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Blue-chips surviving and thriving in the crash

The stocks that have done best and worst in the sell-off
Blue-chips surviving and thriving in the crash

The past three months have seen the FTSE 100 tank 28 per cent. But even during such a savage sell-off, some blue-chip shares have made holders money. These are the stocks that will be leading the charge for my quarterly blue-chip momentum portfolio. These best-performing shares also provide clues about where refuge may be available for those seeking it.

I’ve delayed this momentum screen by a couple of weeks because I felt exceptional market conditions meant there were a few other screens that could provide more timely insights for readers ('cheap as they’ve ever been' and 'high-yield low-risk'). That said, knowing what stocks have performed best and worst during the crash is valuable in trying to make some sense of the markets, and this is something my quarterly momentum screen tells us. 

The screen simply selects the 10 best-performing stocks of the past three months as its 10 long picks and the 10 worst-performing as the 10 short picks.

It may seem perverse, but one of the things I’ve been looking forward to since starting this stock screen column almost a decade ago is a proper bear market. That’s because knowing the strategies the column follows during a serious sell-off should be able to provide some real insights. 

Momentum is perhaps the best research phenomenon of those that I try to emulate with stock screens. It has been thoroughly backtested by both academics and the investment industry. Generally, it tends to go to pieces at times of major changes in the market trend. Considering this, the momentum picks from late 2019 (15 December) didn’t do too badly. While they did underperform the FTSE 100, the result was not jaw-droppingly terrible in relative terms (it was jaw-droppingly terrible in absolute terms) and the shorts did a bit worse than the longs.

 

Three-month momentum performance

Price performance 15 December 2019 - 15 Mar 2020
LONGSSHORTS
SSE -8.3%Fresnillo -5.0%
Taylor Wimpey -26%Pearson -20%
Persimmon -27%Hiscox-21%
The Berkeley Group-30%Imperial Brands -22%
Land Securities-31%Johnson Matthey -29%
Aveva-32%Rolls-Royce-30%
Legal & General-37%Evraz -39%
International Consolidated Airlines-44%Glencore -40%
ITV -45%NMC Health -62%
Royal Bank of Scotland-48%Carnival Corporation -65%
Average-32.8%Average-33.2%
FTSE 100-27.0%FTSE 100-27.0%

Source: S&P Capital IQ

 

The torrid three months wipe out all gains from the longs for one, three and five years. It should be noted that I only track share price performance when monitoring this screen, unlike the other screens, for which I take account of dividends paid. As with almost all the screens in this column, this one is intended to provide ideas for further research rather than off-the-shelf portfolios, and extensive research into momentum suggests dealing costs can seriously undermine the benefit of operating a real-world momentum strategy. The long-term performance of the screen can be seen in the table below along with a 10-year chart.

 

Price performance
 LongsShortsFTSE 100
Since June 200773%-23%-20.3%
10-yr54%1%-4.1%
5-yr-17%-4%-20.4%
3-yr-28%-33%-27.2%
1-yr-31.6%-37.1%-25.8%

Source: S&P Capita lIQ

 

As well as highlighting the official momentum picks for the coming quarter based on three-month performance to 15 March, I’ve highlighted a more up-to-date selection of momentum stocks based on the three months to 1 April. It is the latter selection of 'longs' that I have focused my write-up on below. There are a number of interesting themes that stand out from these 10 shares. It is also interesting that for some classic defensive sectors, such as utilities and healthcare, the impact of the crisis is somewhat nuanced.

 

Official momentum screen longs and shorts (three months to 15 March)

