Ed Croft wrote an article on Stockopedia recently, about DTG (Dart Group) (http://is.gd/tgECyO). the shares shot up that day (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…
