Is falling MomentumRank an early warning sign?

Can changes to a company’s StockRank and factor ranks be used as an early warning sign of possible problems ahead?

Some recent examples have made me think this area could be worth examining. In this piece, I’m going to consider two case studies before taking a broader look at the data behind this issue.

Case study #1: Bunzl

On 16 April I covered the profit warning from FTSE 100 distribution group Bunzl (LON:BNZL) in the daily report. What struck me most at the time was the way that the company’s StockRank had fallen sharply in March following its full-year results:

The annual results had received a poor reception from the markets, but the headline numbers did not seem to flag up any obvious concerns. Profits and margins were broadly stable. 

With hindsight, the problems that triggered April's profit warning were mentioned in management commentary. Even so, brokers had only made a slight cut to full-year forecasts – not necessarily a big concern for a mature and reliable performer like Bunzl:

(Bunzl: 8 March 2025)

However, April’s profit warning subsequently led to a much more severe cut to profit forecasts – and a 25% one-day share price drop that I’m sure some shareholders would have liked to avoid:

(Bunzl: 5 May 2025)

Checking back through the StockRank history, a clear pattern emerged. While Bunzl’s QualityRank and ValueRank have remained broadly stable, its MomentumRank fell sharply following its results and has fallen further since then.

22 Feb 25 - High Flyer - the MomentumRank was high prior to its results (share price 3,336p):

Bunzl’s 2024 results were published on 3 March 25. By 8 Mar 25, its style had fallen to Neutral and the MomentumRank had fallen sharply (share price 3,076p):

The company’s Q1 trading update and profit warning was published on 16 April 25. Here’s how Bunzl’s QVM ranks looked two weeks later, on 5 May 25 (share price 2,380p):

The dominant theme is the rapid decline of Bunzl’s MomentumRank, which has fallen from 93 to 8 since 22 February. Its share price has fallen by 30% over the same period:

Case Study #2: Celebrus Technologies

A week or so later, it was the turn of small cap technology group Celebrus Technologies (LON:CLBS) to deliver a dose of bad news to shareholders – see our analysis here.

However, what struck me again was how the company’s StockRank had come off the boil well before the worst of Celebrus’s share price decline.

Checking back through the StockReport history, I saw a similar story of falling momentum.

Celebrus’s half-year results were published on 3 December 2024. These did not appear to raise any concerns - on 13 Dec 24, MomentumRank was still high (share price 296p):

However, the share price began to head south soon early in January 2025. This was soon reflected in the company’s MomentumRank, which had fallen more than 20 points by 1 Jan 25 (share price: 270p):

As February unfolded, the shares continued to fall. Celebrus Technologies’ MomentumRank also continued to fall, dropping a further 28 points by 14 Feb 25 (share price: 222p):

All of this came before the company’s trading update on 22 April. This warned that sales would miss expectations this year and flagged up some potentially significant changes to both its accounting policies and a key customer relationship.

This news was poorly received by the market and left the stock trading well down on the day. This quickly fed through to a further fall in MomentumRank – although note how Quality and Value ranks were still largely unchanged.

Here’s the situation on 25 Apr 25 (share price 178p):

Celebrus shares have bounced back somewhat since then and were trading just below 200p when markets closed ahead of the Bank Holiday weekend.

However, the accounting changes announced in the April trading update mean that forecasts for FY26 have been withdrawn, as the company hasn’t yet worked out their likely impact on next year’s performance.

I think there’s a risk that revenue (and profits) may reset at a lower level, at least temporarily. Stockopedia’s Falling Star styling is also flagging up the statistical risk of further underperformance.

Investors left holding the shares now may be wondering whether to crystallise their losses or hope for a return to form. But anyone monitoring the falling MomentumRank here would have had several chances to get out at a higher level since December and might now be quite relieved to have done so.

Is there really a pattern?

In situations such as these, it’s easy to fall into the trap of using the wisdom of hindsight to find patterns to support a hypothesis. There’s obviously a risk that this is what I’ve done with these two examples.

To see if the falling MomentumRank was a signal I should consider acting on in the future, I enlisted Alex’s help to search Stockopedia’s historic database for more objective evidence of a possible relationship between MomentumRank and share price returns.

Do changes in MomentumRank correlate with share price performance?

We took snapshots of the UK market at six and 12-month intervals, dividing the market into a number of groupings. We then monitored returns until the next rebalancing date and then repeated the process. In total, we looked at data covering the last 10 years.

The groupings we chose were designed to try and highlight any correlation between MomentumRank and share price performance:

• Positive M-Rank change (all StockRanks)

• Positive M-Rank change (StockRank >80)

• M-Rank >90 (all StockRanks)

• Negative M-Rank change (all StockRanks)

• Negative M-Rank change (StockRank <20)

• M-Rank <10 (all StockRanks)

Semi-annual rebalancing

In this test, our selections were rebalanced every six months. The dominant trend here is that stocks with high MomentumRanks outperformed all other groupings, even including a subset with improving MomentumRanks and high StockRanks.

Conversely, the shares with the lowest MomentumRank underperformed everything else:

The Bunzl and Celebrus Technologies examples both focused on the impact of falling MomentumRanks. These stocks are represented by the pale pink line in the chart above.

Average returns from this subset across a six-month period oscillate around zero on a 10-year view. This suggests to me that shares with a falling MomentumRank won’t necessarily collapse (they may still be good businesses), but are likely to underperform shares with higher or improving MomentumRanks.

The chart above was mostly as I expected, but there were a couple of surprises for me:

• Stocks with a rising MomentumRank didn’t outperform those which already had high MomentumRank;

• Shares with a rising MomentumRank did not do very much better than shares with a falling MomentumRank, on average across all StockRanks.

I had expected improving momentum to have a more marked impact on share price performance. Thinking about this result, I wondered if the six-month rebalancing period was too short to allow improving momentum to feed through to share price performance.

To test this, Alex re-ran the simulation using a rebalancing period of 12 months.

Annual rebalancing

Momentum can be a fairly persistent effect, as Ed discussed recently. But for shares with weak or average momentum, there can be a lag between signs of improvement and share price gains.

I think these two characteristics help to explain what we see here, in our annual rebalancing simulation:

Over a 12-month timeframe, companies with a high StockRank and improving momentum came much closer to matching – and sometimes exceeding – the performance of stocks that already had a high MomentumRank.

The longer rebalancing period seems to have allowed improving momentum the time it needs to deliver results.

In addition, shares with a rising MomentumRank did significantly better than those with a falling MomentumRank, regardless of StockRank. These two groupings were much closer with six-monthly rebalancing, again suggesting that the benefits of improving momentum take time to be reflected in share price performance.

Final thoughts

There is no one-size-fits-all formula that can tell us the right time to buy and sell stocks. As we’ve discussed before in recent months, one key element of such decisions is buyers’ investment style and timeframe.

Long-term investors who make subjective decisions about investing might choose to argue that both Bunzl and Celebrus Technologies are suffering from temporary problems that will not disrupt their long-term growth trends.

This is a reasonable argument that may yet be proved right – or it may not. The difficulty is that it could be several years until the correct answer becomes clear. In the meantime, investors who continue holding run the risk of suffering further losses and prolonged underperformance.

On short or even medium-term timeframes, the evidence from our historic database suggests that in aggregate, shares with weak or declining momentum are likely to underperform.

I see this as a useful systematic element to consider as part of my broader investment process. It's also consistent with the academic theory behind the StockRanks and their performance over the last decade:

In summary, for investors who are comfortable harnessing the power of statistical probability, I’d argue that paying attention to changes in MomentumRank could help to improve overall returns, as part of a systematic investing strategy.