This FTSE 100 stock isn't overvalued – even after its 150pc gain
A fear of missing out on capital gains can lead investors to overpay for shares during a bull market. Indeed, the FTSE 100's recent surge to a record high is likely to prompt increased buying activity among investors when, in theory, it should mean they are becoming more inclined to take profits on existing positions. After all, buying shares at higher prices is typically less likely to produce attractive returns than purchasing them at lower prices.
Investors should avoid becoming complacent on the FTSE 100's outlook. The index has a bright future but also has a long history of boom and bust and it is impossible to accurately forecast either outcome ahead of time. Therefore, focusing on company fundamentals and obtaining a margin of safety remain as important as ever.
Of course, some large-cap stocks continue to offer scope for generous gains even after delivering stunning capital growth. Relx, for example, has surged by 150pc since we tipped it as a 'buy' almost seven years ago. In doing so, it has soundly beaten the FTSE 100 by 135 percentage points, with further outperformance of the wider index likely to be ahead over the coming years.
The company, which provides data analysis tools to enable better decision-making across a wide variety of sectors, released encouraging full-year results earlier this month. Sales rose by 7pc, while earnings were up by 9pc versus the prior year as its profit margins continued to increase, due in part to the implementation of further cost-saving measures. At the operating level, for example, the company's profit margin rose by 80 basis points to 33.9pc.
A strong financial performance allowed the company to announce a £1.5bn share buyback programme for the current year. This follows £1bn of repurchases made in the previous year and could have a positive impact on its share price performance.
Similarly, five acquisitions totalling £195m were made in the previous financial year, which could catalyse its bottom line growth rate in future. With its net interest costs covered 9.6 times by operating profits last year, the company has scope to further bolster its financial prospects through M&A activity despite its elevated net gearing ratio of 183pc.
Of course, Relx's share price surge over recent years means it trades on an extremely high price-to-earnings ratio of 31.5. This may initially indicate that buyers of the stock are overpaying for it.
Indeed, its shares are likely to have been buoyed at least to some extent by the increasing use of artificial intelligence in the company's decision-making tools and the long-term growth potential this brings. However, in Questor's view, the stock continues to offer fair value for money given its excellent past performance and upbeat future growth prospects.
Its earnings have risen at an annualised rate of 11pc over the past three years, for example, and it is forecast to maintain this pace of increase over the next two financial years. Alongside this, Relx has a clear and sustainable competitive advantage, with its return on equity last year amounting to an exceptionally high 56pc.
Although this figure is undoubtedly flattered by the aforementioned use of substantial debt, it nevertheless indicates that the company's business model and market position are sound.
Relx therefore becomes the latest addition to our wealth preserver portfolio. Its notional purchase will be funded partly by existing cash generated from previous sales and partly by the exits of Social Housing REIT (formerly called Triple Point Social Housing) and Residential Secure Income from the portfolio. They have posted extremely disappointing total losses of 30pc apiece since being added in August 2021.
Clearly, we should have included Relx in the wealth preserver portfolio long before today. It has generated stunning returns following our initial 'buy' recommendation in February 2018 that may naturally prompt some investors to question whether further capital gains are on offer.
But with strong earnings growth potential, an excellent market position and a track record of sound performance, the stock continues to offer a favourable risk/reward opportunity on a long-term view.
Try Our AI Features
Explore what Daily8 AI can do for you:
Comments
No comments yet...
