FTSE 100 SHARES REVIEW: DEC 2023
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22nd December 2023
It was a flat year for the FTSE 100 index, showing a gain of only 3% for the past 12 months. The charts for the component shares reflect this, with 42 indicating a bullish outlook and 46 indicating a bearish outlook. This is very similar to the findings of my last review of the London market in February 2023
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There was a total of 5 stocks on our recommended list; 3i Group, Anglo American, Intercontinental Hotels Group, SSE and Burberry, the last one being an additional recommendation in Feb '23.
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The charts for Anglo American and Burberry have since turned bearish, so I recommend the sale of both stocks. All of the others remain bullish.
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My recent review found that two new stocks have very bullish charts; Relx and Sage Group. I have examined the fundamentals of each, and my conclusion is that it's all about Artificial Intelligence (AI).
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Is Artificial Intelligence over-hyped, or is it an exciting discovery that will herald a new technology boom?
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My guess is that AI could indeed be responsible for launching the third major boom in technology stocks of recent times. The first boom, being the dot com mania that took place from 1995 to 2000, as investors realised the disruptive potential of the internet. The second occurred with the development of the smartphone, which gained traction in 2009 and has largely continued to the current time.
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Prior to the development of AI, software programms could only search the internet for data. The results were spewed out, but a human was required to write a coherent report on the resulting data. It is of huge significance that such a report can now also be generated by the software, using AI.
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I have tried the ChatGPT application, it being the AI software that currently has the highest profile, and found that the answers it provided to my questions were both coherent and informative. In addition, it listed the sources of the information. Perhaps some additons could then be made by a human, but it certainly does produce a very useful 'first draft' of any such report. Furthermore, in the educational sector, we know that AI can now be used to write essays on many topics.
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Relx and Sage Group are two FTSE 100 stocks that are already using AI, and could enjoy rapid growth in earnings as a result. Their valuations, while not cheap, with historic P/E ratios of 34 and 36 respectively, are still far from the stratospheric valuations we witnessed, often in excess of 100 (and that only applied to profitable dot coms - many were loss making) at the height of the first tech boom, of recent times, in 2000.
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Relx, formerly Reed Elsevier, was historically a publisher of magazines, and a provider of scientific data. However, it transitioned to a digital business and was an early adopter of AI. It now provides information based analytics and decision tools, such as Lexis Nexis, used by legal practitioners. Similar information and analytics is provided to the medical sector. Digital products now constitute 84% of group revenue.
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UK brokers, Hargreaves Lansdowne (HL), recently issued a very favourable report on the company, and stated that it 'has a large competitive moat due to its proprietary, hard to replicate, data and its sophisticated analysis that provides consumer insights'. Over 50% of revenue comes from recurring subscription models, and the return on capital is attractively high at 24%. The dividend yield is 1.8%.
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It also has an exhibitions business which has bounced back, post covid. Although this non-digital part of the business is relatively minor for the company, it is growing rapidly, with event like 'ComicCon' for fans of animee and manga (based on fantasy cartoon characters, originating in Japan), a market that is experiencing significant growth in the US. HL predict that this growth will have a further favourable impact on earnings.
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The highly rated 'Questor' column on The Telegraph website, also recommended the stock in August when the shares were trading at £25.72. There are currently trading at £30.92. It cited a new product that is being developed called 'Lexis +' which is an AI enhanced version of its legal data tools - it can summarise and draft legal documents.
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Sage Group announced excellent results for the year ended 30th September 2023, in November. An analyst at Finsbury Growth & Income Trust was reported on the Motley Fool website, to have recommended the shares for the reasons set out below.
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The company is experiencing double digit earnings growth. It is sitting on cash of £1.3 billion, and will use £350 million of this for a planned share buy-back. It has begun a new phase of growth, based on providing cloud-delivered software to small and mid cap companies worldwide. Significantly, these cloud based services are now incorporating AI in the product offered to clients.
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The fundamentals support the conclusions from our technical analysis of the charts for these stocks, so Relx and Sage Group are now added to the FTSE 100 recommended stocks.
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