Trading Strategies: a top FTSE 100 stock with growth potential

The FTSE 100’s recent surge to a new all-time high may naturally prompt some investors to consider selling their shareholdings. They may understandably feel that there is now more limited scope for capital gains because the large-cap index’s current elevated level adequately factors in the future growth prospects of its members.

• Our Services: SIPP Account | Stocks & Shares ISA | See all Investment Accounts

A case-by-case basis

However, a new record high does not necessarily mean that the FTSE 100 is now overvalued. Although it has risen rapidly over recent months, gaining 4% in the past month alone, it has posted a meagre capital return of just 16% over the past five years. This compares with an 89% gain for the S&P 500 index and a 71% capital return for the Nikkei 225 index over the same period.

Moreover, the stock market reaching its highest-ever level does not mean that all its members are now unattractively priced. Inevitably, some stocks will have performed better than others over recent years and valuations will therefore be highly varied across the index. Indeed, it is entirely possible to find extremely overvalued stocks alongside dirt-cheap equities within the same index during both bull and bear markets.

Investors may therefore wish to assess each of their holdings on a case-by-case basis. An analysis of each company’s financial position, competitive advantage and future growth prospects, for example, provides an insight into whether it currently trades at, above or below its intrinsic value. Following this, an investor can make an informed decision as to whether each of their holdings is worth keeping, adding to or selling.

Timing the market

Furthermore, seeking to time the stock market’s movements by selling FTSE 100 stocks now before buying them back at a later date could be a risky move. Although stock markets have never risen uninterrupted, with bull and bear markets having followed one another ad infinitum, predicting precisely when periods of growth and decline will occur is almost impossible due to the vast number of variables that can affect equity markets.

• 19 UK stocks on list of conviction ‘buy’ ideas for 2025
• 10 hottest ISA shares, funds and trusts: week ended 24 January 2025

For example, the FTSE 100 rose from 1,000 points at its inception in 1984 to over 6,900 points by the end of 1999. Very few investors at the turn of the century would have expected it to then rise to just 8,500 points, its present level, over the next 25 years. And even just a matter of months ago, a significant number of investors were downbeat about the index’s prospects due to the presence of sticky inflation, geopolitical risks and lacklustre GDP growth across several major economies.

Clearly, investors who sell now could be beneficiaries over the long run. The index may fall dramatically over the short term, thereby enabling them to buy shares at a lower level at some point in future. But with the performance of the stock market – especially in the short run – being subject to a high degree of randomness, it may be more prudent to avoid seeking to time the market and instead adopt a long-term view.

Other options

Investors may also wish to consider the prospects for other mainstream assets before selling FTSE 100 shares while the index is at, or close to, a record high. Although inflation is currently 0.5 percentage points above the Bank of England’s target, the central bank expects it to fall to 2% over the medium term. This should provide scope for further interest rate cuts that reduce the income return available on cash.

Similarly, sellers of FTSE 100 shares who buy bonds may still benefit from a period of looser monetary policy due to the inverse relationship between fixed-income prices and interest rates. However, equities have typically outperformed bonds over the long run. And with interest rate cuts set to boost the operating environment for many firms, rising profits and relatively attractive share price returns could be ahead.

Separately, FTSE 100 members generate more than three-quarters of their revenue from outside the UK. With the US economy in particular forecast to deliver strong growth over the coming years, the outlook for the world economy is relatively upbeat. This could provide a catalyst for the large-cap index that means it delivers further gains over the long run, albeit interrupted by periods of elevated volatility along the way.

A rich market valuation

Source ShareScope. Data as at 27 January 2025. Past performance is not a guide to future performance.

Shares in the London Stock Exchange Group (LSEG) have risen to a record high in recent weeks. Indeed, the financial market data provider’s share price is up 28% in the past year alone as investor sentiment has improved significantly in response to its upbeat financial outlook. As a result, it now trades on a lofty price/earnings (PE) ratio of around 37.

This, however, uses earnings per share from the company’s 2023 financial year, since its 2024 annual results are due to be released at the end of February. Using 2025’s forecast earnings, the stock trades on a forward PE of 33. Although this is still high in comparison to many FTSE 100 stocks, even while the index is at a record high, it evidences the company’s brisk pace of expected profit growth.

Encouraging progress

The company has the potential to deliver a further increase in profits over the coming years. It has a sound competitive position, with over 70% of its income being recurring through subscriptions and licenses. This provides a degree of stability, as well as a relatively high level of earnings visibility. And with its 10-year partnership with Microsoft set to produce a range of new products that, in some cases, utilise artificial intelligence, the firm’s market position is poised to improve.

• Stockwatch: a share with scope to double and more
• Sign up to our free newsletter for investment ideas, latest news and award-winning analysis

Indeed, the company’s latest quarterly update showed that it is making encouraging overall progress. All five of its operating segments generated positive sales growth during the period, with its top line rising by 9.5%. Its diverse geographic exposure, furthermore, provides access to a number of fast-growing economies, while offering a degree of risk reduction.

LSEG’s financial position, meanwhile, is sound. At the time of its half-year results in June, it had a net debt-to-equity ratio of 29%, while debt servicing costs were covered almost 14 times by operating profits on a net basis during the six-month period. And with the company in the process of becoming more efficient, as evidenced by a 120-basis point rise in its EBITDA profit margin during the first half of 2024, it has an upbeat financial outlook.

Risk/reward opportunity

Clearly, the company’s elevated valuation may dissuade some investors from buying it. Undoubtedly, it is possible to unearth far cheaper stocks elsewhere in the FTSE 100 at present. And with the outlook for the world economy still uncertain in the near term due to the presence of time lags following interest rate cuts and ongoing geopolitical risks, the stock’s price could prove to be volatile over the coming months.

However, with a solid financial position, a sustainable competitive advantage and a sound strategy through which to deliver further earnings growth, the company’s shares appear to offer a relatively attractive risk/reward opportunity on a long-term view.

Robert Stephens is a freelance contributor and not a direct employee of interactive investor.