Are These The Best 5 UK Stocks?
01/18/2013 9:00 am EST
A search for the best picks of the FTSE-100 brings up some familiar names and a couple of turnaround stories worth listening to, writes Harvey Jones of The Motley Fool UK.
For the last few months, I've been working my way through the FTSE-100, working out which stocks to buy. I have found plenty of great companies, but now I've set myself the challenge of singling out the most tempting targets. Are these the best five stocks on the FTSE-100?
Legal and General Group
I've been torn between three different insurance groups, all of which enjoyed a storming 2012: Legal and General Group (London: LGEN), Prudential, and Standard Life. All three are expanding into Asia, and boast strong balance sheets, healthy sales, and steady profit growth. The only drawback is that they aren't so cheap, as the market has woken up to their charms.
Of the three, I'm choosing Legal & General. It has the lowest valuation, at ten times earnings, compared to 12.2 times for Prudential and 14.6 times for Standard Life. It also offers the highest yield, 4.3%, against 2.8% and 4% respectively for the Pru and Standard Life.
I'm a big fan of all three stocks, but Legal & General may have most scope to outperform in the months ahead.
I'll declare an interest here. I have owned drinks giant Diageo (London: DGE) for several years now. After a slow start, the share price has been in full swing. It is up nearly 30% over the past 12 months, and 95% over four years.
Troubles in Europe, where many drinkers can't even afford to drown their sorrows, have been more than offset by growth in emerging markets, led by China. Diageo is also investing in its future, pouring more than ?1 billion into the Scotch whisky renaissance.
I like everything about this stock...except the price. Trading at 17.5 times earnings, and with its dividend yield slipping to 2.4%, it is starting to look expensive. That's the trouble with great companies: their success doesn't go unnoticed by other investors. But it still looks a long-term buy to me.
Whatever happened to mighty dividend machine Vodafone (London: VOD)? This global telecom big boy, regularly hailed as a defensive stock, is down 15% since August. A $2 billion tax dispute in India has cast a shadow over its share price, as have declining sales in Europe.
Some people may think this is a good time to sell, but I disagree. Its share price slip has reduced its valuation to just ten times earnings, positively bargain basement compared to Diageo, and beefed up its dividend to a meaty 6%. That's almost three times the return on a best buy savings account, with the chance for a nice re-rating when that Indian tax issue is resolved.
If you can't buy solid global companies when they're going this cheap, when can you buy them?
I've been weighing up the UK's two supermarket giants, Sainsbury's and Tesco (London: TSCO), but I've only taken one of them to the checkout. While the UK high street is going to pieces, with the collapse of HMV, Jessops, and Blockbuster, supermarkets are holding their own.
After fumbling last year's festivities, Tesco has just enjoyed its best Christmas since 2010. Underlying sales rose 1.8% in the six weeks to January 5, compared to 0.9% at Sainsbury's over 14 weeks, and a 2.5% drop at Morrisons.
I bought Tesco last year after its share price had tumbled 20%, because I like buying great British companies on bad news, and I'm glad I did. It is up 7% since then, and I suspect there is more to follow. Tesco's Christmas turnaround suggests it hasn't lost its touch.
I certainly wouldn't call Unilever (London: ULVR) undervalued. Trading on a price-to-earnings ratio of 18.6 times earnings, this Anglo-Dutch brand behemoth isn't for bargain hunters.
Then again, quality always comes at a price. Its diverse roster of global brands includes Dove, Lipton, Flora, Vaseline, PG Tips, Cif, Domestos, Surf, and Sunlight, the type of goods we toss into our shopping trolleys without a second thought. As Unilever expands into emerging markets, hundreds of millions of newly-wealth consumers are now doing to do the same.
It may not be cheap, but Unilever still rose 18% over the past 12 months, compared to less than 8% for the FTSE-100 as a whole. It isn't showy, it isn't spectacular, but it certainly delivers the goods. The yield isn't too bad either, at 3.7%. That makes it a top FTSE stock for me.Read more from The Motley Fool UK here...