When shares are performing poorly it seems as though fewer investors have the aim of beating the index. Instead, many focus on losing as little money as possible or on reducing the riskiness of their portfolios. However, history tells us that stock market falls as have been seen in the last few months are nothing new, with the FTSE 100 having endured countless difficult periods since its inception in 1984.
In the long run, though, the index is likely to perform exceptionally well. In fact, since 1984 it has posted annualised total returns of around 9.3% and, in the long run, similar rates of return are very achievable. As such, for investors who focus on beating the index, major rewards could await in future years.
Of course, oil stocks such as BP (LSE: BP) may not seem likely to beat the index. After all, BP is struggling to cope with the triple threat of low oil prices, compensation payouts for the Deepwater Horizon oil spill, as well as dampened investor sentiment from its near-20% stake in Russian oil company Rosneft. Therefore, a share price fall of 15% in the last year is hardly surprising.
Looking ahead, though, BP has huge growth potential. It continues to have a very well-diversified and high quality asset base as well as a relatively efficient business model which together mean that it should outperform a number of its rivals during a period of low oil prices.
Certainly, a dividend cut is a very real threat – especially if profitability continues to come under pressure. However, BP has stated that dividends remain a priority and, if the company is able to deliver on its forecast rise in net profit of 63% this year and 8% next year, they could be maintained or shaved (rather than slashed) over the medium term. And, with BP currently yielding 7.1%, even a moderate capital gain could be enough for it to beat the wider index over the medium to long term.
While BP is relatively high risk, food producer Cranswick (LSE: CWK) is towards the opposite end of the risk spectrum. That’s because its sales are relatively robust and, although the supermarket sector has struggled in recent years, Cranswick has been able to increase net profit in every year. This has contributed to rising investor sentiment which has pushed the company’s share price upwards by 111% during the period.
Although Cranswick’s shares now trade on a price to earnings (P/E) ratio of 16.9 and earnings growth is set to be in-line with the wider index at 6% per annum during the next two years, the stock could still beat the FTSE 100. That’s because, with the macroeconomic outlook being highly uncertain, investors may flock to more reliable companies and, on this front, Cranswick has huge appeal.
Clearly, Auto Trader (LSE: AUTO) is a more cyclical option than Cranswick, with demand for cars being closely linked to the wider macroeconomic outlook. Therefore, the strong performance of the UK economy is a key reason for Auto Trader being forecast to increase its bottom line by 180% in the current year, followed by further growth of 17% next year. This puts it on a price to earnings growth (PEG) ratio of just 1.6, which indicates capital gain potential.
In addition, Auto Trader has a relatively wide economic moat since it remains the most popular place to find a used car online. This should provide a degree of resilience in the long run and allow it to continue to beat the wider index, which it comfortably has done since listing in March of this year, with its shares being up 43% versus an 11% fall for the FTSE 100.
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Peter Stephens owns shares of BP. The Motley Fool UK has recommended Auto Trader. We Fools don't all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors.