I was checking the performance of my individual portfolio holdings recently. One thing that stood out was that a handful of FTSE 100 stocks was performing better than the wider index this year (it’s up 3.75%).
Here, I’m going to look at the top three. Each one is evidence that actively picking stocks can be a more lucrative strategy than index investing.
Rolls-Royce up 54%
First up, we have Rolls-Royce (LSE: RR). After surging 147% this year, this is the best-performing stock on the Footsie by a wide margin. Unfortunately, I only invested in it a few months ago, so my holding is ‘just’ up 54%.
The reason for investor enthusiasm lies with the aeroengineer’s ongoing turnaround under new chief executive Tufan Erginbilgiç. This strategy, built around cost-cutting, price rises, and the disposal of certain assets, is already bearing fruit. Cash flows are improving and margins have started to expand.
Net debt is coming down, though at £2.8bn at the end of June, this remains a concern. After all, making engines is a capital intensive business, so debt isn’t likely to disappear any time soon.
Still, I’m optimistic, especially as a full recovery in large engine flying hours could be on the horizon. This is important as Rolls makes money when its engines are in the sky. And management expects to reach between 80% and 90% of 2019 (pre-Covid) hours by the end of the year.
Also, margins should improve in its Power Systems division after recent price increases.
Overall, I find the prospect of a leaner Rolls-Royce firing on all cylinders an exciting one.
BAE Systems up 23.5%
Next, we have BAE Systems (LSE: BA.). The defence stock is up a 23.5% in 2023, building on its strong performance last year.
Unfortunately, the reasons for its ascent aren’t so celebratory. The shocking invasion of Ukraine 18 months ago sent military budgets soaring across the world.
As a result, BAE’s order backlog has grown to a record £66.2bn. In H1 2023 alone, it reported a massive order intake of £21.1bn.
This has left the company in a very strong financial position. Its dividend (yielding 2.7%) is covered two times by anticipated earnings. Plus, it recently announced the £4.35bn acquisition of the aerospace division of US firm Ball Corporation.
While this expands BAE’s presence in the space sector, it does increase the likelihood of taking on more debt. In a higher rate environment, this adds an element of risk.
Standard Chartered up 18.5%
Finally, we have Standard Chartered (LSE: STAN). The share price has climbed 20% in 2023. However, like Rolls-Royce, this is a stock that I only picked up during the course of the year (in April).
My purchase followed the collapse of Silicon Valley Bank in March, which sent the shares down 20%.
It was an opportunistic buy premised on the belief that the US regional banking crisis was unlikely to engulf StanChart, which has its core operations in Asia and Africa.
Of course, that’s not to say the stock is risk-free. The bank could see rising loan impairments in these emerging economies if a global recession were to develop.
However, on balance, I like the company’s long-term growth prospects as personal incomes rise in these regions. This backdrop should underpin share buybacks and a growing dividend.
Ben McPoland has positions in BAE Systems, Rolls-Royce Plc, and Standard Chartered Plc. The Motley Fool UK has recommended BAE Systems and Standard Chartered Plc. Views expressed on the companies mentioned in this article are those of the writer and therefore may differ from the official recommendations we make in our subscription services such as Share Advisor, Hidden Winners and Pro. Here at The Motley Fool we believe that considering a diverse range of insights makes us better investors.
Motley Fool UK 2023