While the FTSE 100 may be trading just 8% higher than it was five years ago, a number of stocks have posted significantly higher capital gains during the period. For example, house builder Persimmon (LSE: PSN) is up by 419% during the period as the UK’s house building sector has enjoyed a return to form following the dark days of the credit crunch.
In fact, Persimmon has posted five consecutive years of bottom line growth, during which time the UK property market has posted superb growth, making many homeowners paper millionaires. And, looking ahead, strong growth in the sector is likely to continue since there is a chronic shortage of housing and this means that Persimmon is forecast to deliver a rise in its net profit of 26% in the current year, followed by further growth of 10% next year.
Despite this strong growth rate, Persimmon trades on a price to earnings growth (PEG) ratio of only 1 and this indicates that its shares could rise at a rapid rate in future years. Certainly, there are concerns regarding interest rate rises and their impact on demand for housing, but with wage growth being robust and interest rates likely to move up slowly, Persimmon’s purple patch looks set to continue.
Similarly, National Grid (LSE: NG) has been a strong performer in the last five years, with its shares having risen by 57% during the period. Add to this an income return of around 34% and National Grid has delivered a total return in excess of 100% since November 2010.
Clearly, the planned tightening of monetary policy is likely to have a negative impact on National Grid’s earnings outlook, since as a highly indebted company its borrowing costs will rise. However, following the recent report from the Bank of England, rate rises are unlikely until the second half of 2016 and, even then, rates are not expected to push past 1.3% until after 2018.
In addition, with the global economy having a highly uncertain future, defensive stocks such as National Grid could become increasingly en vogue among fearful investors. For this reason, plus the company’s yield of 4.7%, National Grid looks set to post strong total returns over the medium to long term.
Another stock which has performed well in the last five years is Whitbread (LSE: WTB). Its shares are up by 158% during the period and a key reason for this is annualised earnings growth of 18.5% since 2010, with this mainly being as a result of Whitbread getting its products right. In other words, its Costa Coffee chain is very highly rated by customers due to its quality, which has allowed Whitbread to develop a large degree of customer loyalty. Similarly, its Premier Inn hotels offer good value for money and beat rivals on price, cleanliness and customer service in a number of surveys.
Looking ahead, though, Whitbread is facing the challenge of a rising minimum/living wage and this could hurt margins in the coming years. While it remains a top quality business, it seems unlikely that all of the additional staff costs will be passed on to customers, meaning that Whitbread’s profit growth could come under pressure. Therefore, the likes of National Grid and Persimmon appear to be better buys at the present time.
