Join our community of smart investors

The 10 hottest blue-chip shares

The 10 blue-chip momentum longs and shorts for the next quarter are revealed
June 16, 2015

It's proving a tough year for my blue-chip momentum portfolio with the screen producing a second consecutive quarter of underperformance. The last three months have seen the kind of uncertainty and shifts in sentiment in key investment themes that can often present challenges for momentum strategies. The market's big macro concerns about Greece, the oil price, international politics and emerging markets have all been factors in shifting sentiment over the past quarter. But it is the UK's surprise general election result that seems to have had the most discernible influence on momentum's performance over the past three months as well as the momentum picks for the coming period.

For example, Babcock International appeared as a short pick in the 15 March portfolio. The outsourcer does a lot of work in the public sector, especially for the ministry of defence, and investors were therefore braced for a period of disruption if, as had been widely expected, the country had a messy election result. The continuity promised by the election of a majority Conservative government, and the increased likelihood that Babcock would benefit from a full renewal of Trident, caused the company's shares to surge 9 per cent on the day the election result came in. The momentum has continued since and Babcock is now one of the 'long' momentum picks for the coming three months.

Another noteworthy election-related feature of the new portfolio is the strong showing by housebuilders: both Taylor Wimpey and Barratt Developments are longs. The expectation that the election result means house-buying incentive schemes will continue, as well as the removal of uncertainty over the questions of mansion tax and rent controls, has caused a strong post-election run in housebuilders' shares.

The oil price and the rouble were key influences on another stock that has switched from being a 'short' to a 'long'. Coca-Cola HBC has significant exposure to the region. The company has recently reduced its guidance on the expected foreign-exchange hit for 2015 due to a firming up of Russia's currency, which has been helped by the stabilisation of the oil price.

 

LONGSPerformance (15 Mar -10 Jun)SHORTSPerformance (15 Mar -10 Jun)
ITV5.6%Coca-Cola HBC 26.7%
Mondi 4.1%Babcock International 22.5%
Schroders 0.9%Fresnillo 11.5%
CRH -0.3%Centrica 11.1%
Shire-5.1%HSBC 8.7%
Old Mutual-6.1%SSE 8.3%
ARM -6.7%Associated British Foods0.2%
Tesco-9.5%National Grid0.1%
International Consolidated Airlines -9.7%Royal Bank of Scotland -1.0%
Pearson-12.5%Anglo American-4.5%
Average-3.9%-8.4%
FTSE 1000.6%-0.6%

Source: S&P CapitalIQ

 

All in all, the longs fell 3.9 per cent between the 15 March and 10 June compared with a 0.6 per cent gain by the FTSE 100. Meanwhile the shorts (which are meant to perform worse than the market) were up 8.4 per cent. This represents a very disappointing result and is the third worst disparity between the longs and shorts in the 32 quarters that I have monitored my blue-chip momentum strategy. But such a blow should not be unexpected. Momentum strategies are only meant to work over the long-term and can be expected to produce plenty of short-term underperformance along the way. Indeed, since I started to monitor this blue-chip strategy at the height of the last bull market in mid 2007 it shows very impressive outperformance. The longs boast a 101 per cent gain over the period, the FTSE 100 is pretty much flat (down 0.98 per cent) and the shorts are down 13.3 per cent (see graph).

 

Blue-chip momentum vs FTSE 100

  

The 10 long momentum picks are based on the top performing FTSE 100 shares of the last three months while the shorts represent the 10 worst performing shares. The portfolio is reshuffled once every three months. Due to the publishing schedule of this magazine the list of longs and shorts in this article does not reflect a full three months to the official end of the most recent monitoring period (15 June 2015). The performance quoted in future articles will be based on a portfolio selected on the basis of the full three-month period, meaning these portfolios may vary slightly to those published here.

I've decided to exclude BG Group from this quarter's momentum long list due to the ongoing bid situation which was the cause of its strong recent performance. It would have topped the list otherwise. The longs are given brief write ups below and the shorts are published in a separate table.

 

THE LONGS