As was widely predicted, Just Eat, DS Smith and Halma were added to the list of FTSE 100 constituents on Thursday evening, at the expense of support services firm Babcock, Legoland owner Merlin Entertainments and medical products developer ConvaTec.
Counting the latest three relegations, there have only been nine firms kicked out of the FTSE 100 this year, marking a relatively quiet year for the index with uncharacteristically low volatility.
Looking at the additions of Just Eat and Scottish Mortgage Investment Trust against the subtractions, which includes the likes of Provident Financial and Dixons Carphone, a clear pro-growth pattern emerges said Lewis Grant, Hermes IM global equities senior portfolio manager.
“Throughout 2017 investors have favoured companies achieving sustainable revenue growth and have shown zero tolerance for companies failing to meet expectations.
“Those companies which deliver growth have seen their shares tick steadily upwards whilst those who have disappointed have seen major drawdowns.”
Just Eat’s competitive edge
Earlier this week, Russ Mould, AJ Bell investment director, called online food order and delivery system Just Eat’s arrival into the UK corporate elite a “remarkable” feat, considering it was only floated in April 2014.
“The shares have stormed from a flotation price of 260p to north of 800p since then, to give the firm a market cap of £5.6bn, bigger than each of Marks & Spencer, Sainsbury’s and Morrisons,” he pointed out.
“Analysts expect the company to generate pre-tax profit of £137m in 2017, up from £91m in 2016. This is well below the £576m, £549m and £376m expected of M&S, Sainsbury and Morrisons (on an adjusted basis) for their current financial years.
“They may be more profitable but Just Eat is valued more highly as the market takes the view it has the superior growth prospects – though with Deliveroo, UberEATS and Amazon Restaurants snapping at its heels, to name just three, Just Eat also operates in a fiercely competitive market place.”
Brexit-proof
In addition to investors’ obsession with robust growth prospects, they are also clearly looking for businesses which can withstand the worst case Brexit scenario.
Consistency is important in this uncertain environment, one of the reasons Mould believes Halma’s investment story has taken off.
He said: “This month’s 7% increase in its first-half dividend also holds out the prospect of Halma embellishing its phenomenal record of increasing its annual pay-out by at least 5% for every year since 1980.
“Such consistency is evidence that the firm offers much that is ideal from an investment perspective: the mandatory nature of investment in its products, owing to health and safety regulations and concerns, creates consistent business flows and sticky customers, a combination which provides a degree of pricing power. That in turn can mean high margins, good returns on capital, strong free cash flow and that consistent dividend growth record.”
DS Smith also fits the bill with its substantial overseas presence, which benefits from a weaker pound.
While Hermes does not own Just Eat or DS Smith, he noted that the latter “looks to have a bright future given the increasing packaging demand and the company’s geographic diversification makes it less vulnerable to Brexit”.
