Small-cap High Flyers soared in 2017 - but how do you find them?
It has been a terrific year for many UK smaller quoted companies. With just a few days left in 2017, the Alternative Investment Market has notched up a 20 percent gain, and the FTSE SmallCap is up by nearly 10 percent.
But while the returns have been impressive, smaller companies still present their own challenges. There are more than a thousand shares across the smaller-cap indices. So there’s an ever-present need to avoid risky, low probability stocks and be wary, too, of popular shares where strong momentum isn’t supported by anything more than enthusiastic sentiment.
One strategy that tackles these challenges and has worked very well in 2017 is to focus on shares where strong momentum is underpinned by high quality. In the Stockopedia lexicon, these are the market’s High Flyers.
The hallmarks of a High Flyer
High Flyers are one of the categories in our framework of ‘styles’ that’s based on the exposure of shares to high Quality, attractive Value and strong Momentum.
High flyers have a very distinctive profile. For a start, they are good quality, in terms of both their franchise and financial strength. Good quality companies are highly profitable with strong industry leading margins. They are stable, growing and often have accelerating sales and earnings. They also have strong and improving financial histories and no signs of accountancy or bankruptcy risk.
In addition, High Flyers have strong momentum both in the price of their shares but also in their track records of earnings growth. It shows up in stocks trading at, or above, their 52 week highest prices and are performing strongly against the rest of the market. They’ll often be beating broker estimates and receiving forecast upgrades and recommendation changes.
The catch with high quality, strong momentum shares is that the market finds these features very desirable. So these kinds of stocks rarely look cheap, and that can be a deterrent to many investors.
If you took this High Flyer approach to large and mid-cap companies right now, you’d be looking at stocks like SSP, XP Power, Advanced Medical Solutions and Victrex. These companies have robust financial strength and solid performance histories, but their price charts give away just how much the market values these characteristics. The momentum in these shares can be breathtaking.
How small-cap High Flyers performed
But what about High Flying smaller companies? Stockopedia users will know that we keep a keen eye on the performance of the StockRank Styles, and High Flying small Caps have done very well this year - with stocks in the £50-£350 band returning an excellent 30.6 percent. The chart below shows how baskets of stocks with the highest QM exposure have performed over that period.
Applied to fast-paced smaller company indices like AIM and the FTSE SmallCap, these are the sorts of companies we’re seeing at the moment. You can take a look at the full screen results here.
Name | Mkt Cap £m | QM Rank | Value Rank | Pc Price Chg 1y | Sector | Exchange |
492 | 99 | 32 | +74.1 | AIM | ||
319.4 | 99 | 21 | +47.1 | AIM | ||
282.5 | 99 | 6 | +69.8 | AIM | ||
281.6 | 99 | 31 | +69.1 | AIM | ||
376 | 99 | 30 | +15.6 | LSE Main | ||
372.1 | 99 | 13 | +56.8 | AIM | ||
186 | 98 | 23 | +40.0 | AIM | ||
337 | 98 | 13 | +28.0 | AIM | ||
109.9 | 97 | 14 | +58.6 | AIM | ||
302.8 | 97 | 32 | +26.9 | LSE Main |
By their nature, the Value Ranks of these High Flyer stocks are relatively low, bearing in mind the ranking ranges from zero (very expensive) to 100 (very cheap). But the combined quality and momentum scores are very high.
One of the arguments in favour of looking for High Flyers among small companies is that the large companies of tomorrow are most likely to be found in this territory. So knowing what to look for, and catching these companies early, can potentially offer a big advantage.
But it’s also true that small companies can fail more easily than larger firms, so it’s important to be careful. Likewise, quality can deteriorate in some businesses, and strong momentum can collapse if the story changes. But paying a higher price for better quality shares on the move is a proven strategy of playing two very powerful drivers of returns in the stock market. High Flyers won’t fly high forever, but they can deliver stunning returns over long periods.
