Momentum's great 2013

Source: S&P CapitalIQ

The quarter-on-quarter performance of the screen over 2013 has been remarkably reliable compared with other years, with the longs outperforming the shorts over every period and the longs only underperforming the index once, while the shorts only outperformed (they are chosen with the expectation that they will perform worse than the index) once (see chart).

Source: S&P CapitalIQ

So despite the incredible simplicity of this screen, the past 12 months have compounded the powerful outperformance it has delivered since its inception at the height of the last bull market on 15 June 2007 (it should be noted that I look at performance on a mid-to-mid price basis and without taking account of dealing costs, which has the effect of inflating returns). I've published the 10 long picks and 10 shorts for the coming quarter below. Due to the timing of publication of the magazine the picks do not reflect a full three-month period and therefore portfolio constituents may change when it comes to next updating them.

Source: Datastream/S&P CapitalIQ

TOP 10 MOMENTUM PICKS

Aberdeen Asset Management

Aberdeen Asset Management (ADN) has gone from zero to hero as far as momentum is concerned. It was one of the 10 "shorts" last time I ran the screen but went on to produce the best blue-chip performance of the following three months. The shares tanked earlier in the year when talk of tapering hit emerging market equities, which account for the mainstay of Aberdeen's investment funds.

But tapering concerns have eased since then and last month the group reported strong full-year results, where an impressive operational performance offset outflows. What's more, news that Aberdeen is to buy Scottish Widows Investment Partnership (SWIP) at a keen price has also impressed the market. The SWIP deal, which is expected to complete in March next year, should provide some major synergies and creates some welcome diversification, given Aberdeen's current heavy focus on emerging markets. That said, initial growth expectations from the operation are low, with fund outflows a strong possibility.

* Based on period 15 Sep 2013 to 4 Dec 2013

Source: S&P CapitalIQ

Last IC View: Buy, 487p, 19 Nov 2013

Associated British Food

Full-year results from Associated British Food (ABF) last month underlined just how exciting prospects for its discount clothing chain Primark are. The retail operation now accounts for two fifths of profit and in the last financial year managed 44 per cent profit growth. Indeed, broker Panmure Gordon highlighted the operation as the key reason for profits rising by a third in the past two years and it predicts that expansion of the chain, especially given the current push into Europe, could result in a trebling of ABF's profits over the next decade.

While the group's grocery operation is performing well its sugar business is likely to face major headwinds over the next year due to falling EU prices. This has led to management predicting little change in EPS for 2014. Nevertheless the shares command a premium rating that reflect the Primark growth hopes.

Last IC View: Sell, 2,200p, 5 Nov 2013

Hargreaves Lansdown

Good customer service has been a key driver of growth at Hargreaves Lansdown (HL.) for a number of years, but other potentially positive trends are now playing out for the group, too.

The company is expected to announce a new pricing structure that complies with the commission-banning retail distribution review (RDR) early next year. Already there have been funds flowing into the business as a result of the first stage of RDR implementation and the process could have much further to run. And the group's scale should put it in a strong position to negotiate good deals on fund purchases on behalf of its clients, which should add to the attraction of its offering.

Last IC View: Sell, 999p, 4 Sep 2013

International Consolidated Airlines

British Airways and Iberia owner International Consolidated Airlines (IAG) has been in three of the past four 'long' momentum portfolios. Its shares have been flying high as the market has become more convinced by its turnaround story. The major opportunity here is for improving the performance of Iberia and there are now some early signs that the restructuring action taken is having the desired effect.

The company should also be a beneficiary of a continued pick up in global economic activity with trading already improving in the US and Asia. And while Europe remains sluggish, a pick-up in these markets could prove significant. In the meantime, the group is also boosting performance by cutting costs and switching to flying more fuel-efficient planes.

Last IC View: Hold, 320p, 8 Aug 2013

Whitbread

Whitbread (WTB) is currently something of a market darling. The leisure group has long been lauded for the high-growth rates achieved by its fast-expanding Costa coffee shop chain. Indeed, first-half profits at the division rose by more than a fifth. But with the prospect of an economic pick-up, the outlook for its hotels - which serve a high proportion of business travellers - and restaurants is improving. Profits in the first half at the division were almost 8 per cent ahead and Whitbread's Premier Inn chain continues to win market share from its struggling rivals.