LONGS
NameTIDMPriceMarket cap3mth momNTM PEDY
Polymetal InternationalLSE:POLY1,380p£6.5bn4.9%113.6%
Scottish Mortgage Investment TrustLSE:SMT574p£8bn2.7%-0.5%
PennonLSE:PNN1,086p£4.6bn1.9%203.8%
Rentokil InitialLSE:RTO388p£7.2bn1.7%281.3%
United UtilitiesLSE:UU.903p£6.2bn-3.6%174.6%
Spirax-Sarco EngineeringLSE:SPX8,165p£6bn-4.4%321.3%
OcadoLSE:OCDO1,220p£9bn-4.6%--
FresnilloLSE:FRES667p£5bn-5.0%291.7%
London Stock ExchangeLSE:LSE7,280p£25bn-5.3%331.0%
Severn TrentLSE:SVT2,280p£5bn-6.1%184.4%
Average----1.8%232.5%
SHORTS
NameTIDMPriceMarket cap3mth momNTM PEDY
Carnival CorporationLSE:CCL981p£8.9bn-64.9%--
NMC HealthLSE:NMC0p£2bn-61.9%71.9%
CentricaLSE:CNA38p£2.2bn-50.7%513.1%
Royal Dutch ShellLSE:RDSB1,360p£124bn-49.2%--
The Royal Bank of ScotlandLSE:RBS113p£13.6bn-48.1%619.5%
WhitbreadLSE:WTB3,030p£4.1bn-48.0%17-
Royal Dutch ShellLSE:RDSA1,419p£123.6bn-47.5%--
easyJetLSE:EZJ571p£2.3bn-46.5%797.7%
WPPLSE:WPP551p£6.7bn-45.5%711.6%
ITVLSE:ITV66p£2.6bn-44.6%6-
Average----50.7%1810.8%

 

Unofficial momentum screen longs and shorts (three months to 1 April)

LONGS
NameTIDMPriceMarket cap3mth momNTM PEDY
Polymetal InternationalLSE:POLY1,380p£6.5bn15.4%113.6%
PennonLSE:PNN1,086p£5bn4.3%203.8%
FresnilloLSE:FRES667p£4.9bn2.7%291.7%
Hikma PharmaceuticalsLSE:HIK2,035p£4.9bn2.1%161.7%
Reckitt BenckiserLSE:RB.6,150p£43.7bn-2.5%202.8%
National GridLSE:NG.947p£33bn-3.0%165.1%
AdmiralLSE:ADM2,230p£6bn-5.0%166.3%
Scottish Mortgage Investment TrustLSE:SMT574p£8bn-5.6%-0.5%
OcadoLSE:OCDO1,220p£9bn-5.8%--
United Utilities Group PLCLSE:UU.903p£6bn-7.7%174.6%
AVERAGE----0.5%183.4%
SHORTS
NameTIDMPriceMarket Cap3mth MomNTM PEDY
Carnival Corporation & PlcLSE:CCL981p£8.9bn-74.8%--
International Consolidated Airlines Group, S.A.LSE:IAG215p£4bn-66.5%812.9%
Melrose Industries PLCLSE:MRO92p£4.4bn-64.2%67-
easyJet plcLSE:EZJ571p£2bn-61.2%798%
ITV plcLSE:ITV66p£2.6bn-59.6%6-
Meggitt PLCLSE:MGGT290p£2.2bn-58.9%9-
Centrica plcLSE:CNA38p£2.2bn-58.5%513.1%
The Royal Bank of Scotland Group plcLSE:RBS113p£13.6bn-55.5%619.5%
M&G PlcLSE:MNG113p£2.9bn-55.2%410.6%
Rolls-RoyceLSE:RR.341p£6.5bn-54.9%163.4%
Average----60.9%2211.2%

Source: S&P Capital IQ

 

More about the longs

Golden opportunities

Recent events have increased the allure of gold. Even so, the price of the yellow metal did take a major knock during the sell-off. However, gold's price weakness during the crash (it fell from over $1,700 an ounce to about $1,450) has been attributed to investors selling their profitable investments to access cash rather than any fundamental issues. 

Indeed, gold’s fundamentals – in so far as it can really be described as having any – look bright. The metal is traditionally seen as a safe-haven asset, offering a place of refuge in volatile times; clearly a plus now. What’s more, gold is traded in dollars, and the dollar has surged during the crisis given it also is considered a safe-haven asset/currency. 

Another positive for gold is that interest rates around the world have been slashed in response to the crisis. This has led to many government bonds paying negative real interest rates. Crazy as it seems, this means gold’s promise of a zero payout actually looks attractive. And ultra loose monetary policy provides another more speculative reason to buy gold. Many fear – and with good reason – that fiat currencies are being debased by extreme policies, and gold can offer protection against the extreme damage that is potentially being done to the monetary system. 

Given that shares in gold miners are generally very sensitive to the price of the metal they dig up, it is understandable that two such companies – Polymetal (POLY) and Fresnillo (FRES) – have bucked the wider market trend over the past three months and appear among the top 10 momentum picks.

