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?…

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