Why I’d Buy Unilever plc And BAE Systems plc, But Would Sell Associated British Foods plc And PZ Cussons plc

These 2 stocks seem to have upbeat future prospects: Unilever plc (LON: ULVR) and BAE Systems plc (LON: BA), while these 2 stocks appear to be worth avoiding: Associated British Foods plc (LON: ABF) and PZ Cussons plc (LON: PZC)

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One of the great things about investing is the diversity of companies on offer for purchase at the click of a mouse button. Furthermore, the differing reasons for buying shares is also fascinating, with some offering superb growth prospects, others excellent income potential and many more having relatively consistent and stable operations.

Unilever

A company that seems to fit the bill when it comes to all three of those areas is consumer goods giant, Unilever (LSE: ULVR) (NYSE: UL.US). It has performed remarkably well during the course of 2015 even though demand from emerging markets (which account for the majority of its revenue) has been somewhat lacking and has caused the performance of a number of Unilever’s rivals to come under pressure.

However, Unilever is set to post earnings growth of 13% this year, followed by growth of 8% next year. This shows that, while it is a large company with a vast number of brands, it can still provide superb growth potential as a result of its increasing exposure to the fastest growing markets of the world. And, in the long run, it could be one of the most consistent growth stock around, with demand from the developing world expected to continue on its upward trajectory and add a generous return to its highly appealing yield of 3.2%.

BAE

Speaking of demand, BAE’s (LSE: BA) financial performance has been hit by reduced defence budgets across the developed world. However, it is now back on-track, with earnings growth set to return in the current year and hit around 6% next year. Despite this, BAE trades at a wide discount to the FTSE 100, with it having a price to earnings (P/E) ratio of 12.2 versus over 15 for the wider index. And, with an excellent track record of growth over a long period, it would be of little surprise for the company to be subject to an upward rerating over the medium to long term.

ABF

Clearly, the rating assigned to ABF (LSE: ABF) is likely to be rather high since the company’s share price has trebled in the last five years. And, while ABF is a great company with excellent long term growth prospects, its P/E ratio of 30.9 appears to be very excessive. Certainly, it has grown its earnings at a faster rate than the market over the last five years, with it having an annualised growth rate of 12.5% during the period. But, with growth set to be zero during the next two years, ABF’s valuation is becoming very difficult to justify and, as such, its share price could come under pressure.

PZ Cussons

Meanwhile, one company that has posted disappointing share price performance in recent years is PZ Cussons (LSE: PZC). It is a consumer goods company which has considerable exposure to the struggling Nigerian economy and, as a result, investor sentiment has declined. Furthermore, and unlike Unilever, PZ Cussons is only expected to post earnings growth of 5% in each of the next two years. That’s slightly behind that of the wider index and, while PZ Cussons has a number of excellent brands and a sound management team, its P/E ratio of 19.3 seems somewhat excessive – especially while it lacks the diversity of its larger peer.

Should you invest, the value of your investment may rise or fall and your capital is at risk. Before investing, your individual circumstances should be assessed. Consider taking independent financial advice.

Peter Stephens owns shares of BAE Systems and Unilever. he Motley Fool UK owns shares of PZ Cussons and Unilever. We Fools don't all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors.

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