Over the course of the past year, there have been four FTSE 100 stocks that I could have bought that would have doubled my money. If I extend this to the top 10 companies, the lowest return was still an impressive 77%. In order to consider where I should be looking for the next year, I think it’s a good idea is to look at the common traits of the best performing FTSE 100 stocks in the recent past.
A key trait that’s immediately visible is that most of the best performing FTSE 100 stocks from the past year were actually some of the hardest hit during the stock market crash in 2020.
For example, these include Rolls-Royce and IAG, both of which were hit by the lockdown restrictions and lack of travel. It also includes commodity stocks like Glencore and Royal Dutch Shell. In one of the most extraordinary events I’ve seen in financial markets, oil briefly traded for a negative price.
However, the market quickly put these things in the past. For much of the past year the share price for the respective firms has risen in value. So looking forward, I think that these kind of FTSE 100 stocks that gained from a global recovery could extend the move higher.
One risk with these FTSE 100 stocks is that sometimes the time frame distorts longer-term performance. For example, the Rolls-Royce share price might be up 128% in a year to trade at 142p, but it’s still some way off levels seen earlier in 2020 of 220p+. So I need to be careful about jumping to conclusions when trying to make sense of the numbers.
Banking on gains
Another notable trait in the best performing FTSE 100 stocks is the presence of banks. NatWest, Lloyds, and Barclays all feature in offering very strong returns over the past year.
Part of this is due to the pandemic bounce mentioned above. Banks were beat up hard during the stock market crash, with investors fearing large loan defaults from clients. This didn’t prove to be the case, with many banks reducing forecasted impairment charges.
Another point that has supported banks over the summer is higher inflation. This typically isn’t good for many FTSE 100 stocks. But banks benefit as the Bank of England is likely to raise interest rates soon to counterbalance the higher inflation. This should allow the banks to make a larger margin in the difference between the rates at which they lend out versus interest paid on deposits.
Therefore, I think banking stocks can carry on performing well, although I struggle to see such high gains replicated as seen over the last 12 months.
Themes from the best FTSE 100 stocks
If I don’t feel comfortable in buying the best performing FTSE 100 stocks due to the large gains already seen, I can take the core themes and look to more undervalued stocks.
I’d be looking for companies that could benefit from higher inflation and interest rates. I’d also be looking for sectors that should benefit from a normalisation after Covid-19. From this, I can hopefully buy the best FTSE 100 stocks now, to hold for the next year and beyond.
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Jonathansmith1 has no position in any share mentioned. The Motley Fool UK has recommended Barclays and Lloyds Banking Group. 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.