Polymetal is also a beneficiary of oil price falls. This is because its operations are based in Russia, which means the value of the Russian currency, the rouble, has a major bearing on its costs. Given that Russia is a big exporter of oil, as well as a key player in the oil price war, a plummeting oil price has meant a plummeting rouble versus the dollar and therefore falling costs for Polymetal.

 

Useful utilities

In this crisis, it seems not all utility companies are created equal. Traditionally, the sector is seen as one of the most defensive bastions out there. However, the fact that many consumers are likely to delay bill payments as a result of this crisis could cause problems, especially for companies with weaker balance sheets. The falling oil price has also created issues for some energy companies, such as Centrica (CNA) which owns oil-producing assets.

Pennon (PNN), owner of South West Water, has stood out as a top bet in the utility sector for many years. It is a class operator and its business plan was fast tracked in the water industry’s recent five-year regulatory review. But more significantly for share price performance in the three months, it announced the £4.2bn sale of its waste business Viridor to private equity firm KKR. The deal was agreed at a handsome valuation even as the crisis ravaged markets. Proceeds from the disposal will provide a major boost to the company’s already robust balance sheet and provide opportunities to invest when others may find it harder to access non-essential financing. 

Much of National Grid’s (NG.) business operates one step removed from consumers. That’s because its key customers are energy companies that pay to use its electricity and gas transmission network. While the travails of operators could ultimately be a strain, it looks relatively insulated. Even so, the group has had to slow certain capital projects. And in the US, where some of its operations do bill end users directly, it has suspended debt collection and customer termination, which means less cash coming through the door and a potential increase in bad debts. Overall, though, the National Grid looks relatively solid.

Like Pennon, water company United Utilities (UU.) has done well in the recent regulatory review and was also fast tracked. Covid-19 does bring some uncertainty about payment timing, but the company has pointed out that revenues are fixed under a regulatory agreement for the next five years, and shortfalls in any year can be recovered in later years.

 

The rest

The other five stocks on the list do not have a clear unifying theme. The high-tech holdings of investment trust Scottish Mortgage (SMT) held up pretty well through the sell-off, but the trust’s position in the top 10 also reflects its large holding in electric car pioneer Tesla, which saw its shares rise astronomically earlier this year. The trust also has significant unquoted holdings. As a general point, these type of investments do not have market pricing and often tend to look more stable than listed equities, although much of the difference can be regarded as cosmetic. 

With people being encouraged to stay at home, demand for online food delivery has soared. This has been an immediate boost for Ocado (OCDO), a company that delivers groceries in the UK as well as selling technological and logistics know-how to international supermarkets. There is also the possibility that the change in habits during the lockdown could accelerate the global movement towards online grocery shopping.

Healthcare is a classically defensive sector, which is actually seeing some challenges from the Covid-19 outbreak as well as opportunities. A key issue is that as the industry focuses on fighting the virus supply chains are being disrupted and drug approvals are being delayed. Hikma (HIK), while not on the front line of the fight against the virus, could indirectly be a beneficiary of the work to defeat it. 

Importantly, compared with peers, Hikma has a robust balance sheet and a diverse supply chain, which should mean its operations continue to function relatively well. Meanwhile, its generic opioid products are being used to help treat patients with severe virus symptoms. Delayed drug approvals may also benefit demand for its generic drugs. The company also has a number of new products that could boost sales this year. 

One of the mantras of value investors is to look for a 'margin of safety'. Arguably, this is something that has benefited Reckitt Benckiser (RB.) over the past three months given how poor sentiment was towards its shares at the start of the period. Since its mega-acquisition of Mead Johnson for £13.5bn in 2017, the shares have performed poorly and expectations have ebbed. 

February finally saw the company write off £5bn of goodwill associated with the deal. Reckitt has also unveiled a restructuring plan and a new chief executive is at the helm. The company’s focus on hygiene and health brands, including the likes of Dettol, also looks relatively suited to the crisis.

Whether in the grips of a pandemic or not, the nation's motorists still need insurance for their cars. This makes Admiral (ADM) a relatively reliable bet in the current crisis. What’s more, the company released a strong set of results during the three months under review, which included details of an orderly handover by the current chief executive and a better-than-expected release of reserves.