Ed Croft wrote an article on Stockopedia today, about DTG (Dart Group) (http://is.gd/tgECyO). the shares shot up today (I’ll resist using the word “flew”) by 18% on the release of the trading statement:
The Board believes that Group underlying operating profit(1) for the year ending 31 March 2015 will be ahead of current market expectations and broadly in line with last year (2014: £49.2m), as a result of lower than anticipated winter losses.
Paul Scott said:
if I held these shares, I’d probably be tempted to bank some gains on today’s big move up
DTG has a Stockopedia momentum rank of 96, which is of course very high. It is up 654% over 5 years, and is a share that seems to have confounded everyone by just how it keeps going higher and higher. It has a stock rank of 100. It has a Value of 79, which puts it just outside the top quintile. However, I see that its Price to free cashflow is 6.66, its price to sales is 0.37, and its EV/EBITDA is 1.21. Those are not challenging valuations.
It has actually been a remarkably successful airline, having increased its revenues from £268m a decade ago to £1120m at the latest full report. It can be difficult to know how to play momentum. How do you know when the game’s up? A trailing stop-loss is a good idea: say at about 20% the 52w high. It doesn’t always work, of course, as you would have been stopped out last year.
I’ve confirmed through my only little investigations that momentum does seem a good strategy, though. The momentum effect has been studied by far better researchers than me, and the conclusion is pretty clear: the momentum effect exists.
I am in two minds as to whether to include value and/or quality in with momentum if you want to run a momentum strategy. I had found that some of the momentum shares that were neither high scoring on value or quality went on to produce further massive gains. I saw that with recovery shares like TCG (Thomas Cook Group). With a high amount of debt and thin margins, no-one was ever going to say that it was a quality company, irrespective of its long history. PE ratios also tend to be out of whack in cyclical or recovery plays, and it’s tricky to rely on them.
Perhaps the best approach is to start with a list of momentum candidates. Then go through the list, and try to identify why it a momentum share; favouring the cyclicals and the companies coming back from the brink. You should be able to find some huge winners in these categories.
Nothing is ever straightforward, of course. I’ve had successes and failures with bombed out companies. I am experiencing a lot of pain in the mining sector. These stocks have had a lot of negative momentum, and it’s amazing just how bad they they get. My LMI (Lonmin) shares are down 35%. Momentum can go very far in either direction. LMI reached a 17-year low. Its share price has over 4000p in 2007, compared with 112p now. Very difficult to believe, isn’t it?
John Chew posted a video link from film Platoon, which he captioned “Newbie investor meets a deep value investor”. Here’s the link: https://youtu.be/97dqp28B2mg . The point comes at the end of the clip, where rookie Charlie Sheen looked at a veteran. The vet looks back at Charlie, and his face and expression paints a picture!
It is actually inspiring, in it’s own way, as it reminds us that if you want to be a deep value investor, you’re going to have witnessed a lot of gore which will show on your face. No doubt you’ll have wounds to bare; but hopefully nothing fatal. It can be difficult to know if you’re being contrarian, or just being wrong. There are no easy answers to this question.
If I knew now what I knew then about LMI, I would have held back. But then, investing is always easier if you know the prices 6 months down the line. I am still going with the theory that GLEN’s distribution of its LMI shares will mark capitulation, and the bottom, making it the optimal buying point. I could, of course, be completely wrong. Another, perhaps safer, way to play it is to wait until LMI becomes a high-momentum share, and then place a bet. After all, if my theory is correct that it is deeply undervalued, then at some point it will recover rapidly. So by playing momentum, you get to reap the bulk of the rewards without getting your fingers sliced trying to catch falling knives.
We shall see.