My plan for July is to start adding to my Stocks and Shares ISA to take advantage of some of the cheap prices I can see in the market right now. Today, I want to talk about a FTSE 100 share that I think will beat the market when the next bull run gets going. The company is Hargreaves Lansdown (LSE: HL).
As the UK’s leading DIY investment platform, Hargreaves did very well during the bull run we saw from 2011 to 2019.
However, its share price has fallen by more than 50% since the start of 2020, as investors have priced in slower growth. Sure enough, annual profits peaked at over £300m in 2020, as the company benefited from the pandemic trading boom.
Although profits are expected to be down to £220m during the current year, I don’t see this as a big worry. That’s still double what Hargreaves made 10 years’ ago, at the start of the last big bull market.
Why I’d invest now
I think the secret to understanding this business is to focus on investor psychology. People tend to invest more cash and trade more actively when markets are rising. This generates extra fee income for companies like Hargreaves Lansdown, boosting profits.
However, when markets are falling, they tend to withdraw cash and stay on the sidelines. That results in lower profits for Hargreaves.
My approach is to take more of a contrarian view. I like to keep buying shares in good companies when prices are down. Over time, my experience is that these trades often become my most profitable investments.
I think Hargreaves could be a good example. The falling share price means the stock now offers a forecast dividend yield of 4.9% — well above the FTSE 100 average of 3.8%.
At the same time, this remains one of the most profitable businesses on the UK stock market. Broker forecasts suggest Hargreaves’ operating profit margin will bottom out at around 45% — a very high figure. During the last boom, the company’s margins peaked at nearly 70%.
What’s next for this FTSE 100 share?
Meanwhile, Hargreaves is investing some of its £400m net cash balance in new growth opportunities. The company is expanding its in-house fund range and financial advice offering.
The company’s Active Savings cash product will also be scaled up. With interest rates rising I think this will attract interest from savers who could become investors in the next bull market.
In my view, the main headwind to future growth Hargreaves probably faces is more competition than it did 10 years’ ago. UK rivals such as AJ Bell have upped their game and new services are continuing to launch.
Profit margins could fall due to competitive pressure. But Hargreaves is one of the big beasts in this sector, with £141bn of assets under administration. I reckon customers are likely to be fairly sticky, as long as they’re happy with the service they’re receiving.
On balance, I think this FTSE 100 share could be a great long-term investment at current levels. Although I don’t know when the next bull market might start, I think Hargreaves looks good value today. The shares are on my list as a possible portfolio buy in July.