With all the hype surrounding the FTSE 100 in 2017, it may be surprising to find out that the index is up less than 2.5% since the start of the year. Of course, it has been higher than its current level, but nevertheless the return for the first part of the year is not particularly enticing. Looking ahead though, a weaker pound and upbeat investor sentiment towards international stocks could push the index higher. Here are two large-caps which seem to be worth buying before they become overvalued.
Changing outlook
The last year has been hugely eventful for London Stock Exchange Group (LSE: LSE). Its proposed merger with Deutsche Börse fell through and this meant that its outlook was arguably less certain. However, a recent trading update showed that the fundamentals of the business remain strong. LSE has made a good start to the 2017 financial year, with total income from continuing operations up 19% and gross profit moving 17% higher in the first quarter.
Looking ahead, investment in a range of operations and new initiatives is expected to yield improving financial performance. A £200m share buyback programme could improve investor sentiment in the stock, while a focus on potential investments could provide a boost to its growth profile alongside its impressive organic growth.
With LSE forecast to record a rise in earnings of 12% this year and a further 13% next year, it remains a strong growth proposition within the large-cap arena. Since it trades on a price-to-earnings growth (PEG) ratio of just 1.6, now could be the perfect time to buy it. The company’s share price appears to have room to grow – especially if it engages in M&A activity over the medium term.
Growth opportunity
The recent first quarter results release from leisure travel company Carnival (LSE: CCL) showed that it is making encouraging progress. It witnessed increased demand and rising pricing power. This enabled it to overcome the challenges posed by fuel and currency changes to enjoy a particularly strong peak booking period. This should be enhanced by improved marketing efforts, as well as a more innovative approach to customer service, which together are set to grow its earnings over the medium term.
Trading on a price-to-earnings (P/E) ratio of 23.3, Carnival may appear to be overvalued at the present time. However, it appears to be on the cusp of improving financial performance. The plans for reduced taxes in the US could lead to greater spending among consumers – particularly on leisure items if the state of the economy continues to improve. Similarly, with austerity now nearing the end of its life in many developed countries, the outlook for consumer spending is also generally positive.
While Carnival may not be the cheapest share around, the reality is that its valuation could move higher. For investors seeking a high-quality business trading at a fair price, it appears to be a logical option.
