Why are there so many FTSE 100 companies in my momentum screen?

Like many Stockopedia subscribers, I have a collection of stock screens in different styles that I’ve built up over time. Checking these occasionally can flag up an interesting opportunity or investing theme to consider that I might not otherwise spot.

When I checked my momentum screen recently, I was surprised to see that seven of the top 10 shares were FTSE 100 companies, rather than the small/mid-cap growth stocks I’d expected to see:

Admittedly, there were a few smaller names in there (and further down the list). But I was curious to understand why these top FTSE 100 names were scoring so well.

One explanation may simply be that the outlook for the index as a whole seems positive for the year ahead, while the median valuation remains reasonable:

However, I think it’s worth taking a closer look at the companies near the top of my screen results. Why do they have such strong momentum right now – and can it be maintained?

Screening for momentum

Before I look at some of these stocks in more detail, I just want to revisit the MomentumRank and share the rules of my momentum screen with you.

MomentumRank: academic research suggests there are two main elements to stock market momentum – price and earnings momentum. If earnings forecasts are being upgraded, share prices tend to rise also.

You can find Ed’s in-depth explanation of the MomentumRank here, but in summary, the factors used to calculate this score are shown in the image below:

My Momentum screen: you can view or copy this fairly simple screen here.

The main requirement is for a MomentumRank of over 80. I’ve then added a few other rules in order to restrict the results to profitable, reasonably valued companies with positive earnings growth.

The screen’s results are sorted by MomentumRank.

My additional requirements may be one reason why some FTSE 100 companies are scoring well. They are often a little cheaper than faster-growing small caps.

However, these extra requirements are useful for me because they help align the screen more closely to my personal investing preferences:

• I don’t invest in unprofitable or early-stage companies

• I’m not comfortable paying sky-high valuations for growth

With that said, let’s take a look at some of these FTSE 100 elephants – can they really keep galloping ahead?

International Consolidated Airlines SA (LON:IAG)

The owner of British Airways emerged debt-laden from the pandemic and its long-haul focus meant it did not benefit from the initial rebound in short-haul travel. But IAG has made up for lost ground since then by focusing on its core transatlantic routes, where demand has recovered very strongly.

IAG’s heavyweight presence in London, Ireland (Aer Lingus) and Spain (Iberia) means that it is extremely well positioned to capture traffic on US and South American routes.

Recent trading updates have highlighted the benefit of this positioning. Operating profit for the nine months to 30 September 2024 rose by 10% to €3.3bn. During the third quarter of 2024, IAG’s load factor rose by 1% to 89.9%, despite a 5.7% increase in capacity versus the previous year.

This performance has supported a reduction in net debt from nearly €12bn at the end of 2021, to a Q3 24 figure of just over €6bn. This has been paired with a recovery in profit that’s seen the group’s net debt to EBITDA leverage ratio fall to just 1.0x at the end of Q3 2024.

In short, IAG is performing well. Broker earnings estimates reflect this, with repeated upgrades for both 2024 and 2025 over the last 12 months:

IAG’s price momentum is also very strong, with the shares trending higher and making new highs as earnings expectations climb:

Shareholders have seen the benefits as IAG’s share price has doubled over the last year:

Can IAG’s momentum continue? The chart above shows IAG's StockRank peaking in late summer and drifting steadily lower since then. I think the most rapid gains may already be in the bag, but IAG’s momentum could remain positive for a little longer yet.

However, I think there are a couple of points worth considering. 

First of all, the stock’s forecast P/E of six is probably not as cheap as it seems. Brutal cyclicality and high fixed costs mean that airlines don’t generally attract high multiples. Looking at peer comparisons, the shares are only a little cheaper than US rivals with much stronger earnings forecasts:

Secondly, I can’t help feeling that consensus earnings forecasts for 2025 may simply be extrapolating IAG’s 2024 performance.

IAG has not included any 2025 guidance in its recent RNS statements. While analysts covering the company may have been given a little more insight, much may depend on consumer spending and macro trends over the coming year.

It’s also interesting to see that IAG’s profits have now largely recovered to their pre-pandemic highs:

I’m not predicting an imminent collapse. But I wouldn’t be surprised to see growth slow. I don’t think the opportunity here is as exciting as it was six months ago.

Barclays (LON:BARC)

Like IAG, Barclays’ share price has also doubled over the last year.

However, I’m a little more optimistic about the outlook for 2025 than I am for IAG.

Barclays pre-tax profit rose by 18% to £2.2bn during the third quarter, as the bank continued to benefit from higher interest rates and stronger activity levels in investment banking:

Barclays Investment Bank (IB) income increased 6%. Global Markets income increased 3%, with FICC and Equities both up 3% respectively. Investment Banking income increased 13%, as higher fee income in Advisory and Debt and Equity Capital Markets was partially offset by lower income in the International Corporate Bank

The investment banking division is focused on the UK and US markets. With this positioning, I think it could continue to do well in 2025, given the strength of the US stock market and the expected political backdrop.

Another positive factor is that Barclays does not have the exposure to motor finance that’s currently casting a shadow over rival Lloyds.

Barclays share price momentum is impeccable at the moment:

Interestingly, earnings momentum is more mixed. 2024 estimates essentially round-tripped last year and are flat on January 2024. However, forecasts for 2025 are ahead of where they were 12 months ago and suggest Barclays earnings could rise by 18% this year:

Can Barclays’ momentum continue? A StockRank of 90 suggests a more positive outlook for Barclays. I think this is reasonable. The stock’s ValueRank remains above average, despite last year’s share price surge:

Barclays’ Q3 2024 tangible net asset value per share was reported at 351p, meaning the shares still trade at a discount of 18% to their tangible book value.

