Five red hot momentum shares

We began to run this 'monsters of momentum' screen two years ago and, so far, it has had somewhat mixed results. For instance, on aggregate last year's screen underperformed the FTSE All-Share, returning 8.6 per cent compared with 12.2 per cent, but the previous year's screen strongly outperformed, gaining 4.5 per cent compared with a 2.6 per cent loss from the index. More striking, though, is how wide the variation in performance has been between the companies selected. For example, the shares in last year's screen delivered performances ranging from a 52 per cent rise from both Filtrona and Telecity to a 48 per cent fall from Blinkx.

This perhaps shouldn't come as too much of a surprise given that our screen is trying to find red hot shares and - to labour the language - when you play with fire you're going to get burnt. Indeed, while strong momentum can be a sign that the market is warming to a story and prospects are great, momentum can also quickly run its course if cracks appear in the narrative supporting a hot stock's ascent, which leaves late buyers sitting on an overvalued share with a long way to fall.

That said, the strong rises experienced by many of the stocks selected by previous screens does suggest to us that the stock selection method has merit as a source of ideas. Using stop-loss limits could be a useful discipline given the risks. This year, three of the five stocks passing our screen have been rated 'buys' by the IC based on our fundamental analysis. The screening criteria is given below followed by the five stocks that passed the test ordered by three-month price momentum:

Price momentum: A share price rise in the top 10 per cent of all FTSE and Aim shares over the past three months, in the top 25 per cent over six months, and in the top 50 per cent over a year.

Trend: The 10-day moving average must be above the 30-day which in turn must be above the 100-day.

Earnings growth: Forecast earnings growth must be 15 per cent or more over the next 12 months or 10 per cent plus a positive earnings surprise of 5 per cent. In addition, there must be either historic EPS growth of 10 per cent or a positive earnings surprise of 5 per cent.

Volume: Average daily volume over the past three months must be above the level of the last year.

FIVE RED HOT SHARES

Centaur Media (CAU)

Centaur's shares have rocketed on signs that its strategy to transform the business through acquisitions and internal change is bearing fruit. The business publishing group is boosting its digital activities and focusing on higher-quality earnings streams. Indeed, on a pro-forma basis, last year's digital revenues surpassed print revenues for the first time according to research house Edison. Progress is being made in a tough market and this backdrop has tempered some brokers' expectations recently. But Centaur's growth strategy is still expected to produce significant earnings growth, and while business publications are suffering, the information and events divisions are doing well. The shares trade at a discount to the sector and the earnings multiple still looks low despite the heady run the shares have enjoyed. Last IC view: Buy, 40p, 13 Sep 2012

Source: S&P CapitalIQ

Iomart (IOM)

Iomart's eight data centres have benefited from buoyant demand for its hosting services as small and medium-sized businesses embrace cloud computing, which allows data to be stored and accessed from remote sites. Organic growth for its hosting services, which account for about three-quarters of the business, is running at around 20 per cent according to broker Peel Hunt. This is being supplemented by bolt-on acquisitions, which have helped fuel broker forecast upgrades. Due to a high level of fixed costs at centres, the strong demand is also leading to rising profitability. Sentiment towards Iomart also benefits from the fact that it rents space on long-term contracts, which helps underpin earnings visibility.

Macfarlane Group (MACF)

The packaging materials sector isn't where one would normally expect to find a super-hot momentum share. Indeed, Macfarlane's story is hardly one of high growth. But what is attractive about it is a combination of operational strength, a low earnings-based valuation and an increasingly safe-looking bumper yield. Facing a tough economic outlook, the company has focused on cutting costs and paying down debt in recent years, which has started to make the dividend look a more solid bet. It has also been eking some growth from its manufacturing and logistics businesses. Last IC view: Buy, 20p, 30 Aug 2012

Lupus Capital (LUP)

The strength displayed by Lupus Capital's shares is in no small part a reflection of hopes that the US housing market has finally bottomed out. The door and windows company generates half its sales across the pond and has recently experienced a pick-up in orders. And there are other reasons to feel optimistic about the company's prospects. Trading in the UK and Europe is expected to continue to be tough, but the recent disposal of two businesses should help the group boost margins and the increased focus is helping management to boost market share. Disposals have also raised significant amounts of cash, which puts the company in a strong position to make growth-enhancing bolt-on acquisitions. Last IC view: Buy, 138p, 4 Sep 2012

Smart Metering Systems (SMS)

Smart Metering Systems came to the market in July 2011 at 60p and the shares have rocketed since. The float proceeds gave the group funding to increase the number of meters it has installed in the commercial and industrial gas market. This has proved the basis for substantial growth in recurring revenues - in the half-year to the end of June these grew 25 per cent to £9.3m. Meanwhile, cash profits rose by two-thirds to £4m. There should be plenty more to come, too, as the meter portfolio increased by 25 per cent in the first half to 280,000, while investment in meter assets rose by more than half - and new contract wins present the potential to add 430,000 domestic meters. The company is also now installing its recently developed AMD smart meter device and testing it for use in the water and LPG markets. So there's plenty to be excited about, but it does come with a very high rating on the shares.

Last IC view: Hold, 109p, 16 Apr 2012