10 shares with positive momentum for Q1 2024

This year, the festive period came early for our Momentum Classics screen. The quarterly screen, which takes long or short positions in recent risers and fallers in the FTSE 100, aims to capture the tendency for price trends to play out over weeks and months. Its last run out in mid-September, produced a batch of stocks that went on to do exactly that.

The longs – the 10 UK blue-chips whose share prices climbed the most in the preceding three months – gained a handy 7.5 per cent in the period, compared with a 2.4 per cent decline in the shorts. As I’ve outlined in previous editions of the screen, while it’s worth keeping track of those sliding names, we are primarily interested in positive momentum.

That’s good news, because over the past four quarters, continually rotating into the risers has resulted in a 26 per cent simple return. As for the FTSE 100, it didn’t manage much over the past 12 months. Excluding dividends, it’s up by around 3 per cent, meaning the hypothetical trading and time costs involved in mirroring our strategy in real-time would have been worth it.

With an average outperformance of 5.1 per cent a quarter, the screen’s performance over the past year has been both exceptional and well above the long-term average. The longer we run the Momentum Classics, the more evidence we have that it can lead to a viable source of alpha (or ‘smart beta’, as factor-investing is sometimes marketed).

Over the past three years, the longs have outperformed the FTSE 100 two-thirds of the time. Hark back to when we started running the screen in June 2007, and the odds aren’t much worse, at 62 per cent. During that time, its average quarterly outperformance stands at 2.1 per cent. If smart trading is about placing bets when the odds are skewed in your favour, then this track record, though not necessarily spectacular, is hard to ignore.

This might sound strange coming from an investment magazine more used to advocating a buy-and-hold strategy. Ordinarily, we don’t put much truck in flipping between stocks every three months. Not only does constant trading whittle down returns, it also narrows down an investor’s focus to the immediacy of weeks and months, rather than the periods over which genuine changes in earnings and business fortunes can occur – which is to say years and decades.

Worse, by dispensing with the questions that ultimately matter to a business, a myopic view of weekly price movements is more likely to amplify the emotional responses that often make investing such a tricky pursuit.

However, there are two aspects of our momentum screen that are worth contemplating, whether or not you try to mimic its results (and in the spirit of tradition, I should point out that the screens in these pages should be used as a source of idea-generation, rather than off-the-shelf portfolios).

The first is that momentum seeks to exploit an often-overlooked aspect of markets, which is their short-term inefficiency. While stocks eventually follow earnings over the long haul, on shorter time horizons they are increasingly buffeted by all manner of reactions, overreactions, emotions, fads and fears. We know markets are inefficient because its participants – that’s us – are inefficient.

It might not always be possible to explain investor psychology. But we do know that markets can be swayed by herd-like behaviour, delayed reaction and shifts in sentiment.

The second, albeit connected, reason why a quarterly screen works is that it is a systematic approach. There are no gut feelings, judgements or valuation arguments involved when it comes to applying a set of rules every 90 days. What this loses in nuance is arguably compensated for in its removal of certain difficult aspects of the investing process.

For example, if a stock’s momentum fades, it is unsentimentally cut from the next quarter’s selections. Last time around, I bemoaned the screen’s occasional tendency to include whipsawing companies such as Ocado (OCDO), whose brilliant run between June and September looked likely to fizzle out as the stock reverted to type. I needn’t have worried too much. While, as predicted, shares in the online grocery group lost value over the past three months, it was a mild 3.9 per cent. So long as you accept that momentum fades or reverses, then you can accept the simplicity of the process as its strength.

What’s more, in addition to the timing of sales, the screen’s rules pre-determine how many stocks to hold, where to draw them from and why. And all that matters for the ‘why’ is market price, which unlike analyst forecasts or company-reported earnings, cannot be contested.

Over the past decade, a strategy of continually applying those rules would have generated a simple price return of 120 per cent, versus 19 per cent from the index itself, and 17 per cent from the shorts. That works out to an 8.2 per cent compound annual rate of return, slightly below the all-time average of 8.7 per cent.

Aside from Ocado, the past three months’ detractors were typical of the screen. British Gas owner Centrica (CNA), plus super majors BP (BP.) and Shell (SHEL) – which were powered higher during the last quarter on rising spot prices for oil and gas – all fell back on a reversal in those commodity markets.

But for the first time since the pandemic rebound, six longs managed to post double-digit gains for consecutive three-month periods. This quarter sees the return of three from that group, in the Lazarus-like Marks & Spencer (MKS), the Teflon of high-street retailers Frasers (FRAS), and Rolls-Royce (RR.), whose continuous re-rating under chief executive Tufan Erginbilgiç has landed the stock a place in the FTSE 100 longs for the fourth time in five quarters.

There’s also a definite property flavour to this quarter’s longs. Homebuilders Barratt (BDEV) and Taylor Wimpey (TW), along with real estate investors Segro (SGRO) and Land Securities (LAND) have all ripped higher on signs of a thaw in both residential and commercial property markets. The chief source of optimism – a possible peak in interest rates, evidenced by declining bond yields more than central bankers’ comments – are likely to have to intensify for an imminent repeat of these stocks’ double-digit gains.

As is a common feature with this screen, the ‘longs’ are once again superficially pricier both in terms of their forward price/earnings multiples and dividend yields. Whether that represents a flight to ‘quality’, or the market’s identification of several companies in prolonged earnings upgrade cycles, will become clearer when we revisit the Momentum Classics in three months’ time.