Momentum switches tack

Q2 Momentum performance

Source: S&P Capital IQ

The outperformance of the 10 'shorts' (the worst-performing shares of the previous quarter) is a familiar curveball from this screen and the shorts actually boast better performance than the FTSE 100 itself over most periods (see table). This includes over a lengthy 10-year stretch shown in the accompanying graph. Unlike my other screens, I only monitor the capital returns from the classic momentum strategy and do not make any attempt to factor in dealing costs. Many consider the high turnover of momentum strategies (reshuffles every three months in this case) as likely to create costs to offset the benefits.

L-T Momentum performance

It would be tough to spot a very clear theme in the stocks selected as longs this time around. Some shares are still of companies that many would regard as being quality plays, such as the aforementioned London Stock Exchange, Burberry and JD Sports Fashion. However, there is certainly a smattering of value with the likes of Vodafone and BAE included among the picks. And despite much commentary about the prospects of a global economic slowdown, there are a good few cyclical companies, including Ashtead and ITV.  Arguably, it is easier to point to themes among the 10 worst-performing shares of the last three months – the 'shorts'. Here miners and value plays are well represented. There are also a number of tech names. 

The momentum runners and riders for the next quarter are listed below and I’ve also taken a brief look at what were the top three longs a few days before the period end. The order has changed in the last couple of days of the period, though, as reflected in the accompanying table.

Q3 Momentum picks

Source: S&P Capital IQ

London Stock Exchange

When companies have seen their shares rise in response to a takeover offer, there’s a question over whether they should or should not be included in a momentum portfolio. Much of the extensive research into the momentum phenomenon will have found it impossible to distinguish between share price rises based on improving sentiment towards business fundamentals and price rises caused by a bid approach. I take the view that if a takeover is pretty much a done deal, then there is probably little reason to include it in the screen results as momentum is about trying to catch future upside. But, if a bid situation is still in play, I regard the result as very much of interest. Satellite TV group Sky, for example, made several very positive contributions to this momentum screen during the lengthy bid battle that saw the shares nearly double in price from when the first offer rolled in until it was eventually bought by Comcast for £30bn. 

The London Stock Exchange (LSE) definitely falls into the 'in play' camp. Indeed, it has rejected the 8,361p cash-and-paper offer from Hong Kong Exchanges and Clearing (HKEX) which was made towards the end of the period under review. What’s more, the news of the bid failed to lift the shares very far above 7,000p. That means there is plenty of upside should the market begin to view the bid as more credible. Clearly, though, the market is skeptical at the moment. This is not only down to the regulatory obstacles that frequently thwart exchange tie-ups; the offer also comes with some big conditions attached.

Shares in LSE were enjoying a strong run even before investors got wind of the approach. The strong performance was due to LSE’s own proposed acquisition of another company. The LSE plans to buy data and trading business, and Bloomberg rival, Refinitiv for £27bn in shares. A condition of the HKEC offer is that the Refinitiv bid is dropped. Investor enthusiasm for the “transformational” purchase of Refinitiv, along with a near-£200m break clause, means HKEX’s terms will be hard for many LSE shareholders to swallow. Indeed, the tantalising prospect of tying together exchange data and a data distribution service may well prove too alluring for shareholders to turn their backs on without HKEX’s offer being upped by a noteworthy margin. HKEX is rumoured to be going on a charm offensive with key LSE shareholders over the coming weeks, so it looks like a case of watch this space.

NMC Health

Bid interest – of a sort – is also a key reason for a surge in the share price of Middle East focused-healthcare group NMC Health (NMC). In this case, though, the bid would not be for the whole company but rather a 40 per cent stake in it. Importantly, there are reported to be two potential buyers of the stake, one backed by Chinese conglomerate Fosun. The competition has the potential to ensure a healthy price.

Significantly, when news of potential stake-buying interest emerged, NMC’s shares were in real need of a boost. The share price had more than halved from an August 2018 high of over 4,000p. The shares have come under considerable pressure from short sellers who are negative about the shares for several reasons, which include: high debt; reliance on government revenue and associated receivables (yet-to-be-paid invoices); the pledge of shares as loan collateral by key executives; and related-party transactions. A so-called 'short squeeze' is a factor in the strength of the shares bounce on the news about potential sizeable share purchases.

NMC also reported half-year results hot on the heels of news of the potential stake bidding-war. Six-month sales growth of 33 per cent and a net profit increase of 30 per cent, along with the announcement of a $200m share buyback, are likely to have added to positive sentiment. But it's worth noting that having spiked 62 per cent from August lows, NMC's shares have started to give up ground again over recent days, suggesting the battle between bulls and bears may not be over yet.

Burberry

Following a drab few years, the market has started to price in an ab fab future for British luxury fashion brand Burberry (BRBY). The cause for celebration during the past three months was news of the “excellent customer response” to the first collection from the group’s recently appointed creative head Riccardo Tisci. First-quarter like-for-like sales, covering the three months to the end of June, grew at 4 per cent, which was about twice the rate analysts had expected. What’s more, demand was particularly strong in China, which helped calm fears of a slowdown in this important luxury market. 

Revitalising ranges is one aspect of the group’s turnaround plan. Another key plank – cost-cutting – has also been progressing as expected with store closures and revamps progressing well. There were also signs that the group is benefiting from efforts to improve digital engagement. Hopes are now high that Mr Tisci’s designs will continue to reinvigorate Burberry as his influence becomes more widely felt across the ranges, providing the foundations for the next stage in the planned transformation: sales and margin growth. There’s scope for the good times to continue to roll and champers to continue to flow.