10 high-flying stocks the market might have missed

Stockopedia's Ben Hobson names the best quality, strongest momentum shares in the market right now.

There's an exclusive group of shares in the stock market that most investors would usually love to own. They've got stellar track records, sparkling reputations and the ability to deliver stunning returns over long periods - and Reckitt Benckiser (LSE:RB.) is a good example.

What makes stocks like Reckitt so appealing is their strong exposure to the proven return drivers of high quality and momentum. It makes them capable of compounding market-beating returns over many years. The catch is that they often come with expensive valuations - which means you have to pay up for the privilege of owning them.

You can think of these shares as being the stock market's High Flyers. So what are the common features of stocks like Reckitt Benckiser and where can you find more companies that have them?

High Flyers are high quality...

To start with, High Flyers are very distinctive. They are good quality, both in terms of their franchise and financial strength. This tends to show up in high profitability and strong industry leading margins. They're stable, growing and often have accelerating sales and earnings. They also have strong and improving financial histories and no signs of accountancy or bankruptcy risk.

Reckitt Benckiser, for example, is a blue-chip consumer goods giant. One of its standout quality metrics is its five-year Return on Capital Employed, which is a solid 16%. Good, double-digit ROCEs are a pointer to companies that can grow very profitably.

...and they have powerful momentum...

In addition, High Flyers have strong momentum both in the price of their shares but also in their track records of earnings growth. It shows up in stocks trading close to their 52-week high prices and outperforming the market. They'll often be beating broker estimates and getting forecast upgrades and recommendation changes.

This is also true at Reckitt Benckiser, where the share price has risen by 33% to 6,317p over the past five years. That said, the performance has been much more muted over the past year and Reckitt's one-year relative price strength is a more modest 4.3%. So is the market overlooking it?

... but they can be expensive

The drawback with high quality, strong momentum shares is that the market loves these traits. So stocks like Reckitt rarely look cheap, and that can put many investors off them. Only with hindsight could you say they were a bargain.

Stockopedia's ValueRank scores stocks using a blend of the most important value ratios - from 0 (expensive) to 100 (cheap). On this basis, Reckitt Benckiser has a ValueRank of 29 - putting it squarely in the most expensive third of the market, even though its share price has been fairly flat over the past year.

As you can see from this table of stocks with a similar profile, Reckitt Benckiser isn't alone. There appear to be other high quality, high momentum stocks that have drifted in price over the past year:

Source: Stockopedia

Next Steps

The appeal of the High Flyer approach is that it targets the best quality, strongest momentum shares in the market. Right now, this strategy picks up names ranging from Associated British Foods (LSE:ABF) and Johnson Matthey (LSE:JMAT) to smaller groups like Advanced Medical Solutions (LSE:AMS) and Johnson Service (LSE:JSG).

One word of warning is that High Flyers aren't immune from problems. When sentiment changes, the momentum in these shares can crash. So they need to be watched carefully. 

But on the flip-side, the combination of two factors in quality and momentum can zero-in on the type of company that's capable of compounding investment returns over many, many years. If you can catch them at slightly less expensive valuations - perhaps when the market is distracted - then all the better. 

About Stockopedia

Stockopedia helps individual investors beat the stockmarket by providing stock rankings, screening tools, portfolio analytics and premium editorial. The service takes an evidence-based approach to investing, and uses the principles of factor investing and behavioural finance to help investors make better decisions.

Interactive Investor readers can get a free 14-day trial of Stockopedia by clicking here.

These investment articles are simply for generating ideas. If you are thinking of investing they should only ever be a starting point for your own in-depth research.