Investing strategies that chase share price momentum have performed exceptionally well in the UK this year but some of them are doing even better in Europe. While it’s still early days to be drawing concrete conclusions from our recently-launched European screens, strategies that take a lead from rising prices are undoubtedly producing some excellent early returns. With a handful of refinements, we used one of these strategies as the starting point for finding UK and European stocks on the move but at prices that may be worth a closer look.
Momentum screens such as Earnings Upgrades, Earnings Surprises and Price Momentum all share the same investing concept which is that stocks that have recently risen in price or earnings expectations will often keep rising in the near term. Researchers believe this phenomenon is largely caused by investors being slow (or deliberately cautious) about bidding up share prices following good news. This so-called ‘anchoring’ effect is notably at work when it comes to companies that are trading close to their 52-week high share prices. For investors in these stocks, the 52-week high often becomes a psychological ceiling and even on good news, they (and the market) can take several months to ratchet up what they believe a share should really be worth. According to a study by George and Hwang, buying stocks that are at a 52-week high can be a highly profitable strategy.
In the UK, Stockopedia’s 52-Week High portfolio has produced an admirable 19.2% return in 2013 and over the past three months it’s up by an impressive 11.8%. But in Europe, the same strategy has delivered a stunning three-month gain of 21.9%, outpacing its FTSE Eurofirst 300 benchmark by 15.5%. Dig in to the drivers of that performance and you’ll find a couple of exceptional individual performances, including Swedish computer game developer Starbreeze (STAR), which has seen its price rise by 381% since it was bought in to the portfolio three months ago.
So what about the current crop of 52-week high momentum candidates? Well, for investors that like the concept but may be fearful about tackling a list of unfamiliar European names, there are some refinements that can be made to this screen to give some added comfort about the companies on offer and, crucially, whether they also retain attractive valuations. As we’ve written about before, blending value and momentum can…