The market also seems to have warmed to the medium-term targets management has set for the group and the progress being made against them. And there is also a bit of speculative excitement helping to power the price higher based on recurrent rumours that the group could be broken up. Whitbread has a third quarter trading update scheduled for between the time of writing and the official closing date for the momentum portfolio selection, so if the response to the update is negative the stock may actually not make the final cut for the official 15 Dec 2013 to 15 Mar 2014 Long portfolio.

Last IC View: Hold, 3,395p, 22 Oct 2013

Prudential

Life assurer Prudential (PRU) added to its reputation as a quality growth play last month with an expectation-beating trading update. The group is enjoying strong growth in Asia and looks set to fulfil ambitious growth targets for the business. Its exposure to the region sets it apart from many of its rivals.

Prudential's businesses are also doing well in the US and UK where it has focused on a strategy of generating strong cash returns over chasing sales volumes. This appears to be serving the group well. The company also has a strong balance sheet which should help it to continue to take advantage of opportunities for growth.

Last IC View: Buy, 1,216p, 12 Aug 2013

AstraZeneca

AstraZeneca (AZN) has been dropping off the so-called patent cliff for a while now. This is the process whereby the expiry of patents opens the way for competition from cheaper generic copies of its drugs. Earnings and revenues have both been falling but the market now appears to be giving more credit to the company's strategy for dealing with the problem.

The group has been funnelling more money into research and development though a number of acquisitions, and there are hopes the drugs giant will soon have more decisive acquisitions to announce. In the meantime, the acquisition action to date has helped bulk up the late-stage new-drug pipeline and Astra's fans have their fingers crossed for imminent breakthroughs. That said, as things stand it remains hard for analysts to call an end to the period of declining earnings.

Last IC View: Sell, 3,301p, 1 Aug 2013

Shire

The market has been anticipating a big acquisition by drugs group Shire (SHP) for a while and last month it got it. Shire is splashing out $4.8bn on rare diseases specialist Viropharma, which will be funded by debt. The price represents a massive multiple of nine times sales. But Shire has said the deal will be immediately earnings accretive. What's more, the business is considered to be an excellent fit with Shire's existing operations and Shire has a history of making acquisitions that have significantly boosted long-term prospects.

Nevertheless, the news of the deal has pared the gains established earlier in the quarter. Progress during the three months was helped by expectation beating quarterly results, which were assisted by very strong sales of some of Shire's core rare disease medicines. Still, given the price paid, the jury seems to be out for now on the Viropharma move.

Last IC View: Hold, 2817p, 13 Nov 2013

Compass

Expectation-beating full-year results last month once again underlined the attractions of catering giant Compass (CPG). Not only did the group announce far better than expected profits but it also unveiled another share buyback worth £500m, which will underpin the share price and contribute to growth at the EPS level.

Compass benefits from both structural growth trends and market specific factors. The overarching rationale behind investing in the shares is that companies continue to turn to food services outsourcing as a way to save money, and as Compass gets larger - it is already the world's biggest food services company - it can push through yet more efficiencies and economies of scale. The group is also benefiting from strong demand in both the US and emerging markets and is benefiting from action taken to improve the performance of its European operation, which has been hit by the stagnant economic conditions.

Last IC View: Hold, 948p, 27 Nov 2013

Reed Elsevier

Anglo-Dutch publisher Reed Elsevier (REL) has put in a solid performance this year, which the market has been warming to. The sure footedness of progress has also helped highlight the attractions of the professional publisher's attempts to move its business into more lucrative parts of the market.

Third-quarter results last month also received a boost from the timing of events, which added to the rosy picture. There are some softer spots in the business, most notably legal publishing, but all in all the group looks in encouraging health and the rating and dividend yield, while moderating, still look reasonably attractive.

Last IC View: Hold, 717p, 28 Feb 2013

The Shorts

*Based on period 15 Sep 2013 to 4 Dec 2013

Source: S&P CapitalIQ