Normally spells of market volatility are seen as a problem for simple momentum strategies. However, nothing could be further from the truth for my quarterly blue-chip momentum screen, which has been smashing it during 2020.
Broad lessons about momentum investing should not be drawn from the excellent performance of the screen this year. A lot of the strong run will come down to lucky timing (the screen updates on the 15th every third month). Indeed, many trend following strategies have come a cropper this year. For anyone that wants to take a lesson from the 2020 experience; the best one I can think of is that while history is useful to provide an idea about approaches that can produce good returns, it is a very imprecise guide to the future.
A number of strong trends that were favoured by the market before the crisis have not only continued, but have also been reinforced as events around the pandemic have unfolded.
Over the three months under review (15 June to 15 September), the FTSE 100 itself went pretty much nowhere, recording a rise of just 0.7 per cent. However, over the same period the screen’s 'Long' picks, based on the 10 best-performing blue chips of the three months up to 15 June, rocketed 23 per cent. Meanwhile the 'Shorts', the 10 worst performers, plummeted 11 per cent.
|Name||Share price performance (15 Jun - 15 Sep)|
|Name||Share price performance (15 Jun - 15 Sep)|
|International Consolidated Airlines SA||-26%|
Following the recent run, the Longs I monitor have recaptured their last quarterly peak from two years ago. Meanwhile, the Shorts are now underperforming on every time period I monitor (see table), having notched up a mammoth 44 per cent fall over the past 12 months. This is something of a turnaround for the shorts. Prior to 2020 they had actually produced outperformance (the opposite of what they are theoretically meant to) for a number of years.
|Since June 2017||160%||-36%||-11%|
Source: Thomson Datastream/S&P Capital IQ/FactSet
This screen is monitored based on capital returns only. It is also the only screen I monitor like this and it is also the only screen I monitor without factoring in notional dealing costs. Academic studies suggest the cost of portfolio reshuffles is one of the main impediments to real-world momentum strategies. So even more so than is usually the case, the results of the screen are of primary interest as ideas for further research while the results are an exercise in watching the incredible phenomenon that is 'momentum' unfold in real-time. The results can also be taken as an indicator of the useful role share-price momentum can play in any investment process.
I’ve slightly missed the window for this quarter’s Blue Chip Momentum update. I am about a fortnight behind the official reshuffle date, which falls on the 15th of every third month (ie, 15th September most recently). For this reason, I am producing a list based on price movements to 24th September to give readers a more up-to-date view on blue-chip leaders. My write-up of the top five stocks in the Long portfolio below concerns the stories driving constituents of this more up-to-date list.
For anyone keeping a tally, the stocks making up the official 'Long' portfolio are not too different than the list below: Fresnillo, Kingfisher, Ocado, Polymetal, Scottish Mortgage, JD Sports, Antofagasta, Aveva, Johnson Matthey, and Croda.
And for the Shorts: Rolls-Royce, International Consolidated Airlines, Taylor Wimpey, Royal Dutch Shell, BP, Lloyds Banking, ITV, British Land, HSBC, and NatWest.
|Name||TIDM||Price||Market cap||3-mth mom*||NTM PE||DY|
|Scottish Mortgage Investment Trust||SMT||975p||£14.2bn||19.4%||-||0.3%|
|JD Sports Fashion||JD||792p||£7.7bn||23.6%||26||0.0%|
|Name||TIDM||Price||Market cap||3-mth mom||NTM PE||DY|
|International Consolidated Airlines SA||IAG||101p||£5.0bn||-41.6%||-||0.0%|
|Royal Dutch Shell Class B||RDSB||995p||£79.2bn||-25.2%||13||9.7%|
*15 June to 24 Sep 2020
Mexican gold and silver miner Fresnillo (FRES) has been a beneficiary of the surge in precious metal prices. Although price rises started to peter out in July and have recently gone into reverse, the strength of the run early in the three months under review was enough to give the share top spot among this quarter’s picks.
