identified below. This makes a mockery of the ranking system. The value rank is also absurd!! In the case of RMG it is a BAD VALUE RANK.

Rank Value
Rank Momentum
Rank Growth
Rank Stock
Rank™ Risk
Rating Stock Rank

92 96 54 46 96 Balanced Super Stock

Stockopedia Stock Screener Requirements.

Stockopedia should extend the capability of the web site by introducing a stock screener which can generate a set of overall share investibility scores for a large number of shares for comparison with the following Features:

• Full dividend history, dividend forecast and forward dividend yield forecast for any stock.
• User choice of financial and technical analysis data for screening.
• User configurable screening criteria of financial and technical analysis data.
• User configurable choice of screening metrics including simple mathematical formulae.
• Capability for user to devise fully bespoke screening metrics.
• Summation of metric scores to generate an overall investibility score.

Please see as attached Excel files for Croda International Plc (CRDA) share assessment and for a comparison of metrics for companies I have analysed.

Peter Craven.
30th August 2017.

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herbie47 20th Sep '17 12 of 30

Just lost a long post. So quickly I don't always agree with the styles, some Momentum Traps in particular, Burford Capital (LON:BUR) was one, never agreed with that, now it is a High Flyer, since then its shares have gone sideways. I note that many of Minervini's recent share tips are Momentum Traps.

Would be interested to know proportion of MT that convert to HF or SS status and do they perform better or worse after conversion?

Something that would be useful is just calling up all the shares under each style.

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Graham Ford 20th Sep '17 13 of 30

In reply to post #220963

Hi Peter

Firstly I would say that the Stockranks are from time to time going to throw up rankings that seem overly optimistic or overly pessimistic. But you can look at how the stock rated on the individual metrics that make a Stockrank score to see what it is that is causing a higher or lower reading than seems warranted. But overall the NAPS portfolio that Ed Croft selected using the Stockranks has shown at least so far that it outperforms the market.

Personally when I'm looking for growth companies I tend to pay less attention to the overall Stockrank as good growth companies are often expensive and that may depress their scores. But that is what I like about it. The details are basically there to allow you to ignore the value rank, and use other measures of value as screeners, if it doesn't suit your purpose.

I suppose that what you are seeking is the ability to build your own set of personalised Stockrank formulas with all the flexibility of a spreadsheet. It sounds like a bit of a tall order for a website to do all that and I'm wondering how many users actually want to go through all that work not knowing if their 30 factor formula is going to be any better than something much simpler. Adding complexity doesn't necessarily add accuracy just the illusion of it.

But I'm not wanting to say one way is better than another so the reason I asked you the question was so that if we all can see what you're suggesting then if it is appealing to people they can let the people that run the site know or give your message a thumbs up or something like that so Stockopedia can see the level of demand there is for your suggestion.

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Nick Ray 20th Sep '17 14 of 30

In reply to post #220973

Something that would be useful is just calling up all the shares under each style.

You can do that. e.g. to find all Momentum Traps:

Or do it interactively from this page:

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Peter Craven 20th Sep '17 15 of 30

In reply to post #220983

Hello again Graham and all,

If you would like visibility of how I screen stocks using individual spreadsheets 1 per stock and a common analysys spreadsheet to generate an overall investibility metric please drop me an e-mail on

At the moment I have only analysed 25 stocks. But Stockopedia could develop a similar stock screener with the capability to cover the whole market as they have access to a huge database.

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herbie47 20th Sep '17 16 of 30

In reply to post #221008

Nick, many thanks for that, that's great.

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Ronald Smith 21st Sep '17 17 of 30

In reply to post #220903

It's fascinating that you arrived at this set of parameters independently, and crafted them for convenient use; the more so that you limit them to six, which is also the number employed in the I Ching. Here is a link to a description of its hexagrams and trigrams - the latter corresponding to your chart, as can be seen:

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andyfwwrench 24th Sep '17 18 of 30

In reply to post #220818

Your description of what you want, and say it can't do, is a literal description of the functionality Stockopedia offers, has always offered, and was designed for. Though having experimented with a variety of long screens, I have to say the built in long screens, especially the GARP and quality styles are better than any of my own attempts. I do use my own short screens, looking for unsustainable debt primarily. So without wishing to be rude, I don't think you understand the tool you have subscribed to.

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Peter Craven 24th Sep '17 19 of 30

In reply to post #221973

Hi Andy,

What is needed is a user configurable stock screen which yields a single investability metric for each stock. Unfortunately, the Stockopedia tool nor any other the web based tools does not offer this capability.

The investor challenge is to identify which combination of parameters offer the best measure of a stocks investability. If we take the Stockopedia Value rank for example is has no predictive component except for the generic statistical characteristic that cheap stocks are more likely to perform better that expensive stocks.

Accordingly, I use broker ratings and dividend forecasts as the primary measures of the prospects for a stock. As I use spreadsheets for this purpose I have a fully documented rolling record of the shares I have analysed.

Using the metric of Growth At Reasonable Price (GARP) and unsustainable debt are excellent metrics to use. These metrics form part of the investors "Due Diligence" activity when forensically examining company balance sheets and looking at the wider fundamentals.

