Momentum goes for overseas earnings

While the performance of the 'longs' was better than the 2.7 per cent rise by the 'shorts' (something of a rarity in recent periods) both portfolios underperformed the 8.2 per cent gain made by the FTSE 100 index during the three months. A factor in this underperformance for the 'long' portfolio may well have been a major switch in currency trends that happened around the time of the last portfolio reshuffle (see graph).

Indeed, having strengthened for three months, sterling went into reverse over the last quarter. While the strengthening of sterling was bad for overseas earners in the three months preceding the last screen (the performance period on which the screen’s stock selection is based), the reversal was a big benefit to the share price performance of internationally focused companies (such companies are well represented among the long picks for the coming three months). The currency effect was particularly pronounced for big dollar earners, which included several resources stocks that also benefited from some positive commodity price movements, the oil price being of particular note.

Three-month momentum performance

Source: S&P CapitalIQ

Over the longer term, the 'longs' still show a good level of outperformance against the FTSE 100 index, however the 'shorts' are actually superior to the 'longs' over five, three, and one-year periods.

Longer-term performance

The 10 'long' stocks in this classic momentum screen are based on the 10 best performing FTSE 100 stocks in the three months to 15 June 2018 and the 'shorts' are based on the 10 worst performing stocks of the period. Due to the publication date of the magazine, the portfolios published here are based on performance between 15 March 2018 and 11 June 2018, meaning the official list of stocks monitored may vary slightly from the lists published here. The shares making up both portfolios along with some fundamental data is published below and I’ve also taken a brief look at some of the factors that may help explain the recent strong performance for each of the stocks making it into the 'long' portfolio.

The long and short of it

Source: S&P CapitalIQ

Sainsbury

News of a potential merger has led to big share price gains for supermarket group J Sainsbury (SBRY) over the past three months. The company plans a tie-up with rival Asda, which should allow the expanded group to make large cost savings. Broker Berenberg estimates that gross savings could run from anything between £700m to a whopping £1.5bn. The merger hopefuls must get clearance from the Competition and Markets Authority (CMA) for the deal to go through. While this is by no means a given, the recent combination of Tesco and Booker provides a promising precedent. Berenberg also points to the expansion in industry store space over the past decade as being a reason for optimism that the deal will get the green light and that the merged group will not have to sell off too many of its stores.

Burberry

Shares in luxury fashion group Burberry (BRBY) began the recent three-month period with the wind in their sails following the appointment of a new creative head. Riccardo Tisci is joining the group from his post as head designer at Givenchy, where he previously worked with Burberry’s recently appointed chief executive, Marco Gobbetti. The shares were further buoyed last month by full-year results that came in ahead of expectations and a new £150m share buyback programme. The fashion house is reviewing its store base, investing in its online presence and is expected to have Mr Tisci’s first collection on the catwalks by September. The strength of the dollar has also helped.

Rentokil Initial

The vulnerability of Rentokil (RTO) to a rising pound was underlined shortly before the start of the recent three-month period. Full-year results from the pest control and cleaning giant included news of a noteworthy currency hit due to sterling’s strength. But as sterling has gone back into reverse, investors have been able to focus on the group's virtues, helped by a recent capital market day (a type of corporate shindig where a company gets lots of City types together to explain its strategy). Rentokil has substantial international growth opportunities through bolt-on acquisitions and brand recognition. It also has a £200m-£250m acquisition war chest set aside for the current year. Increasing its presence in target territories should also lead to margin growth and management has a particular focus on developing the North American business.

BP and Shell

The rising value of the dollar and the rising oil price have been a boon for oil and gas companies over the past three months. Both of London’s supermajors – BP (BP.) and Royal Dutch Shell (RDSB) – have made it into the momentum picks for the coming quarter.

The benefit of higher oil prices was underlined by first-quarter updates from both BP and Shell. BP reported a 71 per cent increase in profits, helped by increased production, cost savings and improved plant performance. Shell also reported impressive numbers buoyed by a strong contribution from the integrated gas division. While there was some disappointment linked to cash generation, the general picture continues to be one of strengthening balance sheets. BP’s efforts on this front have been supported by management’s strategy to sell off lower-return operations while reining in capital expenditure. The trajectory of the oil price means both companies are currently expected to experience a further boost to trading in the second quarter.

Next

Clothing retailer Next (NXT) features for the second quarter on the trot as a momentum pick. The share price strength can be characterised as a recovery situation. The company fell out of favour with investors as sales slipped below expectations and its prospects were bundled in with those of other high-street retailers blighted by the ongoing shift to online shopping. But Next was actually an early mover into the online space through its Directory catalogue business. Recent strong trading from this part of its operations has pushed overall performance ahead of City expectations. Trading on the high street remains challenging, but Next is doing what it can to mitigate this through cost cutting and judicious store closures.

BHP Billiton

Diversified mining giant BHP Billiton (BLT) has benefited from buoyant oil, coal and copper prices over the past three months and conditions for the other two commodities it is focused on – potash and iron ore – have not been too bad either. The company also continues to benefit from its past restructuring efforts, which have trimmed costs and capital expenditure.

Ashtead

With about 90 per cent of its business in the US, shares in equipment hire group Ashtead (AHT) have been a major beneficiary of recent currency movements. Strong trading conditions across the pond have also kept hopes high that the company will continue an established trend of beating broker forecasts. Heavy investment in new kit, rising hire rates and strong utilisation are all benefiting the bottom line. Strong US economic conditions, stoked by tax cuts, along with a trend away from equipment ownership towards hiring, have also fuelled the market’s enthusiasm for the shares.

Evraz

Russian steel and coal giant Evraz (EVR) has had something of a bumpy ride to make it back into the blue-chip momentum picks for the second quarter in a row. Investors got the jitters about Evraz shares when new sanctions were imposed on Russian businesses and individuals following the poisoning of former double agent Sergei Skripal in Salisbury. But Evraz’s Russianness aside, the sanctions imposed had limited direct relevance for the company. In fact, of more significance was the indirect effect the sanctions had on the rouble. The fall in the value of the Russian currency should reduce Evraz’s costs, boosting the impact of strong coal and steel prices on cash flows and dividends. Meanwhile, the strong dollar benefits selling prices and Evraz has expressed confidence about re-routing any output affected by US tariffs.

Halma

Aside from currency moves, there are few stand-out reasons to highlight for Halma’s (HLMA) performance over the past three months. However, the company is a clear quality play in the industrials sector given its focus on safety equipment and should benefit from long-term regulatory trends. So the stock may also have benefited from improved sentiment towards high-quality companies, which has followed earlier anxiety that rising bond yields may cause investors to balk at the valuations being put on such stocks. A solid trading update in late March will also have supported enthusiasm.