Disclaimer
This is not financial advice. Our content is intended to be used and must be used for information and education purposes only. Please read our disclaimer and terms and conditions to understand our obligations.
19 comments
Ladies and gentlemen
My first post as I work my way through Stockopedia
I must admit that I have not been a good investor and after 10 years have finally just about broken even
What a plonker-chasing tips trend, listening to noise etc
Selling winners too early to shore up losing positions in value traps
I love this site and the comments of the contributors
Now that I am a member of this site and have discovered Whelliedealer,and also now retired ,I intend to use this site to identify good stocks.
But I am coming late to the party-its not over until the fat lady sings the blues, but a lot of catching up to do
As long as Brexit does not destroy the stock market/Conservative party-not that I think they are doing a good job
But Its Corbyn who will destroy the economy
So to Ben Hobson, thank you for a wonderful article.
But also more importantly from my perspective-as he slowly types with one finger
Thank you to purpleski ,lightningtiger and cafcash49 for your helpful brilliant comments re this web site and how to identify winners
I of course would like to state I do not hold any of these wonderful stocks other than TAP which is now below my purchase price
Give me a year and I will have joined Twitter and will be able to talk about candlesticks trends and how I am a true member of the investment club
Thanks folks
But knowing my ability the Crash of 2018 will have happened
Given your self-confessed problems with predicting the future, I think we can safely say that a Corbyn government should be terrific for the economy!
Thank you Ben for this interesting article. Only just found time to read it. It and many of the comments are thought provoking.
There is an excellent piece in today’s (19/1/2018) FT by John Authers about Factor Investing and what performs best. https://www.ft.com/content/54b7373a-fcab-11e7-a492-2c9be7f3120a But it needs a premium subscription. Though I only have an ordinary sub I was able to access it through the link in his twitter feed.
Though I have taken advantage of the high flyers over the past three years (up 150% in that period) and am still invested mainly in these type of stocks (accesso Technology (LON:ACSO) Air Partner (LON:AIR) Avon Rubber (LON:AVON) Bioventix (LON:BVXP) Boohoo.Com (LON:BOO) Fevertree Drinks (LON:FEVR) IQE (LON:IQE) Somero Enterprises Inc (LON:SOM) Taptica International (LON:TAP) Treatt (LON:TET) XLMedia (LON:XLM) and £XPP) I am beginning to wonder whether things may have run its course with respect to high flyers in this almost continual bull market.
The trouble is I am finding it hard to jump off this fast moving train for fear of missing out, which I know is very poor psychology. But also I do believe that most of these companies are excellent companies who will in 5 and 10 years time have performed well ahead of the market, even if they suffer drawdowns in the interim.
Michael
Hi Ben, In answer to your question " how do you find high flyers?2. Go to the home page , click Brows Indices, click Aim all share,then Ranks and finally stock rank styles.
I have also got a screen to find anything over 100% up in the last 12 months ,and another screen showing anything over 30% up in the last 30 days.
Results in no particular order:-
BUR 102%
EMAN 106
FEVR 96%
KWS 196%
PTSG 127%
VCP 133%
FDP 93%
IPX 147%
COG 125%
IQE 267%
TAP 132%
XLM 121%
and WEY 667% aprox from 3.88p to 33.1p
Currently I hold a long position in 5 of these, and also Focusrite (TUNE).
It is also worth noting from the stock report the 50 and 200 day MA are both positive. The 50 day will usually fail first with a red light showing the share is beginning to fall, so check the stop loss.
The Aim market has done extremely well over the last year and previous years too. Spreads are high and so can the risk be also. That said so can the reward be as well.
Would it be possible to post how the various strategies performed in the U.S. as compared to the U.K.?
Interesting article, but there isn't a way of specifically screening for different 'styles' of stocks. Or have I missed something? Obviously you can use the QM etc ranks, but I thought the 'styles' were more sophisticated than that? Can they be screened/listed?
Go to the Stockranks page:
https://www.stockopedia.com/stockranks/
You can filter on styles as well as ranks. The styles are also fully functional as filters in a screen.
