Momentum magic

In fact, the long portfolio is currently outperforming the index over three months, one year, three years and five years (see table), which is pretty impressive, although in reality dealing costs would almost certainly have put paid to the three-year outperformance, which is relatively minor.

Source: S&P Capital IQ

The strong turn over the most recent quarter may not come as too much of a surprise to regular readers of this column, as our strategy screen from two weeks ago identified momentum as one of the top-performing strategies over recent months. Generally, momentum prospers at a time when the market is building a consensus view around certain types of stocks and outperformance can go on for several quarters, although the end of runs can often be abrupt (see graph).

One clear theme among the long positions selected from this quarter's portfolio is that many have recently released better than expected results and benefited from a rally in anticipation of strong numbers followed by a fillip after better than expected numbers were reported. That aside, they are something of a mixed bag in terms of the sectors they hail from and their characteristics as investments - be that growth, income, value, etc. We give the long positions a write up below and the shorts are published in a separate table thereafter. Due to the timing of this publication, the selection is based on a slightly shorter time period than three months (15 December 2012 - 6 March 2013) and therefore could be subject to change when we update the performance of the strategy in three months' time.

The longs

International Consolidated Airlines (IAG)

On the face of it, the recent full-year numbers reported by IAG were grim. However, the €23m (£20m) underlying operating loss, which excludes restructuring and impairment charges of €545m relating to Iberia, was much better than had been expected. Indeed, BA put in a very encouraging performance, helped by the speedy integration of bmi and busy planes. Even Iberia's final-quarter loss of €351m was not as bad as feared. All this is helping fuel expectations that turnaround plans will pay off handsomely for investors. Industrial action at Iberia are a concern, though, as are pressures on cost. What's more, the valuation based on next year's forecast earnings looks expensive, especially considering the absence of a dividend and a large pension deficit. Still, broker Investec forecasts that underlying EPS will more than double in 2014, from 12.2p this year to 27.3p.

Source: S&P Capital IQ

Last IC view: Hold, 238p, 28 Feb 2013

Eurasian Natural Resources Corp (ENRC)

Eurasian Natural Resources has bounced back recently, which has been helped by improved prospects for industrial metals, albeit with some noteworthy weakening in spot prices since February. The company's shares have also been persistently dogged by concerns about corporate governance and the poor performance of the group's interests in Africa, so the recent willingness of the market to take more risk is likely to have benefited the shares. The market has also recently been getting behind low PE stocks and the price of the shares looks far from challenging. Based on forecasts from broker JPMorgan Cazenove, the shares currently trade at just over seven times 2013 expected earnings, dropping to less than five times predictions for 2014.

Last IC view: Sell, 376p, 16 Aug 2012

Weir Group (WEIR)

Weir's share price slumped during 2012 as it became clear that conditions were tough in some of its end markets, particularly oil and gas where it had benefited from the North American shale gas boom. However, recent full-year results, which met the City's expectations, have underpinned confidence in current trading and the long-term growth areas the pump-maker is exposed to. Weir's performance is expected to improve during 2013, with the second half doing most of the running. Markets in minerals and power have remained strong, though, and the company is confident enough to have predicted a double-digit rise in its dividend this year following on from a 15 per cent increase in 2012. Rising levels of aftermarket orders - 57 per cent of the total last year - also underpin prospects. The company is considered a high-quality play and as such the current valuation does not look too challenging.

Last IC view: Buy, 2,203p, 27 Feb 2013

CRH (CRH)

Following a grim 2012, building materials group CRH is shaping up as something of a cyclical recovery play. The company has already started to see a pick up in orders in the US, where improved conditions in the residential market are showing through. And while Europe remains tough, there are hopes that the market there is bottoming out finally. What's more, the group is benefiting from its own self-help measures in the form of cost-cutting. Acquisitions are also helping to boost the group's growth prospects and the attractive yield should help underpin the share price even if the earnings multiple looks high, while shareholders wait for better things on the profits front.

