There are many theories about investing in shares with momentum. Some people would say that a share, or business, that has done well is likely to keep doing well – at least for a little longer.
If profit has been growing strongly, or management have been handling the business well, then you wouldn’t expect most businesses to suddenly crash and burn.
There’s a decent comparison to a college student. If a person has been a top performer in school and also does great in college, you would expect them to do well in their 20s in the workforce, right?
However, you could also suggest that shares which have performed extremely well have run too hard. Most shares that grow by more than 100% in a year are likely to have seen the multiple of their earnings, the price/earnings ratio, increase. That says that the share has become more expensive, even if the profit has done well. There’s a bigger chance the valuation could reduce.
Over the past year, the below shares in the ASX 300 have gone up by more than 200%:
Emeco Holdings Limited (ASX: EHL) is up by 280%.
Afterpay Touch Group Ltd (ASX: APT) is up by 249%.
New Century Resources Ltd (ASX: NCZ) went up by 247%.
Appen Ltd (ASX: APX) increased by 235%.
Lovisa Holdings Ltd (ASX: LOV) is up by 220%.
Kidman Resources Ltd (ASX: KDR) has increased by 210%.
Beach Energy Ltd (ASX: BPT) went up by 203%.
It is extremely unlikely that any of them will register another 200%, or even 100% gain over the next year.
Some of them are resource based and have benefited from commodity and/or currency movements. There’s every chance that New Century, Kidman and Beach Energy could drop if their respective resource prices fall.
Afterpay and Appen are interesting ideas because they are both seeing significant growth of their underlying businesses. Share price growth over the next year may not be certain but I imagine in five or ten years’ time both could be significantly larger and therefore be worth a lot more than they are today.
So, I had to choose two to buy today, I’d go for Afterpay and Appen. Afterpay is expanding in the US and AI is likely to grow exponentially over the coming years.
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Motley Fool contributor Tristan Harrison has no position in any of the stocks mentioned. The Motley Fool Australia owns shares of AFTERPAY T FPO and Appen Ltd. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy. This article contains general investment advice only (under AFSL 400691). Authorised by Scott Phillips.