Stockopedia: shares that outpaced the market in 2020

Learn lessons from Covid-19 when building a portfolio – and diversify.

Twelve months ago there were very few clues about the difficult year that lay ahead. Without doubt, the social and economic effects of Covid-19 will be felt for a long time yet. But in the stock market, the initial collapse in prices gave way to a determined recovery. Amid the trauma of the past year, some shares and sectors still managed to perform very well.

At Stockopedia, we continuously monitor market trends and performance and last year there were some big changes. As prices cratered under the weight of uncertainty in February and March, some sectors immediately faced problems. Travel, leisure, some retail and banks, to name a few, were causes for concern. Financial firms were asked by regulators to shelve their dividends...but payouts in many sectors across the market were cut.

For others, like those in defensive industries such as supermarkets and utilities, the going was better. And for a few sectors, the turmoil provoked immediate interest. Technology companies with services that make life easier for homebound customers saw their prices fly. Mining companies, especially those drilling for precious metals, were invigorated. And pharmaceutical and biotech stocks, often maligned by risk-averse investors, were suddenly in the spotlight.

As we turn the corner on the year, some of these trends have stuck around. Take a look at the best-performing stocks on the basis of 12-month relative price strength and you can get a sense of what worked well in 2020. Here are the top 10 performers from the FTSE 350:

The biggest winner by a long way was the online retailer, AO World. AO has had a torrid time since it floated back in 2014, but it was a major beneficiary of the changing conditions last year. So too was CMC Markets, the financial trading platform, which benefited from a surge in activity as volatility swept the market.

In the mix we also saw companies such as the food maker Premier Foods, which had suffered an underwhelming few years before launching out of the blocks in 2020. Precious metals miners such as Petropavlovsk and Fresnillo showed just how fast big mining stocks can move when the conditions are right. And solid, niche specialists with powerful businesses, such as Games Workshop, showed that even strong companies can continue to surprise to the upside.

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Today, a number (although not all) of these kinds of big winners are priced on fairly rich earnings multiples. They’re expensive, but often deservedly so because of their financial quality. But this isn’t always the case right across the market...

Big winners in small-caps

AIM had a very solid year in 2020, in part because some of its largest stocks held up well in the conditions, such as Boohoo (LSE:BOO), ASOS (LSE:ASC) and Fevertree Drinks (LSE:FEVR). But that doesn’t tell the whole story. Under the bonnet, some of the strongest price performances came from much smaller, more speculative names.

Indeed, take a look at the top five on a 12-month relative price strength basis and you get a feel for some of these big moves. Synairgen and Braveheart both have Covid-19 related (testing) interests, which propelled their prices. Greatland Gold, a pre-profit exploration company, also attracted a great deal of attention, as did cleantech/ green-tech stocks such as EQTEC and Powerhouse Energy.

But while the price performances of some of these AIM shares look impressive, they can come with risks. A lack of earnings means that they’re often valued on the strength of the ‘stories’ behind them. With highly speculative plays, the momentum can build fast but collapse just as quickly if sentiment around them starts to wane - and this makes them potential momentum traps. Buyer beware.

What’s next for 2021?

Anybody that was making predictions in early 2020 about the likely direction of markets will probably have got a lot wrong. Last year we saw how unpredictable events can cause huge shifts in investment flows, punishing some sectors, revitalising others and even creating entire new industries of interest that go on to produce stunning returns.

In constructing a portfolio it’s worth thinking about how sudden events can cause this kind of disruption and how diversifying between sectors, styles and sizes and avoiding unnecessary risks might protect you better.