The Top 20 Clearest Trending Small Caps - With Implied Themes For 2025

14th Nov by Edward Croft

64 comments 5329 reads

Back in May, a piece titled “Didn’t buy Warpaint? Why clear uptrends are the best uptrends” hit a nerve. If you missed it, here’s the gist: You often don’t buy the stocks you want to because they seem to be in a perpetual uptrend — only to regret it as they keep climbing higher.

This is the power behind “clear trends”. Clear trends are powered by consistent but not excessive buying, with holders who aren’t rushing to sell. They show few significant corrections and on average continue to outperform. The 20 stocks mentioned in the original piece have powered on by an average 8% in less than 6 months, while the 90+ StockRank set is only up 1.6% and the FTSE All Share down 2.8% over the same period (AIM down -9%).

Strength begets strength. Not in all market environments, but much of the time. Here are a few of the top performers from that May list.

Even more powerful in small caps

Since then, I’ve become even more convinced of the power of clear trends. Clear trends not only improve the performance of momentum portfolios, but they especially enhance the returns of small caps.

I recently back tested some simple trend clarity rules on small caps, covering 11.5 years of market data:

Market Cap between £20m and £350m (i.e. small caps)
StockRank at least 75.
Stocks among the top 20% price risers over previous 12 months.
Sorted by trend clarity. (For maths wonks - this uses the R-squared of a linear regression on the share price over time)

Here are the results for portfolios of different sizes, rebalanced annually since March 2013:

The returns are strong, typically 15%+ annualised over the period, and reaching over 19% for the 16-stock portfolio. Risk and return seem optimal with portfolios of around 16-20 positions, showing 10 up years and just 2 down years. Concentration was not a benefit with this approach.

Admittedly, the bid-ask spreads can bite in small caps and liquidity can be an issue - dealing costs can be high. The current portfolio has an average bid-ask spread of 2.6%, which is only partly offset by a 1.1% dividend yield. After all costs (including 0.5% stamp duty), there would be at least a net 2% drag on performance. Nonetheless, factoring that in…

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iwright7

16th Nov

Stocks on the Move has some regression period data…. 90 (working) days narrowly beats the rest in their simulation tests.

Ed,

Another excellent article.

I am using Trend Clarity as part of my stock selection process for mainly small and mid caps, so its perhaps not surprising that I hold 11/20 of the above Trending Small Cap portfolio. I have been using the graph eye balling technique for several years and can confirm that it works particularly well in an “up” market, but for me Trend Clarity is largely ineffective in a down market, (e.g. with negative market momentum during COVID).

Trend Clarity is believed to caused by a number of human biases, including an underreaction to good news, and it is these stocks that continue to make new 52 Wk Highs. A newly published (2024) New Zealand momentum study shed light on this phenomena and suggests that it is anchoring bias that deters retail investors from buying stocks that are reaching new 52Wk Highs. In particular it is stocks with a high retail following (often smaller caps) are prone to extended momentum. Furthermore the authors suggest that the steady price drift higher is actually caused by retail investors (us) who either take little notice of good news, or worse sell out to crystalize an early profit. This upward drift can be exploited by more professional institutional investors, (and by us if we can avoid anchoring etc bias).

2024 Report Summary…..The stock price’s nearness to the 52-week high is a stronger return predictor for stocks with a higher retail trading proportion. Our trading flow analysis reveals that retail investors are subject to anchoring bias. Their trading behaviour causes price underreaction to good (bad) information for stocks traded near (far from) their 52-week high.

And Concludes …As retail investors’ trading is subject to anchoring bias, their advisors (and/or for example Stockopedia) could help them become aware of this bias and adjust their trading accordingly.

The full paper is here....

https://www.sciencedirect.com/...

Epitychia

This is interesting. Can you give more information on where this picture came from?

Yes it’s from Stocks on the Move (2015) by Andreas Clenow. Andreas was ahead of the game in calculating and investing using volatility adjusted slopes.

doctor dave

Thanks Ed. Another great piece. Like the widget a lot. What's the nearest we can get to creating a Screen for your 20 stocks? (Was reasonably pleased to see that I hold five of them....) DD

Paul,

I am using regression data too in my stock selection, and wonder if you will be going to Mello on Wednesday and would like to meet over a coffee to compare notes? Ian

The Phoenix

great book first half if a bit heavy going but second part year by year review of how the system performed is excellent including the years where he was pretty much out of the market in cash for the full year.

17th Nov

Look back periods are an interesting topic and have been explored further in a 2022 paper that used 6M and/or 12M momentum look backs.

