13 Red Hot Soaring Shares

Momentum investing essentially involves putting ones faith in the market's judgement about stocks (reflected in their share price appreciation). The logic is that the market chases certain shares for good reason. So an upward share price trend reflects the development of a business and the growing popularity of an investment case, and ultimately the monsters-of-momentum screen is a technique for hunting out hot investment ideas which will hopefully continue to delight and excite the market for some time to come.

By looking chiefly at share price and volume data rather than fundamentals (although EPS growth forecasts form a part of the criteria) the monsters-of-momentum screen has the benefit of being able to highlight many different types of investment opportunities, from recovery plays to growth stocks, to value situation to cyclicals. The caveat is that the market has already started to take notice of these investment stories so some handsome early gains have already been taken off the table, and in the worse case not only is the run over, but the stock in question is already grossly overvalued with sentiment ready to slip. On the plus side, though, when momentum investing goes well there is little waiting around for the market to get behind an investment idea.

Last year it was a case of third time lucky for the monsters-of-momentum screen. After a disappointing second-year outing, the portfolio this time round massively outperformed the FTSE All-Share producing a total return of 40.9 per cent compared with 20.3 per cent. It should be noted that my figures do not account for dealing costs or share spreads. Following the recent stellar 12 months, the screen has produced a cumulative total return of 62 per cent over the three years I've run it compared with 30.2 per cent from the index, although as can be seen from the graph below, the ride has not always been smooth.

Source: Datastream

The screen has identified 13 monsters this year. I've provided a write-up on the five showing the strongest three-month momentum below (all but one of which are buys based on the IC's fundamental analysis) and provided details of the others in the table that follows. The criteria used for the screen, which is conducted on all stocks in the FTSE All-Share and FTSE Aim 100, are:

Renold

Industrial chains and gearbox manufacturer Renold (RNO) has the makings of a stellar recovery play. Torrid trading and significant pension liabilities have weighed on the group, but a recently appointed chief executive seems to be turning things around.

There has been some progress made on the pension front, while the company has also confirmed the closure of a loss-making factory in Bredbury. Other cost savings are being pushed through, too, and broker N+1 Singer believes pre-tax profit margins can rise from 2.3 per cent last year to 6.4 per cent in the year to the end of March 2016. This underpins its recently upgraded forecasts of compound annual EPS growth of 48 per cent in the years to March 2016.

The icing on the cake, however, would come if trading improved as a result of a pick-up in global industrial demand. Recent economic data has been positive on this front and there were some encouraging signs from the order intake numbers Renold reported in this month's half-year results. Any further positive developments on the pension front could also be key and recent rises in bond yields have already begun to improve the outlook for many schemes.

*Next 12 months consensus forecasts

Source: S&P CapitalIQ

Last IC View: Hold, 19p, 20 Nov 2012

Clinigen

Drug services firm Clinigen (CLIN) came to market just over a year ago with a rather unusual business model. However, maiden full-year results last month demonstrated to the market just how attractive this business model is proving to be and have helped add to the company's growing army of plaudits. The company has three businesses. It supplies drugs for global clinical trials for pharma clients, it also buys drugs that big pharma companies view as moribund and reinvigorates sales, and finally it provides drug consultation services.

There are cost synergies between Clinigen's three businesses but also, and perhaps most importantly, intellectual synergies, as the range of businesses provides Clinigen with in-depth knowledge about potential market niches and possible drug acquisition opportunities.

The view that the company has a business model that provides it with rather unique advantages was strengthened by the 29 per cent underlying EPS growth recently reported for the full year, which was almost all organic. With the consultancy business growing particularly strongly and new drugs on the roster for the coming year, there is a clear buzz about prospects.

Last IC view: Buy, 435p, 25 Sep 2013

Aga Rangemaster

As can often be the case with momentum screens, Aga Rangemaster (AGA) flashed up earlier this year in a more value-orientated screen (22 Apr 2013, Seven cheap and steady growth shares). Based on the share price performance since, it certainly looks like there was value on offer back then.

The story has moved on since the spring. Back then, hopes about improved prospects for Aga were largely based on self-help measures it was taking with a distant inkling that a recovery may, at some point, be on the cards. However, with a government now seemingly committed to boosting housing transactions with schemes such as Funding for Lending and Help to Buy, there are high hopes for a pick-up in demand for the high-end cookers and tiles Aga makes and sells.

Indeed, an improving trend in order intake in the first half suggests things have already begun to move in the right direction. Rising sales are very significant for Aga shareholders as broker N+1 Singer calculates that every 1 per cent rise in revenue translates into a 14 per cent pre-tax profit increase. The company has a large pension deficit which is an ongoing concern, but rising bond yields should help ease the burden.

Last IC view: Buy, 108p, 29 Aug 2013

Photo-Me International

There aren't many companies that can point to Europe as an engine for growth at the moment, but this is the case with Photo-Me (PHTM). In fact, the region was largely responsible for the 10 per cent increase in profit in the first four and a half month of its financial year as reported at the group's September AGM.

Not only is the business benefiting from investment in new photo booths in France - a 7.5 per cent increase is planned this year - but it has also begun to benefit from its roll-out of laundry machines in the country. Other markets have been less exciting with currency losses more than offsetting underlying growth in Asia and flat trading in the UK. However, cost-cutting continues to help the group move in the right direction.

What's more, the business is very cash-generative, so as well as investing in earnings growth, management expects to be able to hike the dividend by around a fifth this year if all goes to plan, while there is also the potential of another special dividend payout - adding to the 3p last year.

Last IC view: Buy, 87.25p, 27 Jun 2013

Staffline

So confident is Staffline (STAF) in its prospects that it has told shareholders it expects profits to treble over the next five years and it apparently will not need any trading tailwinds to achieve this lofty objective. The assertions should not be dismissed as over-ambition as the company has trebled in size twice since its 2004 float.

The company has positioned itself in several sweet spots that should help it deliver on its aims. The group has been running government Welfare to Work schemes and has established itself as a top provider, which should now enable it to win more contracts. The company has also been branching out into new markets such as HGV driver training and white-collar recruitment. Its core business, which involves supplying blue-collar staff from the premises of its clients, is trading strongly, too. And the company should also benefit from stricter regulation of immigrant workers and working standards.

All in all, there are good grounds to believe that the company can deliver, and if it does, the shares, which are not on a very high rating for the sector, seem like a bargain for anyone prepared to look a few years out.

Last IC view: Buy, 590p, 10 Oct 2013

The Rest

*Next 12 months consensus forecasts

Source: S&P CapitalIQ