Magic Formula - Momentum seems to help

Not long ago, on 5 March, I set up a spreadsheet based on Stockopedia‘s Magic Formula. It’s far too early to draw any conclusions, but a quick scan does seem to show that momentum does correspond with performance. The mean return is -2.17% so far. The top 5 momentum stocks returned 2.28%, whilst the bottom 5 returned -7.92%.

Admittedly, the bottom 5 were dragged down by Future (LON:FUTR) , that has lost 36.3% so far. Looked at another way, though, 3 of the 5 high momentum stocks are in positive territory, whilst only 1 of the 5 of the lowest momentum stocks is in positive territory.

FUTR issued a disasterous trading statement on 14 March: “the downturn in trading we saw in the latter part of the first quarter has continued in January and February”, and they expect results to be significantly below market forecasts.

Earnings Yield is good, at 20%, with a PE of 8.3 and a PEG of 0.33. This looks good on paper, but analyst forecasts are sure to come down now. The lesson is that it’s not enough to look at analyst forecasts.

The shares are technically oversold at the moment, so there could be a bounce. The 50dMA is crossing the 200dMA in a downward direction – that would normally be taken as a bearish signal.

When I was looking for a Magic share in March, FUTR was one that crossed my mind. Unfortunately I hadn’t written down any notes , but no doubt their IMS issued on 3 Feb caught my attention. There were some positives, like digital and diversified revenues being up 9%, but there was also a lot of grey areas in the statement: “rescheduling of planned advertising campaigns” and “we remain on track to achieve full-year results in line with our expectations, albeit at the lower end of the current range.” (italics added).

The market didn’t react well to the news at the time, and the share price gapped down. The momentum was downwards after that. Despite being technically oversold since that time, investing in the share would have been a losing game. Investors need to treat the RSI with caution, and can often give a misleading signal for those wanting to make a contrarian trade. In the end, you have to make a gut call as to whether you should go with the trend or against it in an over- or under- sold chart – you can’t be mechanical about it.

The bad reaction to market news, general lack of momentum, as well as a tepid IMS in Feb (although it would have been possible to read good news into it) should have given investors clues that they were making a tricky call if they were looking to go long.

There’s likely to be some very short-term trading activity in FUTR, but that’s not something I get involved in. My worry is that FUTR will turn out to be a tricksy share over the medium term, and too risky for my liking, despite the cheap price.

9.08p