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I’ve been scouring the FTSE 100 for top stocks to tuck inside my Self-Invested Personal Pension, and on Tuesday I took the plunge.
In recent years, I’ve focused on high-yielding dividend stocks trading on single-digit price-to-earnings ratios, hoping for a mix of income and share price recovery. Lately though, I’ve been leaning towards businesses with more growth potential, even if that means climbing the valuation scale.
I still love a bargain though, so I’ve been hunting for companies that have taken a knock but look good to go. And one jumped out at me: London Stock Exchange Group (LSE:LSEG).
The group has potential
After a blistering run the stock has struggled in recent years. The price is down 10% over the past month, 15% over 12 months, and broadly flat over five years.
Yet first-half results, released on 31 July, don’t reflect that. Adjusted earnings per share rose 20.1% to 208.9p. Management lifted the interim dividend 14.6% to 47p and launched a £1bn share buyback.
On top of that, the group is deepening its partnership with Microsoft to build AI tools for banks and asset managers. If successful, that could transform its growth profile over the next decade.
Financial data has become as essential as electricity for global markets, and London Stock Exchange Group is one of the biggest providers. The company’s recurring revenues give it resilience through economic cycles. So why the loss of swagger?
Investors clearly hoped for more. Its price-to-earnings (P/E) ratio was in the mid-30s last year, and when that happens, there’s a lot of expectation built-in. The slightest miss can be punished.
Also, AI could cut headcounts in City firms that rely on its tech, meaning fewer users for the software LSEG is developing. The stock market has been wobbly and we’re heading into the traditionally tricky autumn months. In fact, I was hoping to buy the stock on a wider market dip, but didn’t have the patience to wait.
Analysts bullish
I’m not the only one who rates this stock. Of the 18 brokers giving ratings, 14 say it’s a Strong Buy, two say Buy, and two say Hold. None say Sell. The consensus one-year target is 12,595p, which would mark a massive 42% gain from here. Insider buying after July’s results adds to my confidence.
But we’ll see. I don’t expect the road to be smooth. London Stock Exchange Group is still pricier than the average FTSE 100 stock, with a P/E of 24. But for me, this is the closest thing to a no-brainer buy the FTSE 100 offers right now. Investors may want to consider buying too, but only with a long-term view.
I’d rather take my chances on a high-quality growth business like this than let cash sit idle. As always, time will tell, but I’m glad I jumped in. I’ve kept some powder dry and if there’s an autumn sell-off, I’ll average down and buy more.
This story originally appeared on Motley Fool
