2 large-cap momentum stocks you can’t afford to ignore

There are many large-cap stocks out there that have appealing growth qualities, but two companies in particular stand out. Melrose (LSE: MRO) and Glencore (LSE: GLEN) have produced staggering returns for investors over the past six months.

After conducting a rights issue to fund the acquisition of a new business in August last year, investors have flocked to Melrose seeking to benefit from the firm’s business of turning around underperforming industrial businesses. During the past six months, shares in Melrose have added 34%.

Meanwhile, after recovering from its near-death experience at the beginning of 2016, shares in Glencore have charged higher over the past 12 months, outperforming almost every other stock trading in London. Indeed, since January 2016 shares in Glencore have added 370%, outperforming the FTSE 100 by around 310% over the same period. 

It looks as if, for both companies, these gains are set to continue. 

Further gains ahead

Melrose and Glencore continue to improve their outlook. Glencore’s recovery has been helped by rising commodity prices, along with management’s actions to pay down debt, cut costs and improve cash flows. Since the beginning of January 2016, its balance sheet has been stabilised and the business is now back on a sustainable growth trajectory. 

That being said, its growth potential does depend on commodity prices. Luckily, it looks as if prices are beginning to stabilise as China is shutting off excess production capacity of key commodities such as coal, iron ore and copper. Off the back of higher commodity prices City analysts are expecting it to report a staggering 963% rise in earnings per share for 2017 to 26p. Only a few months ago analysts were forcasting earnings per share of 9p for 2017 which shows just how quickly Glencore’s outlook has changed this year alone. 

If the company meets these earnings targets, the shares are trading at a forward P/E of 13.5. Based on how quickly analysts have updated the company’s outlook over the past year, I wouldn’t rule out further revisions and a higher share price as a result. 

Getting to work

Melrose buys struggling engineering businesses, turns them around and then sells them on, which means the company is more of a long-term focused private equity firm than anything else. With this being the case, it’s difficult to value Melrose on current earnings, so long-term cash return potential is probably a better metric. Unfortunately, the problem with this approach is that it’s impossible to tell what the company’s potential is until it divests assets, and by then it’s too late. 

Still, based on management’s past performance, it looks as if it will continue to produce impressive results for investors going forward. In 2013 for example the company sold five businesses acquired in 2008 for five times their acquisition value.

City analysts have pencilled-in a 119% growth in earnings per share for 2017 to 10.3p followed by growth of 15% for 2018. The shares support a dividend yield of 1.7%. 

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