Blue-chip momentum winners

Three-month momentum

Source: S&P Capital IQ

HISTORIC CUMULATIVE PERFORMANCE

Source: Thomson Datastream/S&P Capital IQ

The idea behind the momentum screen is based on the exhaustively researched principle that stocks that have been rising strongly on average tend to deliver more of the same over the long term. Specifically, the blue-chip momentum screen simply highlights the 10 top performing stocks of the past three months and then monitors the performance of these 'longs' over the following three months. The reverse is done with the 10 worst-performing shares, which constitute the 'shorts'.

A key problem for the many academics that have put years of research into chronicling the phenomenon is whether the outperformance of a momentum strategy can overcome the associated trading costs. Unlike the other screens followed by this column, the momentum screen does not factor in notional trading costs when calculating cumulative returns and it also looks only at the price performance of stocks as opposed to total returns (price plus dividends paid and reinvested). As far as my assessment of performance goes, it can chiefly be seen as an exercise in observing the phenomenon in action.

I’ve provided short write-ups of the 10 best-performing shares of the past three months to give a flavour of why they may have found their way into the long portfolio. Fundamentals relating to these shares and the 10 shorts can be found in the table below. The official cut-off date for this screen is the 15th of the month, which means the official portfolios monitored in the future for performance may vary slightly from those given below depending on price movements between the day of writing and the 15th.

Longs

Shorts

*15 Jun - 7 Sep 2018

**Includes special dividends

Source: S&P CapitalIQ

Sky (SKY)

When reviewing the momentum strategy earlier in the year, I mused about when takeover situations should and shouldn’t be included in the results. Essentially, unless a deal is pretty much done and dusted, I think takeover situations are best considered a valid result. Sky is very much a case in point. The takeover tussle for the company has been going on since late 2016 and the shares have increased in value by over 50 per cent this year as three suitors – Disney, Comcast and Fox – jostle for position. During the past three months,  an increased offer from Comcast valuing Sky at 1,475p a share provided fresh impetus for the share price. A solid set of fourth-quarter numbers didn’t hurt either. As far as the bid battle goes, with other interested parties waiting in the wings, it remains a case of watch this space.

Whitbread (WTB)

For many years Whitbread investors have salivated over the prospect of the group creating value by hiving off its fast-growing Costa Coffee chain from its Premier Inn budget hotel chain and restaurants. Hopes that the business could be sold have been running high since Whitbread announced demerger plans and late last month it was announced that Coca-Cola would pay £3.9bn for Costa. The acquisition price is equivalent to 16.4 times cash profits, a multiple few investors are likely to have complaints about. Much of this money will be returned to investors, leaving management to focus on expanding its leading budget hotel brand both in the UK and fledgling overseas markets – particularly Germany. Broker Shore Capital estimates that after paying back some debt and shoring up the pension scheme Whitbread could still hand back about £3.2bn. The broker believes this would leave Whitbread with about £1bn debt, backed by about £4bn of freehold property and priced at a relatively modest nine times cash profits.

GVC (GVC)

The big news for GVC shareholders over the past three months is that the gambling technology company is entering a joint venture with MGM International in order to break into the recently liberalised US sports betting market. Since US gambling legislation was overturned in May, betting companies have been scrambling to get a piece of the potentially massive Stateside action. Established US players are regarded as being in the best position to benefit and MGM is arguably the country’s biggest gambling brand. As such, MGM looks a fantastic joint venture partner for GVC. Meanwhile, GVC is regarded as a technological leader and brings significant operational and tech know-how. Both companies will contribute $100m to the venture.

Shire (SHP)

The past three months have seen pharma group Shire report half-year results and announce a major drug approval. Most things reported by the company at the moment are seen in light of the recommended offer from Japanese group Takeda, which still awaits shareholder approval. From the perspective of gaining support for the deal, recent news looks encouraging. At the half-year stage Shire reported a fall in its high level of debt and the company said it was near the end of integrating its own 2016 mega-acquisition of Baxalta. The US approval of a potential blockbuster drug in late August is another enticement for shareholders to vote in favour of the deal. However, there is some scepticism about the advantage of a tie-up, not least due to the high level of debt the combined group would have.

Admiral (ADM)

Shares in insurer Admiral enjoyed a good run-up to half-year results reported mid-way through last month and the strength of the numbers helped continue the upward trend. While premiums are falling in the group’s key market of motor insurance, Admiral has been able to more than offset this by hoovering up customers. What’s more, despite rising insurance expenses the company was still able to improve its combined ratio (claims as a percentage of premium income), which is regarded as a key industry quality measure. Meanwhile, the group is making good progress with growing its smaller household insurance and international businesses. The company also paid a 19.2p first-half special dividend, taking the total payout declared for the six months to 60p.

Hargreaves Lansdown (HL.)

Shares in stockbroker Hargreaves Lansdown were helped higher over the three months by strong full-year results, which included news of a 7.8p special dividend. While costs at the group increased as the company invested heavily in customer services, the growth being achieved seemed to suggest to investors that extra spending is probably worth it. Indeed, assets under administration grew by a hearty 16 per cent over the 12 months to £91.6bn while sales were ahead by the same percentage. The performance underpins shareholders’ hopes that a move to self-managed investment presents a strong, long-term, structural growth opportunity for Hargreaves Lansdown.

WM Morrison (MRW)

Shares in supermarket group Morrison have been marching higher since the spring as investors have become increasingly keen on prospects. The share price ascent began after full-year results which included the announcement of a 4p special dividend. The special payout was seen as illustrating how far the group has come with restructuring efforts. There are hopes that there will be more of the same when Morrison reports half-year numbers between the time of writing and publication of this article. Investors hope profits and cash flows will benefit from further cost-cutting, as well as growth at the group’s wholesale operations. Meanwhile, industry data suggests Morrison’s supermarkets have been trading well despite the challenge posed by discounters such as Aldi and Lidl.

London Stock Exchange (LSE)

At the start of August a new chief executive, David Schwimmer, took the reins at London Stock Exchange. This provided some reassurance to shareholders worried about boardroom stability following the surprise news last November of the early departure of former boss Xavier Rolet. Having a new person at the helm has helped the market to focus on strong trading at the group, which was highlighted by first-half results last month. The company is proving a major beneficiary of the shift towards passive ETF investing as many such funds use FTSE Russell indices for their products.

Ferguson (FERG)

Shares in plumbing and heating equipment group Ferguson have been racking up gains since it disposed of its Nordic interests earlier in the year, which allowed it to pay out $1bn in special dividends. The sale has focused the group’s interests on the US, where it now generates almost 90 per cent of its profits. Strong economic conditions across the pond and the benefit of US tax cuts should help performance. Strong third-quarter results mid-way through June also helped sentiment and sterling’s weakness has added to the potential allure for UK-based investors.

Reckitt Benckiser (RB.)

The transformation of Reckitt Benckiser from a broad-based consumer goods business to a health and hygiene focused group has not always been easy going for shareholders. However, the past three months have provided some evidence that the strategic overhaul is paying off. At its half-year results in July the company revealed its infant formula and child nutrition business, recently bolstered by the acquisition of Mead Johnson, are performing ahead of expectations. Analyst forecast upgrades duly followed, as did a share price fillip. Margins are also on the up and investors will hope the improvement in trading and sentiment can be sustained.