Last IC view: Hold, 1,410p, 26 Feb 2013

Aberdeen Asset Management (ADN)

Aberdeen Asset Management takes its place in the 'long' momentum portfolio for the second quarter on the trot. It is strong growth in the group's equity-related products, especially focus on the Asian Pacific region where the group has a superb fund performance record that has really propelled growth. The inflows of new funds into the group have also focused on higher-margin products such as pooled funds. There have been some concerns that the levels of inflows could hamper performance and that the group is too reliant on one part of the business. However, Aberdeen has also been making good progress recently, selling emerging markets debt products. Broker Numis expects strong dividend rises in the coming years, from 11.5p last year to 15p in 2013, followed by 20p in 2014.

Last IC view: Buy, 385p, 24 Jan 2013

Hargreaves Lansdown (HL.)

The momentum in Hargreaves Lansdown's share price and underlying business is being driven by the quality of its Vantage trading platform product and high levels of service, which means new customers keep on flocking to the group. Longer-term trends in the market such as the growing popularity of self-invested personal pensions (Sipps) are also driving growth. The group's small discretionary fund management business is doing well, too. However, the group's excellent track record is reflected in the shares' high rating - not that this has proved any impediment to performance over the last year, when the stock has made it into two out of four of our 'long' portfolios.

Last IC view: Hold, 786p, 6 Feb 2013

GKN (GKN)

Engineering group GKN has diversified away from the automotive market in recent years by spreading its wings into aviation and industrial sectors. The move has reduced the risks associated with the business, which is evident from the ongoing troubles in the European automotive market, and given analysts reason to talk of long-term sustainable growth prospects. The group is expected to benefit this year from cost-cutting and strong conditions in the civil aerospace market. Last year's acquisition of Volvo Aero will also make a full-year contribution to performance. Nevertheless, the shares trade at a relatively low rating compared with peers, which suggests there could be re-rating upside if a GKN growth story continues to take hold.

Last IC view: Buy, 260p, 26 Feb 2013

WPP (WPP)

The cyclical nature of the advertising business means times have been tough for WPP of late. However, the group is making progress on a number of fronts. Growth from its digital business and emerging markets has been strong recently. In addition, cost savings are now being pushed through in Europe, which should help boost performance. On top of this, the company is producing solid cash generation. The valuation of the shares is more or less in line with the peer group, but the market has clearly warmed to prospects recently.

Last IC view: Hold, 1,055p, 4 Mar 2013

Bunzl (BNZL)

Packaging company Bunzl has a well-deserved reputation for reliability and recent results for 2012 proved no exception. The company bolstered solid organic growth with 13 acquisitions during the year, which boosted performance during the 12 months and should provide growth impetus into the coming year. Trading in both North America and Europe is looking up, too. Further acqusitions are expected this year following a refinancing in 2012. However, the strong run in the shares has led many analysts to question the rating on the shares of what many regard as a dull but reliable play.

Last IC view: Hold, 1,220p, 26 Feb 2013

ARM Holdings (ARM)

The verdict of ARM's fourth-quarter results in early February from broker Peel Hunt was that they "really could not have been stronger in any area". No surprise, then, that the shares, despite their high valuation, have been building on their impressive pre-results gains since. The Cambridge-based chip designer has been riding the surge in demand for mobile devices and sold a record amount of processor-design licences in the final three months of 2012 and increased the proportion of sales that were for higher-value chip types. Royalty payments also jumped, helped by the larger amount of top-end chips ARM has in the market. However, the perennial problem for anyone looking to buy ARM remains its shares' valuation. Even taking account of the cash pile, the rating looks expensive. However, this has not stopped ARM making eight appearances in the 20 'long' momentum portfolios published over the past five years and never appearing as a short.

Last IC view: Hold, 930p, 5 Feb 2013

The shorts

Source: S&P Capital IQ