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Last week, the FTSE 100 crossed the 10,000 mark for the first time. It closed over the 10,000 figure for the first time too.
The milestone reflects a confluence of global and domestic factors rather than a sudden surge in UK economic strength. A weaker pound — relative to where it was a decade or so ago — has continued to flatter the overseas earnings of multinational constituents.
Meanwhile stabilising inflation and a slow-moving economy continue to underpin expectations for further interest rate cuts.
As interest rates fall, we typically see money move from savings and bond markets back to stocks. It’s like trading a government bond yielding 4% for an insurance stock yielding 7%.
At the same time, resilient corporate profits in energy, defence, and financials have supported index-level gains. Persistent share buyback programmes and dividend flows have also underpinned valuations.
Still value to be found
One stock I continue to like is London Stock Exchange Group. It’s not my usual type of investment as it’s not clearly undervalued on a traditional price-to-earnings (P/E) basis. However, its appeal lies in the quality and durability of its revenues.
The groupâs increasing exposure to data, analytics, and index services has transformed it into a critical piece of global financial infrastructure, with high recurring income and strong pricing power.
Long-term structural growth in capital markets data, coupled with disciplined capital allocation and a robust balance sheet, makes it a business I am comfortable owning despite the lack of obvious near-term value.
The market is seemingly a little skeptical about its AI credentials. But analysts aren’t, with the share price target indicating a 40% undervaluation.
Pick of the bunch
My pick of the bunch remains Melrose Industries (LSE:MRO). The company operates in the same sectors as Rolls-Royce (with the exception of nuclear propulsion), but trades at a fraction of the price.
It’s not in competition with Rolls. It instead supplies critical components to major engine and airframe programmes, benefiting from long-term aerospace demand without taking on the same development risk.
With civil aviation recovery continuing and defence spending rising, Melrose offers operational leverage and improving cash generation that, in my view, the market still underappreciates.
It also has incredible pricing power with 70% of its sales representing sole-source positions. With that in mind, the valuation, at 16.2 times forward earnings and a price-to-earnings-to-growth (PEG) ratio of 0.9, looks a little cheap. Especially compared to Rolls with a PEG of 2.7.
Now, net debt isn’t tiny. It’s £1.6bn and that’s comfortable for now but something worth watching. If we see a reversal of current demand trends, then that becomes a risk.
However, I absolutely believe this is one worth considering. It’s not the beast it used to be — it’s sold off excess units — and it’s becoming a streamlined business with improving profitability metrics.
The post FTSE 100 tips 10,000, finally! But this stock still looks dirt cheap appeared first on The Motley Fool UK.
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James Fox has positions in London Stock Exchange Group Plc, Melrose Industries Plc, and Rolls-Royce Plc. The Motley Fool UK has recommended London Stock Exchange Group Plc, Melrose Industries Plc, and Rolls-Royce Plc. Views expressed on the companies mentioned in this article are those of the writer and therefore may differ from the official recommendations we make in our subscription services such as Share Advisor, Hidden Winners and Pro. Here at The Motley Fool we believe that considering a diverse range of insights makes us better investors.
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