I’ve nothing against buying a cheap exchange-traded fund and tracking the return of the FTSE 100. In fact, I think this would be ideal if I had no real interest in investing beyond slowly growing my money over time. I’d leave attempting to beat the market to someone else.
The trouble is, it’s not hard to find companies that feature in the top tier and yet have massively outperformed it. One example is speciality chemicals firm Croda International (LSE: CRDA).
FTSE 100 beater
Over the last year, the £12bn cap has climbed 43% in value (including today’s near-7% rise). For comparison, the FTSE 100 is up 15%.
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It’s not just that Croda has beaten its index over the last year. The long-term gains have been excellent too. Since 2016, the share price has appreciated a little over 145%. The FTSE 100? Just 4%. Even though the latter boasts a larger dividend yield that can be reinvested, there’s simply no contest when it comes to performance.
Based on Croda’s fundamentals and today’s interim results, I don’t see this trend changing soon.
Record first half
Thanks in part to a recovery in demand “across all regions and sectors“, sales jumped by almost 39% to £934m from January to June. At 60%, growth at its Life Sciences division was a particular highlight. Importantly, the FTSE 100 stock announced that sales were now “well above 2019 levels” before the pandemic struck.
As such, it was no surprise that the company reported record adjusted pre-tax profit of £229.5m. That’s 50.5% higher than at this point last year. It’s also 35% higher than two years ago.
Although unlikely to generate much interest from income hunters due to its relatively low yield, I also noted that Croda hiked its interim dividend by 10% today. As the firm itself highlighted, this continues “an unbroken trend of increasing returns over nearly 30 years“. This is the sort of consistency that separates the wheat from the FTSE 100 chaff, in my opinion.
Richly-valued
Looking ahead, Croda thinks recent momentum will continue over the remainder of 2021. Thanks to ongoing demand from customers and the contribution of new acquisitions, the company now expects adjusted pre-tax profit to be “significantly ahead of current expectations“. No wonder the share price is setting fresh highs today.
This is not to say an investment in Croda now would be devoid of risk.
As always, past performance is no guide to the future. Despite today’s news, the company commented that sales of solution ingredients relating to Covid-19 “could moderate” in the months ahead.
At 38 times forecast earnings before markets opened this morning, Croda’s valuation is also undeniably rich. When markets shake, it can be the case that holders of the most expensive stocks suffer the most. And even if the FTSE 100 generally behaves itself over the rest of 2021, we could see more investors taking profits and rotating into battered value stocks as the pandemic is sent packing.
For holders of a fund tracking the return on the index, this won’t be a problem. However, it could cause some short-term pain to those backing Croda.
Still a buy for me
Despite the above concerns, I’d still buy the stock today based on its track record and growth potential. In an index that arguably features some established, but ultimately very average, companies, CRDA looks to be a great exception.
