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Why this small-cap convinces me to head for the FTSE 100 today!

Kevin Godbold
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Small-cap company Secure Trust Bank (LSE: STB) has deferred the release of its full-year results that were due today in line with the request by the Financial Conduct Authority (FCA).

The FCA has asked all public limited companies (except those on AIM) to delay their preliminary financial statements for “at least two weeks.” However, most firms have opted to send out a trading update instead of their results reports. Secure Trust Bank did that on Tuesday.

One-time high flyer

But before I dig into it, here’s a little background information. The stock looked like a fast-growing, new-generation, disruptive competitor in the UK banking sector for several years, and the share price shot up. But in December 2015, the up-trend reversed and the shares have been generally falling ever since. That happened despite incremental rises in the shareholder dividend throughout the period of the fall.

The recent plunge to 800p today because of the pandemic is merely the latest jolt lower. It looks insignificant compared to its long slide from around 3,060p. On Tuesday in the update, the company suspended the dividend – ouch!

The directors said that, so far, there’s been no change in business performance arising from the coronavirus crisis, apart from “reduced demand” for retail finance and motor finance products. However, they reckon it is “impossible” to quantify the future effects of the pandemic on the business. 

And I think that’s true of many businesses right now, particularly those with cyclical operations such as retailers, housebuilders, commodity firms, banks and others. Normally, after seeing such big plunges in the banking sector, I’d be starting to get interested in banking shares again. But before I do, I need to be certain that a big general economic recession is going to happen. Bank stocks will likely be the first in and the first out of such a slowdown.

Diversification is more important than ever today

But I’m avoiding Secure Trust Bank for the time being for two reasons. Firstly, the uncertainties surrounding the pandemic. And secondly, the long valuation de-rating that has transitioned the firm from its growth rating to a more realistic cyclical one – I want to be sure that move has run its course.

Meanwhile, the narrative in the update drives home how unknowable the future is for individual companies right now. And for that reason, I’d rather diversify widely by drip-feeding money into a low-cost, index tracker fund. And I believe that a FTSE 100 tracker fund would be an ideal vehicle when investing to benefit from a recovery in the markets down the line.

However, it’s not the only tracker I’d consider. I reckon the FTSE 250 index is more growth-oriented than the FTSE 100, and there’s no denying the success of America’s S&P 500 over recent decades. But tracker choices are many, and I’d be inclined to consider them before other investments right now.

The post Why this small-cap convinces me to head for the FTSE 100 today! appeared first on The Motley Fool UK.

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Kevin Godbold has no position in any share mentioned. The Motley Fool UK has no position in any of the shares mentioned. 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 2020