The FTSE 100 has gained 6.5% during the first six months of 2024. That’s a good result, but the headline number masks some pretty depressing results.
Only 35 stocks are outperforming the index this year. And even among those, the news isn’t necessarily as positive as it looks.
Acquisitions
The best-performing FTSE 100 stock so far this year has been Darktrace, which is up 61%. The trouble is, that’s not because the business is growing – it’s being taken over.
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Back in April, the company accepted an acquisition bid from private equity company Thoma Bravo. That’s completely changed the equation for anyone thinking about buying its shares.
The question now isn’t how much cash the firm can generate, it’s how much it will be sold for. And it’s not just Darktrace – the same is true for Hargreaves Lansdown and DS Smith.
I find it depressing that the best returns from the FTSE 100 have come due to acquisitions, rather than growth. But in any event, it’s hard to see much opportunity here going forward.
Pandemic recoveries
The other big theme at the top of the FTSE 100 is the exit from Covid-19. The most obvious example is Rolls-Royce, which has benefitted from a recovery in aircraft flying hours.
The Rolls-Royce share price is up 54% since the start of the year. And in the banking sector, NatWest and Barclays have fared well as interest rates approached more normal levels.
In each of these cases though, I think the momentum is starting to wear off. Engine flying hours have reached pre-pandemic levels and interest rates look set to fall from these levels.
Unlike the acquisition targets, there has been genuine growth from Rolls-Royce, NatWest, and Barclays. But I think it’s difficult to make a case for buying any of them at the moment.
Where are the opportunities?
I think Bunzl (LSE:BNZL) has about as much chance of being acquired as the Monster Raving Loony Party has of winning the election outright. But the firm looks very likely to grow its earnings over time.
The company distributes consumables like paper plates, hygiene products, and carrier bags. Weak trading – especially in the US – has caused the stock to fall 5% so far this year.
With 60% of revenues coming from the US, there’s clearly a risk this might continue. But the company has some important long-term advantages that investors should pay attention to.
Most notably, the company’s size and scale allows it to provide customers with an unrivalled service. And it allows Bunzl to keep making acquisitions of its own to boost its earnings.
UK shares
The FTSE 100 has done well so far this year. But I’m doubtful the forces that propelled share prices over the last six months will continue to push them higher over the long term.
Instead, I’m looking to invest in companies that can make their shares more valuable by growing their earnings over time. Fortunately, some of these haven’t fared so well this year.
Bunzl is a great example. The stock might be down 5% since the start of the year, but its growth prospects and its competitive position still look as strong as they were before.
