The Motley Fool

Are Halma plc and Auto Trader Group plc destined for the big league?

If you’re a football fan, you’ll be aware that Sheffield Wednesday and Hull will be battling it out for promotion to the Premier League in next Saturday’s Championship play-off final. Whichever team wins will leave their fans joyous, their city proud and their accountants rubbing their hands with glee. Promotion guarantees increased revenue, profits and greater interest in the club. Even those who elect to follow the League rather than a particular team will sit up and take notice.

With this in mind, it’s always worth keeping an eye on which companies may, over time, win promotion to the FTSE100. In a similar way to those casual football fans, promotion to the market’s biggest league means increased attention from index fund managers who are required to invest as soon as they enter it. Today, I’ll focus on two promotion hopefuls that could join the best of the best if their share prices keep rising.

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Safety first

Halma (LSE:HLMA) is a group of almost 50 companies operating in 23 countries. Its products detect hazards, safeguard life, protect the environment and improve personal and public health. In other words, Halma’s in the non-cyclical business of keeping us safe and sound.  Over the years (and due to canny investment and prudent acquisitions), this company has shown the sort of earnings growth that makes it the envy of companies in the FTSE250, despite not garnering the headlines afforded to others. 

Indeed, Halma’s decision to pursue growth over rewarding shareholders means that the dividend yield isn’t outstanding. This year’s forecast yield of just under 1.5% may put some investors off. That said, this £3.4bn cap has consistently raised its dividend every year for the last 36 years. Given that health and safety legislation will only grow in the future, I see no reason why this performance can’t continue. Halma will announce its full-year results on 14 June.

Revving up for glory

In sharp contrast to Halma, Auto Trader (LSE:AUTO) is arguably more familiar to UK consumers. Indeed, the company’s own website boasts that 92% of us know about the automotive online marketplace (or, at the very least, its now defunct print title) and that 65% of all used car transactions in the UK involve cars advertised there.  

Arriving on the market last March, the company’s share price has since accelerated to 384p from 266p. A trading update in February predicted that underlying operating profit will be in the range of £169m to £171m by the time full-year results are announced on 9 June. Positively, this is “marginally ahead of current market expectations,” according to the company. Assuming there have been no surprises over the last few months, now may be a good time to add this £3.8bn cap to your portfolio.

Reassuringly expensive?

Will either company breach the FTSE100? If profits continue to grow, more investors will consider parking their cash with these market-leading companies. If this happens, the capitalisation of each may make them too large to remain in the FTSE250, making promotion and increased attention from index funds a formality.

These shares are unlikely to appeal to more value-oriented investors, however. Halma has a forecast rolling P/E ratio of almost 24. AutoTrader’s P/E is higher at just under 27, according to Stockopedia. Clearly, these will be costly additions to any portfolio. Whether they’re worth paying for must be your decision.

Investing in companies with a good chance of entering the FTSE100 may be a profitable strategy. That said, if you’re only starting out on your investing journey, it’s important to learn the basics first. That’s why the team at the Motley Fool has a produced a highly readable report entitled 10 steps to making a million. Better still, it’s completely free.

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Paul Summers owns shares in Halma. 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.