Interactive Investor

25 momentum stocks for 2017

17th January 2017 12:43

Lee Wild from interactive investor

Designing a stock screening tool is rarely straightforward, and most require regular tweaks. A momentum style screen run last summer by N+1 Singer underperformed, but the broker has now tinkered with the threshold and “refreshed” the screen. Not one of the 25 small-caps in the original basket of shares appears in the new list.

Set up in July last year, the momentum portfolio underperformed the main small-cap and micro-cap indices by 2.5 percentage points and 9 percentage points respectively, on a weighted basis. On an unweighted basis, the average price fell 0.9%, when small-cap and micro-cap indices jumped by 12% and 18%.

"Possible reasons for this could include that the holding period coincided with a general increase in momentum in the market, coupled with perhaps a longer-than-ideal period before refreshing the screen," says Singer.

The new screen widens the lower end of the market cap range from £24 million to £21 millionNow, the broker has uncovered another 25 stocks displaying most technical momentum from a screen of just over 500, excluding mining, oil, property and investment companies.

Momentum is defined by the amounts by which the 20-day average share price exceeds the 50-day average price, and the 50-day average exceeds the 100-day average.

Among the changes made this time round, Singer has increased the percentages by which the shorter day average exceeds the higher average from 3.5% to 7.5%. The old threshold would have selected about 75 stocks, implying much more technical momentum in the small-cap area than five months ago.

Singer has also widened the market capitalisation range at the lower end from £24 million to £21 million, to enlarge the pot of stocks to pick from. The upper end is £390 million.

"Unsurprisingly, there are no stocks carried over from the previous screen," says Singer, which has chosen to focus on 10 of the 25 stocks thrown up by the screen and listed below.

CompanyTickerMkt Cap as at 10 Jan 2017 (£m)Price at 10 Jan 2017 (p)
IQEIQE27541
FocusriteTUNE128221
Frontier DevelopmentsFDEV105309
Games WorkshopGAW245764
Anglo Eastern PlantationsAEP282711
ErgomedERGO66162
Surgical InnovationsSUN214
LamprellLAM33899
CPP GroupCPP13916
BrammerBRAM213165
Blue PrismPRSM317510
D4t4 SolutionsD4T463170
NetDimensionsNETD3977
On The Beach GroupOTB345265
ULS TechnologyULS5990
FutureFUTR7313
Revolution BarsRBG112225
VeltycoVLTY2132
Dolphin Capital InvestorsDCI849
NorthacreNTA4198
Northbridge Industrial ServicesNBI37144
recordREC7936
Speedy HireSDY27252
Gear4musicG4M110546
GfinityGFIN2616

For the record, here are Singer's comments on the 10 "focus" stocks.

Ergomed

"We believe the co-development business could drive significant upside potential as [drug developer] Ergomed co-invests a proportion of revenue in return for equity or royalty payments," says Singer analyst Sheena Berry. "Positive clinical data provides upside potential to our 293p target price."

Future

"Future is setting the tone for how a strong and dynamic consumer publisher should operate and can achieve. We expect further significant progress," writes Johnathan Barrett of the magazine publisher.

Gear4music

After such a strong rally, the shares in the largest online retailer of musical instruments and equipment in the UK may be discounting a lot of good news to come," admits Singer of Gear4music.

"Whilst there was value in the stock last year, a 450% rally in the last six months and trading on 27 times calendar year 2017 enterprise value/earnings before interest, tax, depreciation and amortisation (EV/EBITDA), means a lot is now in the price," writes the broker.

Gfinity

"With momentum in the wider eSports industry continuing to grow and the company releasing a steady stream of positive newsflow, the shares have benefitted in recent months as there are a limited number of ways to play this attractive theme," says Oliver Knott of Gfinity.

IQE

"We expect further positive newsflow throughout 2017 and IQE is one of our key picks for the year. 'Buy'," says Knott of the supplier of compound semiconductor wafers.

NetDimensions

NetDimensions provides learning, knowledge and performance management solutions to highly regulated industries. "Strong regulatory drivers in underlying markets, an attractive solution set, a healthy (normalised) growth profile and a cash generative business model are the key attractions of the business," argues Adam Lawson.

Revolution Bars

"Fundamentally, the shares were oversold for something which is seemingly delivering," says analyst Sahill Shan of Revolution. "The shares now trade on a more appropriate YR1 price/earnings (PE) multiple of 13.5 times and 6.3 times EV/EBITDA."

Speedy Hire

"The recent uptick in Speedy's share price is the result of its new management team successfully stabilising trading in the business," explains Greg Poulton.

"Speedy still has a long way to go in terms of driving sector-leading returns. The shares are optically expensive on a PE basis and in line with the peer group on an EV/EBITDA basis."

Surgical Innovations

"Under new management, minimally invasive surgery specialist Surgical Innovations has recently completed a rehabilitation exercise, restoring the group to profitability and strengthening the balance sheet," Chris Glasper tells us.

"As investors' faith in the recovery has increased, the share price has begun to move. The next stage will be to capitalise on this goodwill, growing the top line organically and adding new products to the portfolio, either from the development pipeline, or via acquisition."

ULS Technology

"ULS [comparison platforms provider] announced in December the acquisition of Conveyancing Alliance, which is expected to be significantly earnings accretive in the first full year of ownership," says Tintin Stormont.

"Conveyancing Alliance has a strong track record of revenue and profit growth and will significantly increase ULS's share of the conveyancing market and further diversifies its conveyancing revenue sources."

This article is for information and discussion purposes only and does not form a recommendation to invest or otherwise. The value of an investment may fall. The investments referred to in this article may not be suitable for all investors, and if in doubt, an investor should seek advice from a qualified investment adviser.