Momentum investing — buying stocks that have done well in the hope that this form will continue — is a popular strategy for the simple reason that it’s been shown to work.
According to a study that looked at returns between 1900 and 2016, UK stocks that had outpaced the market in the previous year returned an average of 14.1% over the next 12 months.
With this in mind, here’s a selection of stocks from the FTSE 100 that are currently doing very well indeed.
Accountancy software provider Sage (LSE: SGE) is a great example of just how profitable taking a contrarian stance can be. Its shares have climbed 50% in value since October, having previously fallen 35% from the beginning of 2018.
Some of this can probably be attributed to the general return in positive sentiment to markets but, as my Foolish colleague Kevin Godbold explained last month, Sage’s recent results have been decent, including a 9.9% increase in recurring revenue.
It’s certainly quite a turnaround for a company whose former CEO departed in 2018 amid disappointing trading and problems relating to the execution of a new business model.
Today Sage looks in much better shape and — at 26 times forecast earnings — boasts a high valuation to match.
Another stock that has performed admirably for holders lately has been medical technology business Smith & Nephew (LSE: SN). It’s up 36% since last October, comparing favourably to the 6% odd increase seen in the index over the same period.
May’s trading update has helped keep this momentum going with the £15bn cap reporting a 4.4% rise in underlying revenue over Q1. Management now believes that growth will now be “in the upper half of guidance range of 2.5% to 3.5%” for the full year.
This news, combined with a series of acquisitions to “strengthen leadership positions across the business,” should give investors confidence that the good times can continue. The shares are available on 22 times forward earnings.
It won’t come as a surprise that my last example is one the newest additions to the FTSE 100 — sportswear specialist JD Sports Fashion (LSE: JD).
Bucking the trend seen elsewhere on the high street, JD’s revenue jumped almost 50% in the 52 weeks to 2 February with pre-tax profit also rising 15.5% to just under £340m.
Naturally, this form hasn’t been ignored with the shares galloping 70% higher since the beginning of 2019. They now change hands for 18 times expected earnings, compared to the five-year average of 15.
The company’s growth strategy, part of which has involved a spate of acquisitions, including menswear brand Pretty Green and footwear retailer Footasylum (although the latter still needs to be approved by the Competition and Markets Authority) has clearly gone down well with investors.
Last year’s capture of US firm Finish Line also serves to increase JD’s geographical diversification — a prudent move with Brexit somewhere on the horizon.
Don’t get too comfortable
Based on recent trading, I think there’s a good chance that all three of these stocks will keep rising, at least in the near term.
There can be no guarantees though. Popular companies can fall hard when their purple patches end and/or external events dictate otherwise. Don’t expect a gong to signal the optimal time to sell.
If all that doesn’t sit well, then the Fool’s general philosophy of buying quality companies and holding on through thick and thin for many years may have more appeal.
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Paul Summers has no position in any of the shares mentioned. The Motley Fool UK has recommended Sage Group. Views expressed on the companies mentioned in this article are those of the writer and therefore may differ from the official recommendations we make in our subscription services such as Share Advisor, Hidden Winners and Pro. Here at The Motley Fool we believe that considering a diverse range of insights makes us better investors.