Shares in the infrastructure investor John Laing have been on a strong run in 2019, helped by some solid earnings forecast upgrades from analysts. The the question now for investors is whether that momentum can continue.
Finding stocks that can break-out and move higher on news updates is a tactic used by some of the world’s most successful traders. But it’s not a black-box strategy…
Indeed, knowing the factors that drive relative strength in share prices can help you find profitable momentum trades, too. I’m going to use John Laing as an example of how this can work.
How has the John Laing (LON:JLG) share price performed?
John Laing is a conservative, mid cap in the Construction & Engineering industry and it has a market cap of £1,882m.
Over the past year, the John Laing share price has risen by 36.0%, which sounds pretty good.
But it’s important to put this in context and look at the market trend. After all, in a rising market where prices are up across the board, that gain might not be as remarkable as it seems.
As it turns out, the FTSE All-Share index has been broadly flat over the past year, meaning that John Laing shares have a 1-year relative strength of 38.6%.
Why relative strength matters
Relative strength is a crucial tool in the armoury of technical traders and investors. It’s an instant measure of how a stock has performed in comparison with a benchmark.
And while there are no certainties about which way a stock will move next, research shows that price trends often persist.
Studies by Narasimhan Jegadeesh and Sheridan Titman, who are leading experts on momentum, show that stocks with the strongest price strength tend to keep up the pace for anywhere up to one year.
But what causes this?
The answer is that investor behaviour plays a big role. Academics point to two key drivers:
- Under-reaction - prices are slow to move up because investors are hesitant to bid prices higher in stocks that have already been on a strong run.
- Delayed over-reaction - investors chasing rising prices attract the attention of other investors, who follow them into those trades, pushing prices higher and higher.
So the answer is that momentum in stocks with strong relative strength is at least partly caused by a virtuous circle of human emotion. Investors have to constantly re-price these improving shares in their own minds.
It won’t always happen - and it might take some time - but when momentum takes over, it can push prices higher and higher.
Next steps
John Laing has clearly been on a strong run recently. Research into momentum suggests that kind of price trend has the potential to continue. But it’s important to remember that while momentum is a powerful driver of stock market returns, it can be also prone to strong pull-backs when sentiment changes - so care is needed.
To find out more you might want to take a look at the John Laing StockReport from the award-winning research platform, Stockopedia. StockReports contain a goldmine of information in a single page and can help to inform your investment decisions.
Disclosure: The author of this report often has positions in the currencies and securities referenced in the report at the time of publication, or plans to trade in these currencies and securities. The views expressed in this report accurately reflect the author’s personal opinion about the referenced currencies and securities referenced and other subject matter. The report does not contain and is not based on any non-public, material information. The information in this report has been obtained from sources we believe to be reputable and accurate, but we have not independently checked or verified that information.
This report is protected by copyright laws. Please do not republish, post or distribute in any way its contents without prior permission from our company. Our Company is incorporated and licensed in Australia to provide only general financial advice. Please see our financial services guide and terms and conditions for use of this report for more information.