This stock and its index keep hitting record highs. We think they'll hit more

Telegraph

2 days ago

Questor is The Telegraph's stock-picking column, helping you decode the markets and offering insights on where to invest
The FTSE 100's recent surge to a record high inevitably prompts the question of whether it will continue to rise.
Some investors will feel the index is just getting started after a period of truly disappointing performance that has seen it dramatically lag other major indices. Meanwhile, less optimistic investors will point out that the stock market has never risen uninterrupted in perpetuity and, therefore, the FTSE 100 could easily decline from its current level.
In Questor's view, it is impossible for any investor to know whether the FTSE 100 will rise or fall in the short run. After all, an infinite number of economic, political and other events could take place, many of which are unforeseeable, that either help or harm the performance of the UK's large-cap index over the coming months.
But over the long term, the FTSE 100's relatively low price level and its history of ultimately making new record highs, combined with an improving global economic outlook, mean it is very likely to comfortably surpass its current level.
Of course, a record stock market high means several of our previous recommendations are now trading at elevated price levels. Among them is Relx, which provides data analysis tools to improve decision-making across a wide range of sectors. For example, its tools help insurers to assess risk, aid the retail sector in unearthing fraudulent transactions and guide healthcare professionals towards the most effective treatment options.
The company's shares have reached a record high this year, currently trading 152pc higher than at the time of our 'buy' recommendation in February 2018. In doing so, they have outperformed the FTSE 100, even after the index's surge to a record high, by 134 percentage points.
The company's recently released interim results showed it is making encouraging progress in implementing its longstanding strategy of moving away from print publishing in favour of the superior growth opportunities afforded by analytics and decision tools. Revenue rose by 7pc versus the same period of the prior year, with operating profits increasing by 9pc as the company's margin rose by 70 basis points to 34.8pc amid continued cost control.
This growth trend is set to continue, with Relx forecast to generate a 9pc annualised rise in earnings per share over the next two years. An improving financial performance means it is capable of making further acquisitions that act as an additional catalyst on its top and bottom line growth rate following the three purchases that were completed for a total consideration of £262m in the first half of the current year.
The company's net interest cover of seven in the six-month period further highlights its capacity to take on additional debt in an era of declining interest rates.
Alongside its results, Relx also confirmed it is on track to complete the remaining £425m of a previously announced £1.5bn share buyback programme during the current year. Given its manageable debt levels, it would be unsurprising if further repurchases are made over the medium term – even though the company's shares trade on a rather rich price-to-earnings (P/E) ratio of 31.8 following their rise over recent years.
Some investors may feel this is simply too much to pay for a business that is forecast to deliver only high single-digit earnings growth over the medium term. Indeed, even while the FTSE 100 trades at a record high, there are countless stocks in the index that have earnings multiples of less than half that amount. In many cases, they are high-quality firms with upbeat financial prospects.
However, in Questor's view, Relx deserves to trade at a substantial premium to the wider index because of its long record of strong performance, improving competitive position amid rising profit margins and its capacity to make continued acquisitions that catalyse its bottom line.
Moreover, the company is well placed to deliver sustained above-average profit growth as it continues to shift towards more lucrative market segments and keeps cost rises under control. Despite its heady price level, it still merits purchase on a long-term view.