2 small-caps for momentum investors

Find out why these two small-cap momentum shares may continue to outperform the market?

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A momentum investor believes in the saying “the trend is your friend,” which implies that stocks that have been doing well lately tend to continue to outperform the market.

According to conventional financial theory, past performance is no guide to the future. In practice, though, it has long been recognised that price momentum exists in financial markets. Although researchers aren’t entirely certain sure why a stock’s past performance is a causative factor on future share price returns, the effect has been shown to be fairly consistent over time.

With this in mind, here are two momentum stocks that are certainly worth a closer look for small-cap investors.

Market leader

Georgia Healthcare Group (LSE: GHG) may be a small-cap stock, but as the name suggests, the company is a market leader in the fast-growing Georgian healthcare services market. And as the company is the largest healthcare services provider in the country, in terms of hospital bed capacity and medical insurance, it benefits from significant economies of scale, which gives it a cost advantage and throws up barriers to entry for competitors trying to enter the market.

This should mean that it would be difficult for rivals to disrupt the firm’s strong competitive position and wear down its market share and profitability. The company therefore benefits from a wide economic moat, a perk usually only reserved for larger businesses.

Shares in Georgia Healthcare Group are up 132% year-to-date, but I think further gains may be yet to come. The firm is fast-growing, with the shares currently trading at 21 times its expected 2017 earnings and it potentially paying its first dividend over the next few years.

FX tailwinds

Another stock with great price momentum is specialist engineering group Hill & Smith Holdings (LSE: HILS). The Infrastructure products supplier and galvanising services group is a major beneficiary of the weaker pound, thanks to its significant sales presence in the US and a large cost base in the UK.

It’s set to benefit from recent promises to boost infrastructure spending in the UK and US, as it’s a leading supplier of permanent and temporary road safety barriers. In the UK, the implementation of the Government’s Road Investment Strategy has already lifted demand for its temporary safety barrier, with further gains likely to come from the installation and maintenance of street lighting, road signage and traffic management systems.

Underlying revenue for the four months leading to 31 October 2016 rose 15% to £185m, with FX tailwinds contributing £9.1m of the gain, equivalent to 6% of its total revenues. Looking forward, City analysts expect the group to post a 24% increase in underlying EPS for the full year, with a further 8% gain in the following year. This gives the stock a forward P/E of 19.3 for 2016, which is due to fall to 18 by 2017. And although the stock has a current yield of just 1.7%, an expected dividend rise of 20% this year gives it an indicative forward dividend yield of 2% for next year.

Should you invest, the value of your investment may rise or fall and your capital is at risk. Before investing, your individual circumstances should be assessed. Consider taking independent financial advice.

Jack Tang has no position in any shares mentioned. The Motley Fool UK has no position in any of the shares mentioned. We Fools don't all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors.

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