Related Articles
The Herald Scotland
3 hours ago
- The Herald Scotland
Rachel Reeves making ‘even bigger mistakes' than Liz Truss, says Kemi Badenoch
'For all their mocking of Liz Truss, Keir Starmer and Rachel Reeves have not learnt the lessons of the mini-budget and are making even bigger mistakes,' Mrs Badenoch wrote in The Telegraph. 'They continue to borrow more and more, unable and unwilling to make the spending cuts needed to balance the books.' Conservative Party leader Kemi Badenoch hit out at the Chancellor and the Prime Minister (Paul Marriott/PA) Short-lived Conservative prime minister Ms Truss's mini-budget spooked the financial markets in 2022 and led to a spike in mortgage rates. 'As we all saw in 2022, the Chancellor and the Prime Minister are reliant on the bond markets,' Mrs Badenoch added. 'Yet those bond markets are increasingly jittery about the levels of borrowing today with no balancing spending decreases. 'Rachel Reeves's unfunded series of U-turns have only added to the pressure. She is boxed in by her party on one side, and her fiscal rules on the other.' The Chancellor earlier admitted Labour had 'disappointed' people while in Government, but said that the Government had got the balance right between tax, spending and borrowing. Rachel Reeves said she could not please everyone as Chancellor (Yui Mok/PA) She told an audience at the Edinburgh Fringe Festival that balancing the books meant making tough decisions, even if the are unpopular. Appearing on the Iain Dale All Talk Fringe show, she said: 'The reason people voted Labour at the last election is they want to change and they were unhappy with the way that the country was being governed. 'They know that we inherited a mess. They know it's not easy to put it right, but people are impatient for change. 'I'm impatient for change as well, but I've also got the job of making sure the sums always add up – and it doesn't always make you popular because you can't do anything you might want to do. You certainly can't do everything straight away, all at once.' Ms Reeves pointed to Labour's £200 million investment in carbon capture in the north-east of Scotland, which she said was welcomed by the industry. The Chancellor defended Labour's windfall tax on energy companies (Andrew Milligan/PA) At the same time, Labour's windfall tax, she said, was not liked by the sector. 'I can understand that that's extra tax that the oil and gas sector are paying, but you can't really have one without the other,' she said. Defending Labour's record, she said her party had the 'balance about right'. 'But of course you're going to disappoint people,' she added. 'No-one wants to pay more taxes. 'Everyone wants more money than public spending – and borrowing is not a free option, because you've got to pay for it. 'I think people know those sort of constraints, but no-one really likes them and I'm the one, I guess, that has to sort the sums up.' Ms Reeves said Labour had to deliver on its general election campaign of change, adding that her party did not 'deserve' to win the next election if it does not deliver the change it promised.
Daily Mail
5 hours ago
- Daily Mail
Warhammer chief queries his own £2m bonus
The publicity-shy boss of the company behind Warhammer miniatures and many video games has cast doubt on a new bonus scheme that has nearly trebled his pay. Kevin Rountree, chief executive of Games Workshop, earned £4.4 million last year at the fantasy figurine maker, up from £1.5 million the previous year. The pay bump, one of the biggest for a FTSE 100 boss, came as the Nottingham-based business entered the blue-chip index. Its shares have continued their stellar rise and are up more than a fifth this year to value Games Workshop at £5.3 billion. Last week it posted a 30 per cent rise in full-year profits to £263 million and promised to open more stores around the world after cashing in on the launch of Space Marine 2, a video game that is based on its hugely successful Warhammer 40,000 franchise, set in the year 40,000AD. Games Workshop staff shared a £20 million cash bonus pot worth £6,000 each, but it was the media-shy Rountree, whose picture has never been published, who was the biggest winner. He landed a 'one-off' bonus worth £2.2 million as a reward for his ten years running the company. Crucially, the award is payable in shares in three years if Rountree is still in the job and hits certain targets. This type of share-based deal is common among other big companies, but it is the first time Games Workshop has made such a payment since it was set up in a London flat in 1975 – and Rountree seemed unconvinced. 'The new policy is a big change,' Rountree wrote in the company's annual report. 'Time will tell whether it improves Games Workshop's performance and whether it is the right change,' he added. Rountree said he would continue to focus on 'what is right for Games Workshop and our long-term success, not on short-term gains'. Kate Marsh, who chairs the company's pay committee, admitted that such one-off payments 'can attract shareholder scrutiny', but felt it was now 'appropriate' when compared to other firms of a similar size.
