When previously high-flying UK stocks fall, my instinct has been to scoop them up and stick them in my SIPP. I like buying good companies on bad news, as it gives me an opportunity to buy at a lower valuation, and higher yield. Then I simply sit back, and wait for them to recover. Except it’s not that simple.
Sometimes, the underlying investment case has changed, which means the shares could struggle for years. Maybe they’ll never recover. Two of my favourite FTSE 100 growth stocks have had a torrid 12 months, after years of sustained share price and dividend growth. I’m relieved I didn’t buy either. So are they now brilliant buys or yesterday’s heroes?
Big FTSE 100 fallers
The two companies are information and analytics group RELX (LSE: REL) and accounting software provider Sage Group (LSE: SGE). For years, investors couldn’t get enough of them.
RELX has been described as the biggest British company investors have never heard of, the sixth biggest FTSE 100 stock with a market cap nudging £70b. Sage is Britain’s biggest listed technology company, once touted as our (modest) riposte to Silicon Valley. Suddenly, investors are very wary. What’s changed? Artificial intelligence.
When ChatGPT first emerged, both shares took an instant hit, as investors wondered whether AI could do the same job, but without the subscription fees. The initial panic eased, as management persuaded markets they could turn AI to their advantage, by embedding it in their systems. But it hasn’t quite gone away. Certainly not judging by their shares, with RELX down 26% in the last year, and Sage down 27%.
It’s an issue across data-driven companies, including FTSE 100 stalwarts Experian and London Stock Exchange Group. They’re down more than 30% in a year.
A key reason I didn’t buy RELX and Sage is that they were expensive, as their price-to-earnings (P/E) ratios both topped 30. I thought that made them vulnerable to bad news, and now I’m relieved I didn’t buy them. They’re cheaper today, with P/Es of just over 20, but there’s a huge existential question hanging over both. Can AI wipe them out?
Artificial intelligence threat
The answer? We simply don’t know. But the fact that the question is being asked is supremely worrying. AI is posing similar questions across the economy, of course, as it threatens business models and even the entire graduate jobs market.
There’s a chance the reaction has been overdone. AI is brilliant but has severe limitations. But I’ve learned one thing about buying good stocks on bad news. More bad news often follows. Even if it doesn’t, winning back investor confidence takes time. Years, in many cases.
I took advantage of London Stock Exchange Group’s troubles. That’s a stock I’d wanted to buy even more than RELX and Sage. But I’m having second thoughts about that too. AI is a huge issue, and as long as investors don’t know how things will turn out, Sage and RELX may struggle to recapture their glory years. I’ll be watching them, but won’t consider buying while the AI shadow lingers, which it might for some time. There are plenty of exciting FTSE 100 stocks I do want to buy though, where there’s no threat from AI, and I’ll channel my efforts at them instead.