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andyfwwrench 24th Sep '17 20 of 30

In reply to post #221978

Hmm, I'm not sure I agree with your desired outcome. The future is inherently unpredictable and thus an absolute ranking score provides fake certainty. All that screening can do is provide a balance of probability that a stock may provide positive or negative returns. The rest is money management, diversification strategy and so on.

Use of broker forecasts is the Zacks approach.

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Peter Craven 24th Sep '17 21 of 30

In reply to post #221983

Hi Andy,

As the future is inherently unpredictable an absolute ranking score provides fake certainty but, only if used on a stand alone basis. This applies equally to the Stockopedia Stock Rank and other metrics generated by Stockopedia.

Apart from this I agree with your comments

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Howard Marx 24th Sep '17 22 of 30

In reply to post #221978


"Accordingly, I use broker ratings and dividend forecasts as the primary measures of the prospects for a stock."

I've yet to see any empirical evidence that broker ratings/recommendations have any more predictive accuracy than flipping a coin. There are at least two reasons for this:

(1) inherent optimism biases of brokers - the disclosures on the back of a recent Cannaccord Genuity broker note highlight this much discussed bias - 70% of recommendations are 'Buy', only 2% are 'Sell'. This seems optimistic, not least given that we're eight years into an economic recovery


(2) the sector specialisation of analysts - a UK house-building analyst may have a deep understanding of Persimmon, Bovis, Bellway etc, but his Buy/Hold/Sell rating is made relative to the overall local Equity index & therefore is exposed to both the over-bearing broad macro-economic forces as well as the relative merits of all of the other sectors.

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Peter Craven 24th Sep '17 23 of 30

Hello Howard,

I agree with you comment 100% and the heavy buy bias that broker ratings contain.

But, by comparing broker ratings for different stocks I am able to select stocks with the highest broker ratings typically over 50% out of 100% (100% where every broker rates the stock as a strong buy) and add the broker rating to the other metrics, Dividend Forecasts, Dividend Yield and Share Price Difference from 1 year Maximum.

I am not able to offer evidence that my method has effective predictive accuracy. However, it is logical system when supported by looking into company reports, presentations and balance sheet numbers.

Drop me an e-mail if you would like visibility of the spreadsheets I use. My mail address is

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Aislabie 24th Sep '17 24 of 30

In reply to post #222008

I am completely in agreement with your note on broker buy ratings, but the interesting bit is the sell ratings. The 2% may be small in number but my experience ( not tested numerically) is that the "sell" ratings have a high probability of success and I view them as an extremely serious warning. I instantly sell any holding that turns up in this exclusive club and so far that has proved to be a good strategy.

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zeibots 29th Sep '17 25 of 30

In reply to post #221158

Hi Ronald, yes interesting that here are many ways to come to a similar view. I try to keep a balance between the fundamentals and the technicals. I`m not strong on fundamentals and that is why the Stockopedia approach is so important to me. I have about a yard of TA orientated books on my bookshelf accumulated over many years and feel much more confident in this discipline. I use graphs to study historical price and volume patterns in order to predict the future direction of share prices and favour liquid shares where the price/volume relationship is more valid.
When the `big boys` -- institutions and funds get involved there is no hiding place and they always leave their footprints behind.
The Accumulation/Distribution indicator as well as On Balance Volume indicator tell their story about current and future price action. I use both of these in a WEEKLY rather than DAILY setting to remove the static from the market.
I did look at I Ching on Wikipedia but I think it is too much for me to take onboard and as you say it may well simply duplicate my conclusions.

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herbie47 21st Nov '17 26 of 30

In reply to post #222018

Are you talking about just one broker with a sell rating? I do agree that sell ratings are rare but then the quality of brokers does vary quite considerably.

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herbie47 21st Nov '17 27 of 30

Going back to original article I note Hotel Chocolat (LON:HOTC) is now a high flyer again and the shares are up over 40%. So yes you do have to watch them.

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Aislabie 21st Nov '17 28 of 30

In reply to post #243543

One broker sell rating is enough for me but that is specifically for small caps where often there is only a single broker following, since this is often a house broker for a small cap it is doubly disturbing.
For large caps with many brokers I would not necessarily jump so quickly but sell ratings are rare enough that I would look very closely at whether I would want to continue holding. For highly controversial stocks with both sell and buy ratings (such as Tesla for instance ) I would recognise them as intrinsically dangerous to my way of investing.

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herbie47 21st Nov '17 29 of 30

In reply to post #243588

OK thanks. I did have a look at a few and most recent ones were down, is that because of the sell rating though? Only one I saw wrong was Purplebricks (LON:PURP), 13-Jul-16 UBS Sell - 115.00, it went up to 470.
If I have some time I may do some more work on it. I agree about TESLA, I read so many negative things about them.

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Quantockriser 21st Nov '17 30 of 30

For me, momentum arises when one or more added value features are embedded in a business. Maybe charts and brokers can give pointers , but , to me, what counts is what the company or trust is doing, where and why and what is being achieved in their markets. And what the public reaction is and what it is likely to be.
I don't think you get this from charts.
So Purplebricks, for example gets high marks for breaking new ground and I am starting to see their signs around, so that's a big positive. The risk is that management are not up to it and that the values are hyped up too far already. . That is the trap !

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