Join our community of smart investors

Earnings recession indicators

Few companies score well on our earnings momentum screen
February 3, 2020

Since 2011, our price and earnings momentum screen has delivered outstanding results. The past isn't a guide to the future, although perhaps the fact companies scoring well are in short supply, can also be useful as a warning sign. Could the weakness in forecast earnings and earnings upgrade momentum signal a profit recession for UK-listed companies? 

One thing momentum tells us, however, is that it doesn't pay to be out of the market on fear signals as you not only miss the last leg of upside but also the best part of recoveries. Therefore, the sensible thing to infer is that portfolios should have some defensiveness built into their strategic asset allocation and as part of this, investors should be holding on to the quality companies they already own a slice of, while not over-concentrating positions in momentum darlings where valuations are getting stretched. 

  • Thanks to improved one-month share price momentum, this month, software group AVEVA (AVV) joins digital services business Kainos (KNOS), Liontrust Asset Management (LIO), leisure and gambling company Rank Group (RNK) in passing 8/8 tests on our share price and earnings momentum screen.
  • Across the market capitalisation scale, not many businesses are scoring well on the screen, reflecting global uncertainty and where we are in the cycles for both the economy and the stock market. Tests commonly failed by FTSE All Share companies are requirements for forecast earnings growth of over 10 per cent in the current and next financial year.
  • Aim is normally a market associated with momentum shares but only Knights Group (KGH), the legal and professional services specialist, gets full marks this month. The caveat, with Aim stocks especially, is that further research needs to be undertaken - into facets of operations and accounting policies on revenue recognition – before making a final assessment.
Download PDF