The Highest Flyers Of The FTSE 350

2nd Apr '19 by Jack Brumby

13 comments 10905 reads

Stockopedia’s High Flyers are high quality, high momentum, low value stocks with a history of beating estimates.

Playing in this area of the stock market can be a high risk / high reward kind of game. This is where the stratospheric multi-baggers tend to hang out - right alongside potential Momentum Traps and Falling Stars.

The giants of tomorrow can be found here. Newcastle-based pie shop Greggs, for example, which, given its current rate of expansion, will surely one day ditch the vegan sausage rolls, invest all its pound coins in artificial intelligence and do battle with Google for global supremacy.

But buyer beware - if the momentum falters and trading disappoints, these high flyers can fall very far. When the Broker downgrades come, evaporating valuation premiums and price multiple contractions can lead to stocks halving (or more) in the blink of an eye.

One recent example of a High Flyer crashing to earth is Gear4music, which has become something of a victim of its own rapid revenue growth. Looking at Its three-year share price chart might leave you feeling like you’ve just stepped off a rollercoaster:

This is not to say Gear4music can’t recover from its current capacity and margin issues - it is just a useful illustration of the kind of turbulence that you might anticipate when investing in High Flyers.

Can we de-risk High Flyers by screening for low volatility?

These kinds of shares are more volatile than the market and, because of their high price momentum, they can suffer reversals more strongly than the overall market. So, what happens if we screen out the more volatile High Flyers? Maybe we’re left with a valuable subset of low-volatility outperformers.

I’ve set up two screens to see what differences there might be between more and less volatile High Flyers. One excludes smaller companies by focusing on FTSE 350 stocks with an Adventurous, Speculative, or Highly Speculative Riskrating. The next filters for the same but accepts only Conservative and Balanced stocks. Both tables are sorted by one-year relative strength.

Adventurous, Speculative and Highly Speculative FTSE 350 High Flyers:

Name	Mkt Cap (£m)	RS % 1y	ROCE % 5y Avg	Quality Rank	Momentum Rank	RiskRating
Ocado	9,452	+152.3	2.53	66	94	Speculative
Micro Focus International	8,212	+99.2	89.5	67	99	Speculative
AVEVA	5,261	+67.7	19.6	76	99	Adventurous
Dunelm	1,813	+67.4	43.6	96	98	Adventurous
Entertainment One	2,040	+53.6	7.43	59	89	Adventurous
Hikma	4,441	+49.5	7.53	88	90	Adventurous
Inmarsat	2,536	+48.4	9.98	72	61	Speculative
JD Sports Fashion	4,870	+46.6	29.9	91	96	Adventurous
Games Workshop	1,026	+34.5	45.5	95	82	Adventurous
Mean	4,090	+66.58	27.16	79.1	90.6	…

Unlock with Email

Unlock with Google

Already have an account?
Login here

ISAallowance

2nd Apr '19

It would be interesting to compare the returns if you leveraged the less volatile basket to give the same drawdown as the more volatile basket. I suspect you'd recover the performance deficit, and possibly more.

Whitbourne

It's fascinating how different people react to the same data. I look at these charts and think - these are expensive and I have clearly missed the boat here, well done to anyone who held them. I would be crazy to buy them now. What companies can I find in the market today that look like Halma, Diageo or Experian did five years ago, so that I can buy, hold and look back at a chart like that in five years' time?

Each to their own!

Rusty2

Yes Not sure why Inmarsat (LON:ISAT) is in this list. Yes the performance over 10 years would be interesting to see.

Nick Ray

If I plot expected return against volatility for the FTSE350 and highlight the stocks from your two groups I get this:

As you can see the stocks are close to the efficient frontier as you might expect. The lower volatility stocks have a lower expected return. It is a trade-off - higher returns near the efficient frontier will have higher volatility.

I've added three stocks which did not make your lists but also lie close to the frontier and deserve an honourable mention: A.G.Barr (LON:BAG) John Laing (LON:JLG) and EI (LON:EIG) .

iwright7

3rd Apr '19

Whitborne, You rightly point out the differences in how people react to skyward share price graphs. Many of the above High Quality 10Y graphs are at, or near their 52 Week Highs and it's tempting to think that they can't continue to rise at a similar rate. But research shows that it is selling individual investors that lose out and buying professional/institutional investors that gain from this type of behavioural error.

Of course also nice to find cheap Quality companies that are re-rating too.

Worth looking at for example this recent paper to help decide which side of the fence to be on...

Investor Behavior at the 52 Week High - Faulty Anchors

http://fmaconferences.org/SanDiego/Papers/Faulty_Anchors_01.15.2018.pdf

dfs12

Interesting stuff but surely it is critical that this sort of analysis is based on the ratings at the start of the period being analysed rather than the end. Otherwise we are just stating that good and steady performance generates a good and steady rating within stockopedia.... and guess what if you look backwards their performance looks good and steady. I know there is lots of research saying that good and steady will tend to stay good and steady - but I'm sure you can see what I am saying.
By the way I really appreciate the work put in to create content like this and as a matter of fact these are the type of stocks I'm most interested in - so I don't want to be discouraging. I'm also aware that many of these metrics weren't available at the start of the periods (i.e. 10 years ago).