During the third quarter, NTAVps rose by 11p, thanks in part to the bank buying back its own shares at a discount to book value.

The trailing 12-month return on equity of 6% shown on the StockReport suggests a discount to book value may be justified for Barclays’ shares. But the bank’s preferred measure of return on tangible equity suggests a potential 12% return for 2024. I think that could justify a share price closer to NTAV.

HSBC Holdings (LON:HSBA)

HSBC also enjoyed a strong third-quarter last year, for similar reasons to Barclays:

Profit before tax increased by $0.8bn to $8.5bn compared with 3Q23, primarily due to revenue growth in Wealth and Personal Banking ('WPB'), and in Foreign Exchange, Equities and Global Debt Markets in Global Banking and Markets ('GBM').

My concern here is that the geopolitical aspects of this business – with its heavy dependence on China, the UK and US – mean a greater risk that external factors might have an outsized influence on future results.

Is there a risk that US relations with China will cool further under President Trump? Who can tell? Not me, anyway.

The complexity of HSBC’s political exposure has kept me away from the stock for years, despite the attraction of its high dividend yield and strong global franchise.

However, this £147bn bank’s price momentum does look very strong at the moment…

… although earnings momentum is more mixed, with 2025 estimates suggesting a slight fall in profits this year:

Can HSBC’s momentum continue? Perhaps the most sensible way to view HSBC’s geopolitical situation is that it’s been successfully managing similar pressures for more than 150 years. I suspect it will continue to do so.

In the meantime, a strong StockRank and Super Stock status combine with a 6.5% dividend yield to create a picture that could be attractive, despite last year’s strong share price performance.

Carnival (LON:CCL)

Like IAG, cruise ship operator Carnival exited the pandemic with a hefty debt load and has seen its profits (and share price) recover more quickly than expected.

Unlike IAG, however, Carnival’s debt burden remains substantial. The group ended its 2024 financial year with net debt of $26bn and a net debt-to-EBITDA ratio of 4.3x. While this is an improvement on 2023, there’s clearly still some work to do here.

High debt levels mean that the generous dividend payments of the past remain a distant memory.

Carnival shares do not look especially cheap to me, on a price-to-earning multiple of 13 and three times book value:

Profit margins in this business are respectable and Carnival's return on equity has been boosted by the increase in debt (which erodes book value). However, for a capital-intensive business of this kind, I’d see return on capital employed as the most relevant profitability metric. Carnival’s ROCE seems fairly average to me:

Outlook: in his fourth-quarter results commentary, CEO Josh Weinstein reported record full-year operating profit of $3.6bn and said that advanced bookings for 2025 were at an all-time high for both price and occupancy.

Clearly demand for Carnival’s services remains robust. The momentum picture is also strong. Earnings forecasts were upgraded regularly last year and suggest a healthy 18% rise in earnings in 2025:

Price momentum is also strong:

Can Carnival’s momentum continue? For me, elevated debt levels and the lack of a dividend rule out Carnival as a possible investment.

On the other hand, the cruise market still seems to be booming and I recognise Carnival’s appeal as the owner of iconic and popular brands such as P&O, Cunard and Holland America.

I can’t rule out further gains for the stock in 2025, perhaps aided by additional upgrades. But I think there are downside risks too. In my view, Carnival’s StockRank highlights the risk that momentum may have run ahead of the stock’s quality and value credentials:

On balance, I’m neutral.

Imperial Brands (LON:IMB)

It’s a common fallacy that the best investment opportunities are found in growth sectors of the economy. In reality, there’s often very little correlation. Imperial Brands is a good example of this.

Since CEO Stefan Bomhard took charge in 2020, Imperial’s tobacco volumes have declined from 239.1bn SE (‘stick equivalents’) to just 190.0bn SE. That’s a decline of 20%, or 5.9% annualised. No surprise here, really – we all know global cigarette consumption is in decline. 

What’s more surprising is the company’s financial performance over the same period. Imperial’s operating profit has risen by 30% since 2020, while net debt has fallen by 20%.

The dividend is growing and the company has also generated enough cash to buy back 10% of its share capital at highly attractive valuations.

Oh, and the shares have almost doubled:

Bomhard set out a five-year plan when he took charge. He’s delivered and has now promised a new set of five-year targets will be unveiled at a capital markets day in March.

2024 was a good year for this business and the market has rewarded Imperial’s delivery with strong momentum. The shares rose by almost 40% last year and this is reflected in excellent price momentum metrics:

However, I feel there’s a little less clarity on earnings.

On one hand, forecasts have been upgraded since November and suggest Imperial’s earnings will rise by around 10% in FY25.

However, actual estimates for both FY24 and FY25 earnings are lower than they were at the start of 2024, despite the beneficial impact of share buybacks.

Can Imperial’s momentum continue? As a shareholder I’ve been impressed by the group’s turnaround under Bomhard. I’ve been happy to sit tight and collect a growing income stream.

While I’m not an unqualified fan of buybacks, I think they have delivered impressive results here and may continue to do so. The valuation remains relatively modest, with a trailing EBIT/EV yield of 11.7%, so buying back shares should generate attractive returns.

However, the sector shift towards reduced harm products is continuing and Imperial is not a market leader in areas such as vaping or heated tobacco. The company’s outsized exposure to developed markets such as the UK and Germany is probably not ideal, either.

The StockRanks suggest a positive view on the outlook:

My own calculations also suggest that the shares could have a little further to go to reach fair value.

However, I’m not planning to make any decisions on whether to increase or decrease my holding until after March’s CMD. Any changes to Imperial’s strategy or capital allocation priorities could have a marked impact on shareholder returns.

Disclosure: Roland owned shares in Imperial Brands at the time of publication.