The FTSE 100 is a ‘Jurassic Park’ index, full of companies that are too stuck in their ways to grow or expand. That’s what some critics say, at least.
There are plenty of big winners on the Footsie. And one stock, in fact, would have turned a £5,117 stake into a million pounds over the last 15 years.
The stock in question is Ashtead (LSE: AHT), an industrial equipment rental company. It rents out things like diggers, scaffolds or forklifts to anyone who needs them. It’s very successful at it too and has worked its way up to the 24th largest firm on the index.
The stock traded more or less sideways for many years before shooting up after 2008. In December of that year, the shares were 29p. Today, they trade for £56.67.
Anyone who bought in at the bottom would have seen their stake go up 195 times in value. Their £5,117 stake would have turned into £1,000,000. I don’t know how many did, but I’ll bet they’re patting themselves on the back now.
Too mature
Can Ashtead repeat the trick? Well, probably not. The issue is it’s just too big, too mature. If it grew that much again then it would need to become the largest company in the world at about a £5trn market value.
Tesco is another mature firm. The supermarket grew massively plonking its stores up and down the country. But at a certain point, there weren’t enough places left to put them. Investors buy companies like this for slow and steady returns rather than fast growth.
I already have enough exposure to this type of company, so I won’t be buying Ashtead today.
But if safe, mature firms are not what I’m after then a better question might be: how would I find the next Ashtead? The next big UK growth stock? Of course, this isn’t an easy task, but I’d say there are a couple of non-negotiables to look for.
Two tips
The first is to look for smaller firms. Ashtead had around a £150m market value before it exploded. Companies of that size simply have more room to grow. It’s one reason why the smaller firms on the FTSE 250 have outperformed the FTSE 100 behemoths over the last few decades. There’s a downside here though, as smaller firms are riskier and tend to go bankrupt more.
A second point is to find firms with a proven business model. Ashtead didn’t come out of nowhere. It was in business for decades. It was founded in 1947.
What’s more, before the stock began to climb in the 2000s, it had excellent cash generation, growing earnings and manageable debt. In short, it ticked all the boxes of a well-run company. And that, I’d say, is a key part of any spectacular growth story.
