The short selections from my classic momentum screen can be particularly troublesome at times, and the past three months have been a case in point. While the FTSE 100 as a whole has moved ahead 2.6 per cent since 15 December 2015 (the last quarterly change-over date for the screen), the 10 worst performing shares of the previous three months (the shorts) have experienced a monster rebound. All in all the 10 short picks have managed to produce a massive 26.5 per cent gain over the period.
The stock showing the biggest gain was one of 2015's worst dog stocks, Anglo American. Indeed, Anglo dropped 75 per cent in 2015 and continued heading lower at the start of 2016, to bottom at 216p in late January. The shares recovery since then, however, has been meteoric, rising 140 per cent.
While the shorts have been a cause for consternation over the past three months, at least the longs also managed to just about outperform the FTSE 100 with a 2.8 per cent gain (see table), which follows a very poor run over recent quarters.
LONGS | SHORTS | ||
---|---|---|---|
Name | 15 Dec - 12 Mar | Name | 15 Dec - 12 Mar |
Fresnillo | 40.8% | Anglo American | 97.0% |
Compass | 6.9% | Glencore | 79.3% |
SABMiller | 4.9% | Antofagasta | 29.1% |
Merlin Entertainments | 4.4% | Rolls-Royce | 27.4% |
WPP | 4.4% | Pearson | 23.5% |
Sage | 0.7% | BHP Billiton | 21.3% |
BT | -2.0% | Meggitt | 12.9% |
Direct Line Insurance | -10.1% | Rio Tinto | 7.8% |
Dixons Carphone | -10.4% | Standard Chartered | -1.5% |
Hargreaves Lansdown | -11.5% | Sports Direct Int'l | -31.6% |
Longs | 2.8% | Shorts | 26.5% |
FTSE 100 | 2.6% | - | 2.6% |
Source: S&P Capital IQ
The terrible quarter for the shorts (terrible given that they are meant to underperform the market rather than produce 10-fold outperformance) means these stocks are now doing better than the FTSE 100 index since I started monitoring a blue-chip momentum strategy in mid 2007 - the peak of the previous bull market (see chart).
Momentum
The last year in particular has been very tough for my classic momentum strategy, which is based on constructing a long portfolio consisting of the 10 best performing shares of the previous three months and a short portfolio based on the worst performers. As can be seen from the graph below, not only have the shorts outperformed the market substantially over 12 months, but the longs have underperformed it, which is the opposite of what is meant to happen. Still, periods of disappointment are all part and parcel of this kind of rigid rule-based system. And the longs look better on a three and five-year view (see graphs) and importantly beat the shorts over both these time periods despite the massive gain from the shorts over the past three months.
Momentum - 1 year
Momentum - 3 years
Momentum - 5 years
The epic outperformance of last year's most battered stocks means the longs picked by the classic momentum screen for the coming quarter look like an extremely risky bunch. Not only are there six commodity stock picks, but the remaining four shares have been the subject of many negative headlines over 2015 and for most of the start of the current year. If we're seeing a sustained turn in market sentiment which heralds the start of a proper recovery for these companies, then the longs could do very well. However, should the recent risk-on rally simply prove a temporary reprieve, I will have more momentum woes to report come June.
THE LONGS
Name | TIDM | Price | Mkt cap | Dividend yield | Fwd NTM PE | 3-mth mom |
---|---|---|---|---|---|---|
Anglo American | AAL | 518p | £7.2bn | - | 30 | 93.0% |
Glencore | GLEN | 143p | £20bn | - | 40 | 87.7% |
Randgold Resources | RRS | 6,310p | £5.9bn | 0.7% | 38 | 54.9% |
Fresnillo | FRES | 932p | £6.8bn | 0.5% | 49 | 39.8% |
Antofagasta | ANTO | 530p | £5.2bn | 2.8% | 60 | 28.9% |
Tesco | TSCO | 193p | £16bn | - | 29 | 34.1% |
Rolls-Royce | RR. | 688p | £13bn | 2.4% | 25 | 27.3% |
Pearson | PSON | 877p | £7.1bn | 6.0% | 16 | 25.9% |
BHP Billiton | BLT | 820p | £43bn | 2.7% | 44 | 24.2% |
Burberry | BRBY | 1,380p | £6.1bn | 2.6% | 19 | 25.8% |
Source: S&P Capital IQ