Ben, I take it that these are the GM rankings etc as they stand today. Is it possible to run the screen on the historic data i.e. the metrics at the start of the year to see how predictive these metrics proved to be?
A tip for everyone at Christmas but I am sure some do it already. Go to Tools and then Chart Signals. Here you will find thumbnails of shares that are showing some action at the moment in Bull Signals and possibly some shorting candidates in those showing bear signals at the moment. You still need to be careful and only pick the best but the 'thumbnails' help with that. As always DYOR. I hope everyone using Stockopedia has a wonderful Christmas break and a successful 2018. Charles (cafcash49)
Excellent food for thought as ever Ben.
As a died in the wool value investor I find this concept of "high flyers" quite challenging, but I always aim to live learn and adapt. So I have added an additional qualitative filter which is to ask myself whether I can see a credible case for the company in question to actually achieve sufficient earnings to justify the market cap on a "normal" PE ratio.
Totally unproven at this stage (but it makes me feel more comfortable) and I have not the first clue how to codify it. On the plus side I hope that it avoids me getting into stupid bubbles , but on the downside it probably avoids me getting into stupid bubbles (being an early investor in bubbles and adopting the "greater fool" theory is a great investment play!)
But it is interesting how these things sometimes play out. I recall back in the 90s rejecting a substantial investment in global telecoms infrastructure on the basis that the market forecasts were ludicrous, by extrapolating trends the "experts" had come up with demand forecasts that would involve every person on the planet holding 3 simultaneous phone calls 24x7x365.
In the near term we were totally on the money to reject the investment, but in the longer run the story is different : we are now all sharing video - eating up much more bandwidth than "voice" and we also have toasters constantly tweeting each other about the precise technical perfection for toasting a bagel.
So the "sanity check" is only effective so far.
As an investment method though I still have some challenges with the high flyers - specifically that "Stockranks" as I understand it have only existed during an extended bull market. Given that many feel some form of correction is on the way, do we have any view of how "high flyers" would perform during such a market phase? (My gut feel is that they would be amongst the worst performers - but I'd love to see evidence to either back that up or rebut it)
From your graph there are clearly two phases, but I wonder if there may be a third phase yet to come?
In his ground-breaking book 'What Works On Wall Street' James O'Shaughnessy concludes that value-oriented factors (price-to-sales, price-to-book, price-to-cash flow, price-to-earnings, and dividend yield) are much more important to stock performance long term than growth factors (earnings growth rate, return on equity, etc.), except for relative strength.
However what's true in aggregate is not true at a more micro level.
Refreshingly the author's son, Patrick O'Shaughnessy, observes the folowing in a recent interview:
"The best stock returns come from stocks that begin in the most expensive statistical bucket... even though this bucket as a whole is the worst performer"
Interview here, with specific quote at 25:30:
http://investorfieldguide.com/...
I lost my earlier reply.
I have been with you one year having moved from Company Refs. I don’t read all of your output but I do appreciate the 2 way contact which in my experience other sites don,t often provide.
Eddie Koeppl
Sure would be nice if you would provide the same analysis on U.S. stocks. Love the program..but feel like an ugly sister.
It is provided, you need to buy the US data. Be a Happy Sister, can't do anything about the looks!!! Have a Happy Christmas and successful 2018.
Charles
Richard means that the blog commentary is non-existent for non-UK stocks.
Aaaagh, I missed that point. Thought he might not know about the US data. Anyway, all have a good Christmas break and a successful 2018. Charles
New to Stockopedia so just feeling my way around the information-- but so far looks very interesting,mainly hold Investment Trust shares as my core in my portfolio with just a few individual shares
Keywords Studios (LON:KWS) is worthy of a mention as a high flyer, although its now grown out of your Mkt Cap filter. Closed on £5.03 on 21-Dec-16, now £14.61 and showing no sign of losing quality or momentum
Interesting take - stored!