Jack Brumby

That's a fair point. We're building this kind of functionality so it's in the works, and the period across which we have good financial data to test is growing all the time. I don't want to commit to anything as site dev is not what I do, but suffice to say we want to write the types of things you want to read, and we are working hard to be able to do so!

I have just calculated the 10 year returns but 2 shares have been listed less than 10 years. Ignoring the fact about less than 10 years, the more risky 9, gained 10,947%, which is +1,216% average per share, excluding Inmarsat (LON:ISAT) the return is 1,367% per share, excluding Games Workshop (LON:GAW) as not one of the charts, it is 1,170% per share.
The less risky 10 gained only 3,919% which is 392% each share. Excluding Greggs (LON:GRG) and Games Workshop (LON:GAW) as not on charts, it is 3,365% for 8 shares so 420% each.

You may sleep better but if you invested the same amount 10 years ago the risky ones would have returned over 3x the profit. Roughly £100,000 would be now worth £1,300,000 in the risky ones, only about £492,000 in the safer ones.

Thank you Ian, that is a really interesting paper. This whole question of anchoring is one that I am trying to get away from - the anchor that I tend to get stuck with is the purchase price. I am getting better at selling my bad ideas, crystallising the loss and moving on.

The revelation has been how quickly I forget my previous interest - so for example I took a long time persuading myself to get rid of Bonmarche Holdings (LON:BON) which I felt had a strong balance sheet and a new CEO who could turn it around. Afterwards the price kept falling and I have saved myself significant further losses. For whatever reason I tend not to be tempted to sell at the 52 week high as suggested by the research paper.

My investment style is rather different from yours, I tend to go for businesses that have low P/E, ideally no debt and decent dividends, so that one is compensated for holding them. Using the very useful 'analysis' tab shows that my portfolio has an average P/E of 9.2 (market = 12.2) yield of 4.6 (3.8) and PEG 0.6 (0.96).

Thanks again for the paper - definitely food for thought. The Stockopedia community is a great source of ideas...

4th Apr '19

Whitborne - Yes lots of ways to invest, (and to beat the market).

For comparison I used the Stocko Analysis Tab to check my average Portfolio numbers which are: P/E of 18.2 (market = 12.2), Yield of 2% (3.8%) and PEG 2.3 (0.96), which is a very different style to yours. It would seem obvious that cheap stocks have a better chance of appreciation than expensive ones. Indeed when I started investing I did not like buying a stock with a high PE/PEG. However I made some exceptions (Bioventix (LON:BVXP) and Burford Capital (LON:BUR) come to mind). After a few years I noticed that it was these types of Quality companies which had contributed the most to my portfolio gains and they had become relatively expensive stocks.

I was also strongly influenced by Keith Ashworth Lord’s Buffettology Fund whose fund performance graph mirrors many of the graphs above. Whilst you would think this is a Buffett style Value fund, its composition more closely reflects the FTSE 350 types which Jack has screened above. Keith continues to buy into what on the face of it look quite expensive High Quality stocks. This technique is mirrored by Lindsell Train, both of whom are in the Top 3 (out of 212) of this week's average 5 Year UK Equity Fund league tables. Keith’s Buffettology Fund graph to ponder below….

I do think it’s a case of finding an investing style that suits your personality and allows you to sleep at night. To that end and to have a foot in more than one camp I now like to mix my investing styles with a few Value, the lowest PE of which is John Laing (LON:JLG) @ 8.3 and the majority QM, with highest Kainos (LON:KNOS) on a PE of 31. Good hunting. Ian

P.S. I run a dummy Stocko approximation of the KAL Buffettology Fund and its average Analysis numbers are even higher than mine:

PE 21
Yield 2.4%
PEG 4

Jack - Would be interesting to see how these average numbers compare with your 2 High Flyer FT350 screens above. Also if you are thinking of further articles, a Stocko comparative analysis of the successful and intellectually similar KAL (5Y gain 83%) and Lindsell Train UK funds (5Y gain 63%), might be enlightening?

https://citywire.co.uk/wealth-manager/sector/uk-all-companies-funds/i1576/?periodMonths=60&page=1&expandedList=true

dansankan

18th Jun '20

what is the difference between a trust...eg black rock thrg and an etf?

Brilliant Leader

19th Jun '20

Hi dansankan,

A trust is an active fund that has an independent board of directors who appoint a fund manager to run the investment portfolio. An ETF is a passive fund that merely invests in a specified index. As you would expect, the fees for an active fund tend to be higher than those charged by passive funds.

Hope that helps

The Highest Flyers of the FTSE 350

Can we de-risk High Flyers by screening for low volatility?

Unlock the rest of this article with a 14 day trial

About the Author

Jack Brumby

13 comments

Unlock the metrics for all these stocks and more...

Unlock the metrics for all these stocks and more...