Why it pays to factor in momentum

What should you look for in a stock? Good quality firms and cheapness are important, but don't forget about momentum. Investec's Philip Rodrigs reveals six on-trend stocks from his portfolio.

What drives share prices? Good quality firms do well; cheapness is at the core of value investing; but momentum (earnings surprise as well as technical) is also important. Investec's 4Factor equities team buys stocks where all four factors show strongly at once. We pay close attention to new clusters of attractive stocks, which gives us an early warning of emerging trends in the market. This has allowed us to benefit from a switch by investors from a value-orientated approach in global companies, to quality, high-yielding, long-term growth plays, often with a domestic UK bias.

A case in point is Dignity Funeral Services (DTY, 540p). The firm is benefiting as the continental trend to pre-pay for your own funeral catches on in the UK. Through its national network, Dignity offers customers the chance to fix funeral prices, which should allow market-share gains in the long-term. Meanwhile, highly predictable cash flows make it deserving of a premium valuation.

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