What have Europe’s largest defence contractor and the UK’s number one property website got in common? Not much really, except that they’re both FTSE 100 stocks. And they’re both now in my portfolio for the first time.
BAE Systems (LSE: BA.) and Rightmove (LSE: RMV) are certainly very different businesses. But I think they’re both set up well for the future, albeit for totally different reasons.
Rocketing share price
The BAE share price has been strong year-to-date, soaring 48%. This is in contrast to the four years leading up to 2022, when the share price flatlined.
As a new shareholder though, I’m more interested in the future performance of the stock. And there are a number of reasons why I was attracted to it.
First, despite its market-beating showing in 2022, the stock still isn’t particularly expensive. BAE shares trade at around 17 times earnings, which isn’t that much above the FTSE 100 average of 13.2 times. And I like the fact that the dividend yield still stands at 3%, despite the recent share price appreciation.
Second, countries around the world are bolstering their defence capabilities in response to Russia’s invasion of Ukraine. As a result, BAE’s order book is now bulging. New arms orders have topped £28bn this year already.
Finally, these contracts are long term in nature as they’re mostly negotiated with governments. That means they’re probably not going to be greatly affected by a recession.
Just to note, BAE shares would likely fall sharply if the war in Ukraine suddenly ended. Sadly, that doesn’t seem likely any time soon, though nobody knows exactly how things will develop. What does seem more certain, though, is that global defence spending is going to increase for many years in response to that and other conflicts.
Moving downwards
The Rightmove share price is down 31% in 2022. However, long term it has been a solid performer, with the shares rising 275% over the last 10 years.
The lacklustre performance of Rightmove stock this year is related to fears about an imminent slowdown in the UK housing market. Nationwide warned last month that house prices could collapse by up to 30% next year (in its worst-case scenario). Other forecasters are predicting a more modest 10% decline.
Rightmove makes money by selling advertising and property data services to estate agents, lettings agents and new home developers. Undoubtedly, a decline in property prices creates risks to its earnings growth.
However, I think the housing market is simply going through a cyclical downturn related to rising interest rates. I don’t expect this to be a generational slump in demand.
I also anticipate Rightmove will maintain its dominant position in the UK (an 84% market share). The company had 16,116 agency customers as of H1. Its agency retention rate stands at 95%, so I don’t see any boycotting of the platform due to high fees (a common complaint among agents).
Rightmove’s asset-light platform model is extremely profitable, with an eye-catching operating margin of 73%. And the platform is also extremely popular as 1.5bn hours per month were spent on it across the first half of 2022.
I don’t see people’s desire to hunt down their dream home changing. As such, I’ve tucked some shares away in my retirement portfolio.