The Independent
a day ago
- The Independent
Stocks rocked by tariffs and weak US jobs data
The FTSE 100 sank on Friday after US President Donald Trump announced tariffs on dozens of trading partners, and weak US jobs data fuelled concerns as to the strength of the US economy. The FTSE 100 index closed down 64.23 points, 0.7%, at 9,068.58. The FTSE 250 closed 263.49 points lower, 1.2%, at 21,699.34, and the AIM All-Share closed down 4.34 points, 0.6%, at 757.16. For the week, the FTSE 100 fell 0.6%, the FTSE 250 was down 1.9% and the AIM All-Share lost 2.6%. The Bureau of Labour Statistics said nonfarm payrolls grew by 73,000 in July, shy of the FXStreet-cited consensus of 110,000. It was also short of the 147,000 initially reported for June. However, June's number was sharply revised downwards to just 14,000. What is more, May's reading was lowered to 19,000 from 144,000. June's reading now represents the weakest month for the US labour market in four-and-a-half years. The last reading that was weaker was in December 2020, when 183,000 jobs were lost, according to BLS data. The unemployment rate edged up to 4.2% in July from 4.1% in June, as expected. 'This was an unexpectedly weak report,' said Kathleen Brooks, at XTB. 'Tariffs have yet to meaningfully kick in, so the fact that job growth has been anaemic at this early stage is worrying,' she added. 'A new narrative about the US economy is emerging. It is one where the labour market is rapidly softening, where wage growth remains strong, which could pressurise corporate margins down the line, and where the US economy needs interest rate cuts,' Ms Brooks added. ING said the 'huge downward revisions to May and June' have put 'a completely different light on the health of the US economy', reigniting the prospect of imminent US rate cuts. On Wednesday, the Federal Reserve left interest rates unchanged despite two officials voting for a cut. On Friday, in similar statements outlining their dissents, Federal Reserve vice chair for supervision Michelle Bowman and governor Christopher Waller argued that the inflationary effects of Mr Trump's tariffs were temporary and that the central bank should focus on fortifying the economy to avert further economic weakening. Both Ms Bowman and Mr Waller were appointed by Mr Trump, who has repeatedly lambasted Fed chairman Jerome Powell for not cutting rates. The jobs shock added to the already downbeat market mood after Mr Trump reignited the trade war, hitting dozens of US trading partners with tariffs. Mr Trump raised tariffs on Canada to 35%, India was hit with a rate of 25% and Switzerland with 39%. The tariff rates for 92 nations range from 10% to 41%. Mexico received a reprieve with a 90-day extension, while China faces a separate deadline of August 12. However, in a minor reprieve that opens the door to further negotiations, the White House said these measures will take effect on August 7, not Friday as previously expected. Russ Mould, at AJ Bell, said investors have been 'caught off guard', having previously hoped Mr Trump would 'kick the new tariff levels down the road'. In Europe on Friday, the CAC 40 in Paris tumbled 2.9%, while the DAX 40 in Frankfurt slid 2.7%. In New York, the Dow Jones Industrial Average was down 1.4%, the S&P 500 was 1.6% lower, and the Nasdaq Composite slumped 2.1%. The US jobs data put the US dollar on the back foot while bond yields tumbled. The pound rose to 1.3247 dollars late on Friday afternoon in London, compared with 1.3230 dollars at the equities close on Thursday. The euro traded at 1.1538 dollars, higher against 1.1442 dollars. Against the yen, the dollar was trading lower at 148.12 yen compared with 150.48 yen. The yield on the US 10-year Treasury was at 4.24%, trimmed from 4.34%. The yield on the US 30-year Treasury was at 4.81%, narrowed from 4.87%. In London, pharmaceutical stocks weighed on the blue-chip FTSE 100 index after Mr Trump demanded that drug companies lower prices for American consumers. GSK fell 1.2% and AstraZeneca dipped 1.8%. 'Widespread share price declines among pharma stocks are the market's way of saying it doesn't like the prospect of Trump effectively declaring war with the sector,' said Mr Mould. Faring better were Pearson and Melrose, up 6.3% and 4.9% respectively. London-based publisher of digital and virtual learning materials Pearson raised its dividend and said it is on track to deliver guidance, expressing confidence in stronger growth in the second half of the year. Chief executive Omar Abbosh said: 'We are making rapid progress with bringing AI-powered products to market and are scaling and enhancing our enterprise business with a range of new partnerships and deals.' Aerospace engineering company Melrose said all of its end markets were growing structurally amid rapidly increasing demand in the defence sector, as it increased its dividend amid a swing to profit. The Birmingham-based company reported pre-tax profit of £379 million in the first half of 2025, swinging from a loss of £105 million. Adjusted pre-tax profit climbed 22% to £248 million from £204 million. But IAG fell 1.6% despite a strong performance in the first half of 2025, with the British Airways owner expecting 'good earnings growth and margin progression' for the full year. Brent oil was quoted lower at 69.78 dollars a barrel in London on Friday, down from 71.11 dollars late on Thursday. Gold firmed to 3,349.92 dollars an ounce against 3,292.45 dollars. The biggest risers on the FTSE 100 were Pearson, up 67.5 pence at 1,140p, Melrose Industries, up 25.2p at 537.4p, Fresnillo, up 39p at 1,439p, Unilever, up 122p at 4,530p and British American Tobacco, up 85p at 4,125p. The biggest fallers on the FTSE 100 were Intertek, down 338p at 4,602p, Weir, down 162p at 2,504p, Rentokil Initial, down 19p at 360.5p, Anglo American, down 89p at 2,059p and Barclays, down 15.3p at 356p. Monday's local corporate calendar has half-year results from shipping and offshore services provider Clarkson. Later in the week, half-year results are due from oil major BP, Guinness owner Diageo and life insurance firm Legal & General. The global economic calendar on Monday has US factory orders data.