Given miners’ costs are relatively fixed, rising metal prices have a huge impact on profit. In July, despite some Covid-related shutdowns, Fresnillo reported expectation-beating results. The performance was also helped by a weak peso, which had the effect of lowering costs.
The strength of the gold price recently has been linked to narratives around the potential for a sustained period of dollar weakness, and once a recovery is under way, the potential for inflation due to stimulus funded by money printing. The recent gold price weakness, which coincides with a broader market pullback, could be a sign of doubts creeping into these narratives. Definitely, deflation is the bigger issue in the near term. Equally, though, gold fell during the last big market sell-off as investors used it as a source of liquidity. The price did not take long to shoot back up.
As far as retailers go, European DIY specialist Kingfisher (KGF) looks to be a real Covid-19 winner. The long-troubled group had begun to restructure before the pandemic struck and many of the changes it had started to make have served it well.
In particular, a focus on internet sales has helped support trading. Indeed, lockdown has significantly sped up progress in growing online sales. Giving more power to local management is also showing some signs of paying off. And the company’s increased focus on inventory management and supplier terms has boosted cash flows.
However, the main cause of the significant broker forecast upgrade trend that has developed over recent months is simply that more time at home has also meant more home repair and renovation work. This has lifted demand. The backdrop should make Kingfisher’s job easier as it tries to address its long-running problems associated with competition and shop formats. However, it is likely to be some time before the market is convinced the new management team can achieve what others have failed to do in the past. For now, though, further upgrades based on the trading tailwind may prove enough to sustain momentum.
Online grocery company Ocado (OCDO) reported storming third-quarter trading in September, which helped continue the price momentum experienced during the pandemic. Much of the increase in online food shopping during lockdown is expected to continue, accelerating a trend that already existed.
The third quarter also saw the grocer transfer from Waitrose to M&S products. The switch seems to have gone very well. The group plans to add 40 per cent more capacity next year, with a speedy turnaround on new centre set ups.
The tighter timetable is encouraging for the Ocado solutions business, too, which is arguably where most potential exists. The solutions business sells the company’s technology to retailers around the globe. News from this side of the business could stoke momentum in the coming three months as could the next trading update, which should happen towards the end of the current three-month period.
Scottish Mortgage investment trust
Scottish Mortgage’s (SMT) end of August factsheet puts its holding in Tesla at 14 per cent of its portfolio. The mighty run by the shares in the electric car maker has been instrumental in the investment trusts’ strong performance over the period. However, its other holdings have also benefited from the huge interest in tech companies and industry disruptors. Many of these companies have experienced strong growth as people have been forced to go 'virtual' during lockdown.
Recent share price wobbles for big tech names including Tesla suggest this part of the market has got a bit 'frothy'. And the US Presidential election in November could also interfere with the momentum the trust’s shares have recently shown. Still, Scottish Mortgage is surfing some of the hottest trends in business at the moment.
JD Sports Fashion
If evidence was needed, JD Sports Fashion's (JD.) lockdown trading has gone to show that it takes a lot to separate teenagers from designer trainers. First-half sales at the sports fashion group only fell 6.5 per cent year on year to £2.5bn.
Still, profitability was hit hard by the fact that more of those sales were made online, the fixed nature of many costs, and the expense of extra in-store procedures. Pre-tax profit dropped 68 per cent to £41.5m. But to make a profit at all in such a tumultuous period ranks as a major achievement.
The company has also hoovered up cash during lockdown. It finished its first half with net cash of £765m. About £200m of this is due to temporary measures such as refusal to pay landlords as the group plays hardball over lockdown rents.
Arguably, though, the best news from the retailer’s first-half results concerned its guidance for profits in 2021. It expects these to be about £100m more than analysts had expected at £265m. Reopenings so far have been broadly encouraging, with lower footfall partly offset by more motivated customers who are more inclined to make a purchase and to spend more than they did pre-Covid.
There is still a lot of uncertainty. Especially with infections picking up in the UK and Europe where many of JD’s shops are located. Stricter lockdown measures look to be the main potential obstacle to the shares’ momentum in coming months.