The paper “Overlapping Momentum Portfolios” studied US companies from 1928 to 2018 and formed top decile momentum portfolios from companies that passed 6M, 12M or both time periods. They concluded that the Overlapping 6M and 12M portfolio significantly outperformed the other 2.

Almost as an aside the authors split the momentum look back periods by the type of investor. They termed 6M look back momentum traders as informed “news watchers”, whilst 12m look back traders were more “finite term” Momentum traders. They postulated that the 2 trader types utilise different information diffusion rates and that combining the 2 momentum investor types created the excess return.

Whilst these findings don’t relate specifically to Trend Clarity type stocks I can’t see why this approach shouldn’t be valid. Something else to add to the list maybe!

The paper is here https://papers.ssrn.com/sol3/p...

Edward Croft

Thanks Ian - I've not actually read that paper, so I will add to my library. It certainly backs up our use of 6m and 12m lookbacks in the Momentum Rank.

Paul Walton

Hi Ian

In Derby? Bit of a trek for me as I live on the South Coast. If you take a look at the fund/etf side its interesting to see how travel companies are faring (The Travel UCITS ETF Acc (LON:TRIP) reflected in companies like International Consolidated Airlines SA (LON:IAG) and Carnival (LON:CCL) trending strongly (original screenshot). Happy to compare notes

18th Nov

Paul - Interesting ETF results and a lovely graph for £TRIP. I hold International Consolidated Airlines SA (LON:IAG) and have looked at Carnival (LON:CCL), but have been put off be the high level of gearing. Happy to compare notes by email, so if you email me I will reply. Mine is idwright@btinternet.com

Thank you.

Melva Dunn

Quite interesting information, thank you for it

Rusty2

Just seen Enwell Energy (LON:ENW) is down 48%, it did not look good on the chart.

RichardK

A very thought provoking article, Ed.

A question which occurs to me is, "How long can these upward trends be expected to last for?" As we know, no tree grows to heaven.

A further thought is that these trends rely on historical data. There was a lot of research in the last century (and maybe more recently) which shows that share prices follow random walks. In other words, past price movements provide no guide to the future. How do we reconcile the two approaches?

In spite of my queries I still like shares which have good, sustained, upwards movements unless they look too expensive. And especially upward trends in dividend growth.

Richard

Robert Didymus

2nd Dec

Dreadful! having just bought into Enwell Energy days before the plunge of nearly 50% in a single afternoon, I was fortunate enough to hold my nerve long enough for the management of the company to have the order preventing operations suspended, while legal activities proceed, attempting to overturn the Court decision and managed to sell my holding after the share price had recovered to 21p. However from viewing the institutional shareholder details it seems that Smart Energy the main shareholding company is simply a non-operational shelf business, set up by a person or persons previously banned from receiving profits from this type of business by Ukranian authorities, in order to hide their involvement and divert funds offshore.

Thanks for the Article Ed. As a newbie to Stockopedia I have previously relied on investing through a range of large equity funds with an emphasis on North America and until quite recently, India after China fell from favour. I made several mistakes upon joining, the worst because I failed to appreciate the need to buy into companies that were rising in value and quality, immediately jumping in and only considering those that fit neatly into the top right-hand green portion of your bubble chart. No doubt others have been there and done that. I have corrected this lately by an appreciation of the need to find companies offering room for growth and clearly on the rise, so have been pleased to find several of my choices listed in your top twenty list of small and mid-cap stocks. The main difference between small and mid-cap which I have noticed from my own slowly growing valuation is the larger number of high flyer and super stock listings in the mid-cap stocks against speculative in the small-cap leading to a greater sense of security in the former listings which do not seem to lag in growth and earnings sufficiently to bother me. The listing you have provided has been a great help for me in adjusting my own portfolio having brought several completely unknown companies to my attention.

That was bad luck. Having looked into Enwell Energy (LON:ENW) a bit more l would not have invested, as it is based in Ukraine, also the forecasts don't look that good. I'm very wary of shares that spike up, l often sell them, sometimes they go up even more but more often, people take profits and they fall back. These screens work well overall but you will always have a few bad apples, especially in the small caps.

I should have looked further into the institutional shareholding companies of Enwell Energy and their directors together with news for sure, but was relieved to have only lost about 23% rather than 50% of my investment, which I have already recovered by Ed's tip for Costain to be honest. Apart from that one name on the list of trending shares, I am delighted by the progress of most of the remainder many of which would have escaped my notice, together with the importance of momentum and value ratings as growth drivers.

Fri 11:41am

Not a good start for this folio, down nearly 3%, when All share index is up nearly 4%. The Mid caps are doing better. Early days.

Small caps obviously more risky.

The top 20 clearest trending small caps - with implied themes for 2025

Even more powerful in small caps

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Edward Croft

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