This stock is underperforming the FTSE 100. Is it time to buy?

Dan Appleby is looking for bargains in the FTSE 100. This stock is significantly underperforming, so has it presented a buying opportunity?

| More on:

The content of this article was relevant at the time of publishing. Circumstances change continuously and caution should therefore be exercised when relying upon any content contained within this article.

Bus waiting in front of the London Stock Exchange on a sunny day.

Image source: Getty Images

When investing, your capital is at risk. The value of your investments can go down as well as up and you may get back less than you put in.

Read More

The content of this article is provided for information purposes only and is not intended to be, nor does it constitute, any form of personal advice. Investments in a currency other than sterling are exposed to currency exchange risk. Currency exchange rates are constantly changing, which may affect the value of the investment in sterling terms. You could lose money in sterling even if the stock price rises in the currency of origin. Stocks listed on overseas exchanges may be subject to additional dealing and exchange rate charges, and may have other tax implications, and may not provide the same, or any, regulatory protection as in the UK.

You’re reading a free article with opinions that may differ from The Motley Fool’s Premium Investing Services. Become a Motley Fool member today to get instant access to our top analyst recommendations, in-depth research, investing resources, and more. Learn More.

As companies go, I think London Stock Exchange (LSE: LSEG) is a great one. But this year, the share price has fallen a disappointing 20%, while the FTSE 100 index is up a respectable 13%. 

Is the market telling me something I should know? Or has this share price weakness presented me with a buying opportunity? Let’s take a closer look.

A wide economic moat

The reason I think London Stock Exchange is a great business is due to its economic moat. This phrase was popularised by Warren Buffett and ultimately means a company can maintain market share . Here’s what he said at Berkshire Hathaway‘s annual shareholder meeting in 1995: “What we’re trying to do is we’re trying to find a business with a wide and long-lasting moat around it, protecting a terrific economic castle with an honest lord in charge of the castle.”

LSEG has a terrific economic castle, in my view. Its operating margin is consistently around the 40% mark, and return on equity is in the double-digits.

I also think the moat is wide, and long-lasting. It would be very difficult for a competitor to set up a rival stock exchange as the LSEG is ingrained in the UK’s financial services industry. This is as close to a monopoly as business gets.

It all sounds great so far. But why has the share price underperformed this year?

Results and an acquisition

The share price was actually up 14% in February, settling at close to £100. But in March, the shares crashed, hitting a low of £69. The share price fell over 14% on one day alone, so there must have been a reason.

The steep one-day fall occurred on the same day its final results to December 2020 were released. Revenue grew 6%, and adjusted earnings per share rose 5%. Growth wasn’t spectacular then, but I don’t think it warranted a 14% fall in the share price.

It was the acquisition of Refinitiv, first announced back in August 2019, that seemed to be the catalyst behind the share price plunge. The $27bn all-share deal finally completed in January this year, but guidance in the final results was for costs to increase by mid-single-digits.

Citigroup at the time said that the extra £150m of operating costs will recur in 2022 and beyond, and proceeded to lower its rating on the stock to ‘neutral’ from ‘buy’.

Refinitiv and outlook

I do understand the concerns over rising costs. Refinitiv is a legacy platform, and it will need considerable investment to upgrade and integrate into the wider London Stock Exchange business.

I’m optimistic about the potential here, though. The combined data and analytics capabilities of both companies should make it a leader in the industry and widen the economic moat.

The shares currently trade on a forward price-to-earnings ratio of 25, which seems reasonable to me. I’ll be looking to buy at this valuation.

Should you invest, the value of your investment may rise or fall and your capital is at risk. Before investing, your individual circumstances should be assessed. Consider taking independent financial advice.

Dan Appleby owns shares of London Stock Exchange. The Motley Fool UK has no position in any of the shares mentioned. 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.

More on Investing Articles

Investing Articles

Could the JD Sports Fashion share price double in the next five years?

The JD Sports Fashion share price has nearly halved in the past five years. Our writer thinks a proven business…

Read more »

Bus waiting in front of the London Stock Exchange on a sunny day.
Investing Articles

If interest rate cuts are coming, I think these UK growth stocks could soar!

Falling interest could be great news for UK growth stocks, especially those that have been under the cosh recently. Paul…

Read more »

Investing Articles

Are these the best stocks to buy on the FTSE right now?

With the UK stock market on the way to hitting new highs, this Fool is considering which are the best…

Read more »

Petrochemical engineer working at night with digital tablet inside oil and gas refinery plant
Investing Articles

Can the Centrica dividend keep on growing?

Christopher Ruane considers some positive factors that might see continued growth in the Centrica dividend -- as well as some…

Read more »

Smiling family of four enjoying breakfast at sunrise while camping
Investing Articles

How I’d turn my £12,000 of savings into passive income of £1,275 a month

This Fool is considering a strategy that he believes can help him achieve a stable passive income stream with a…

Read more »

Person holding magnifying glass over important document, reading the small print
Investing Articles

2 top FTSE 250 investment trusts trading at attractive discounts!

This pair of discounted FTSE 250 trusts appear to be on sale right now. Here's why I'd scoop up their…

Read more »

Smiling young man sitting in cafe and checking messages, with his laptop in front of him.
Investing Articles

3 things that could push the Lloyds share price to 60p and beyond

The Lloyds share price has broken through 50p. Next step 60p? And then what? Here are some thoughts on what…

Read more »

Young female business analyst looking at a graph chart while working from home
Investing Articles

£1,000 in Rolls-Royce shares a year ago would be worth this much now

Rolls-Royce shares have posted one of the best stock market gains of the past 12 months. But what might the…

Read more »