Trading Strategies: a top FTSE 100 stock with long-term potential

The global economy’s outlook has dramatically changed over recent weeks. While US tariffs on imported goods were previously widely anticipated, the scale of trade barriers initially put in place, and then paused for 90 days for most countries except China, has understandably caught many investors by surprise.

In the short run, it would be wholly unsurprising if the global trade war persists, and even worsens, with it being an extremely fluid situation. This means that forecasts regarding inflation, interest rates and GDP growth are, in the near term at least, likely to be of limited value. After all, trade policies could rapidly change over a short period and without warning.

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Furthermore, other geopolitical risks, such as conflict in the Middle East and in Ukraine, remain elevated and highly changeable. Developments concerning them could prompt a sharp improvement or deterioration in investor sentiment that causes heightened stock market volatility over the coming weeks.

A revised strategy?

In response to elevated stock market volatility, some investors may determine that there are opportunities to make a quick buck. Indeed, the stock market’s movements have recently been exceptionally dramatic over very limited time periods. This may tempt some investors to seek to buy and sell shares in quick succession.

However, given the challenges in anticipating near-term market movements, especially since they may largely be based on unforecastable government policy changes, such a strategy could prove to be problematic.

Other investors may decide that it is best to wait for economic uncertainty to dissipate before buying stocks. They may even decide to sell shares en masse given the highly opaque future for global GDP growth. Although this may mean they avoid any subsequent downturn, they could also miss out on an eventual upturn in the economy and stock market’s performance.

Indeed, the economy has always bounced back from its very worst periods of recession to post positive growth. And with the stock market having been cyclical throughout its history, with all previous downturns, corrections and bear markets having previously proved to be temporary, any current or future declines are unlikely to last ad infinitum.

A fundamental-led approach

Rather than seeking to make a quick return on extreme volatility or avoiding the stock market completely, it may be more logical to instead buy high-quality stocks for the long run.

Certainly, they could produce paper losses over the short run should the stock market fall again. But companies that have a solid financial position and a clear competitive advantage are relatively likely to overcome a period of elevated economic uncertainty. They may also be well placed to capitalise on a subsequent improvement in the economy’s outlook, thereby producing attractive capital gains over the coming years.

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In terms of possible long-term stock market catalysts, previous interest rate cuts across developed markets may not yet have had their full impact on GDP growth due to the existence of time lags. Further monetary policy easing is also likely to be ahead, since inflation in the US, eurozone and the UK is now close to central bank targets, with a period of potentially weaker economic growth likely to prompt an increasingly dovish stance among policymakers.

Pound cost averaging

Given the stock market’s highly volatile recent performance, investors may wish to consider gradually purchasing shares instead of utilising all their excess capital in a short space of time.

Although there are a wide range of stocks now trading at lower prices than earlier this year, with several of them being at discounts to their intrinsic value, their market valuations could still come under additional pressure in the near term should the economic outlook deteriorate further. This may make a pound cost averaging strategy all the more appealing.

An evolving business

Source: ShareScope on 28 April 2025. Past performance is not a guide to future performance.

While the share price of FTSE 100 member RELX (LSE:REL) has been hugely volatile over recent weeks, as per the wider stock market, the company’s latest trading update showed that it remains on track to meet financial guidance for the full year. It reported that all four of its divisions are performing well, with sales and profit growth still set to be achieved during the current year.

As a reminder, the firm provides tools that use algorithms to enable better decision-making across a wide range of sectors. For example, its tools are used to assess risk in the insurance industry and to help select the most appropriate treatment option in the healthcare sector. It is continuing to benefit from a gradual shift in focus away from print publishing, which offers a relatively undesirable growth opportunity.

Indeed, print accounted for just 4% of the firm’s revenue in its latest financial year. This is down from 18% in 2014, with its overall sales and profit growth rate likely to benefit from a continued trend towards analytics and decision-making tools.

Solid fundamentals

Encouragingly, the company has sound fundamentals through which to overcome near-term economic uncertainty and capitalise on long-term growth opportunities. Its return on equity last year, for example, was 56%. Its operating profit margin, meanwhile, improved by 80 basis points to 33.9% in its most recent financial year. This suggests it has a strong, and improving, competitive position that bodes well for its financial performance across a variety of economic periods.

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Although the firm has a relatively high net debt-to-equity ratio of 183%, its net interest payments were covered 9.6 times by operating profits in its latest financial year. This suggests it has the means to overcome a period of economic uncertainty, which could yet negatively impact its profitability, while providing scope for further acquisitions. Indeed, the company purchased five businesses in its latest financial year. With asset prices potentially moving lower as a result of heightened economic uncertainty, it may be well placed to capitalise on lower valuations in future.

The company’s sound financial position also means it can conduct a share buyback programme totaling £1.5 billion. The latest tranche of £300 million was recently launched and should provide a degree of support to its share price over the near term.

Risk/reward opportunity

Clearly, an uncertain economic outlook could hamper the firm’s financial performance due to its broad geographical spread and relatively cyclical status. However, the company’s financial track record highlights its strong performance across a range of economic conditions. In the past decade, for example, its earnings per share have risen at an annualised rate of 7% despite it experiencing periods of economic difficulty such as those prompted by the pandemic.

A strong track record of earnings growth could be a reason why the firm’s shares trade on a relatively high forward price/earnings ratio of 30.6. Clearly, there are significantly cheaper stocks in the FTSE 100 index at present that could offer greater scope for an upward rerating over the long run. However, Relx’s sound fundamentals mean it could be worthy of a premium valuation.

It has a strong, and improving, competitive position that could aid its performance across a range of economic conditions. Its ample net interest cover also offers a degree of ballast amid ongoing elevated geopolitical risks, while a share buyback programme and recent acquisitions could boost its share price performance in future. On a risk/reward basis, therefore, it appears to offer investment potential over the long run.

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