10 stocks that resisted market pressure in 2018

After a poor year for equities, it's easy to forget that not every stock fell like a stone. Here, Stockopedia's Ben Hobson names the quality players and super stocks to own in 2018.

There are all sorts of behavioral biases that can lure investors into making bad decisions. One of the most common is connected with what's probably the best known warning in the stockmarket:

"past performance is not necessarily a guide to the future"

- and that's hindsight bias.

Hindsight bias is when you're tempted to think that you predicted an event before it happened, even though there's no justification for it. Psychologists have shown that surprising events tend to reframe all our previous thinking. The big risk is that we get overconfident in predicting the future (because we "knew it all along").

In his book Thinking Fast and Slow, the renowned psychologist Daniel Kahneman, wrote that the core of hindsight bias is that we believe we understand the past, which implies that the future should be knowable as well. But in fact, we understand the past less than we think we do.

This behavioural flaw is why it's so important for investors to avoid extrapolating too much from recent events in order to guess what might happen next. But that doesn't mean that there's nothing to learn from recent trends…

What happened in 2018

After a challenging year in the stock market, and with Christmas just around the corner, this week we're indulging in a review of some of the biggest stockmarket winners of 2018. Unlike recent years, small-caps, growth stars and popular momentum names are well and truly off the the menu. 

Growth and momentum were still driving the biggest profits in equities right up until the middle of the year. But in the months that followed, there was steady decline in prices and since October the trend has got worse. The UK market is now well off where it started the year.

There are likely to be a variety of causes for this pull-back. US equities have come under pressure in 2018 and that will certainly have been influencing sentiment here. But of course you could also blame Brexit, the value of the pound, interest rates… the list goes on.

In these conditions, what did it take to not only outperform the All-Share index - which has fallen by close to 12% in 2018 - but actually generate a positive price gain during the year? Here is a list of some of those stocks that managed it... 

Source: Stockopedia        Past performance is not a guide to future performance

The rules for this screen are simply that the shares belong to the main FTSE universe. Each needed to have delivered a positive price gain through the year and needed to have positive price strength relative to the index over 1 year, 6 months and 1 month.

The Risk Rating classification - which ranges from Highly Speculative, Speculative, Adventurous, Balanced and Conservative - is a measure of volatility based on the standard deviation of three year daily price returns. As such, it’s likely the classifications for these stocks won't have changed over the year. What we see is that, with the exception of Gem Diamonds, Speculative and Highly Speculative volatility shares have not been among the big winners this year. Basically, based on this small sample, it looks like less volatile shares like Hikma, Huntsworth and SDL have performed better.

In terms of market-cap, again the size classifications won't have changed much during the year. On these rules, mid- and large-cap stock have done better than smaller firms. 

The StockRank Styles can and do change depending on the overall exposure to quality, value and momentum of each stock relative to the rest of the market - so it’s important to be wary of hindsight bias. But what we can say is that a number of these firms - which have performed well this year - currently have strong exposure to the quality and momentum that define 'high flyer' stocks.

Finally, in terms of sectors, there's a trend in the top 10 performers towards more defensive and slightly less cyclical areas like healthcare, technology and industrials. Again, this is quite a change from what we’ve seen in the market in recent years, when much more cyclical firms have outperformed. Now we’re seeing less volatile, more conservative firms in slightly more reliable sectors performing better.

Looking ahead to 2019

While there is never any certainty in the stockmarket, there is perhaps just an added element of unpredictability about 2019. How that affects stocks is impossible to know. Hindsight bias dictates that it's pointless trying to map the past to the future in any kind of concrete way. But what we have seen this year is a shift away from the go-go-growth and moment trend that has been driving the market in recent years. Whether it's a pause of a more solid change in trend… we'll have to wait and see.

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