Is Now The Perfect Time To Buy Rotork p.l.c, Diageo plc And Greggs plc?

Should you add these 3 stocks to your portfolio? Rotork p.l.c (LON: ROR), Diageo plc (LON: DGE) and Greggs plc (LON: GRG)

| More on:

The content of this article was relevant at the time of publishing. Circumstances change continuously and caution should therefore be exercised when relying upon any content contained within this article.

Despite experiencing a challenging first half of the year, manufacturer of actuators and flow control units Rotork (LSE: ROR) has posted a 2% rise in its share price today. Part of the reason for this is optimism regarding the acquisition of a unit (M&M International) of engineering peer, Spirax-Sarco, for just under €10m in an all cash deal.

Of course, Rotork’s pretax profit fall from £61m to £56m between the first half of 2014 and the first half of 2015 was largely due to challenges faced in the oil and gas industry. With the oil price being lower and expected to be for some time, a number of projects have been deferred or cancelled by oil explorers and producers, which has had a detrimental effect on the performance of Rotork. And, looking ahead, things are unlikely to dramatically improve.

Inflation Is Coming

Inflation is out of control, and people are running scared. But right now there’s one thing we believe Investors should avoid doing at all costs… and that’s doing nothing. That’s why we’ve put together a special report that uncovers 3 of our top UK and US share ideas to try and best hedge against inflation… and better still, we’re giving it away completely FREE today!

Click here to claim your copy now!

That’s because Rotork is expected to grow its bottom line by just 2% next year. Clearly, this would be a disappointing rate of growth and, even if the oil price does rebound between now and the end of 2016, oil sector companies are unlikely to ‘turn the taps on’ with regard to capital spending, since they are likely to be nervous about downward movements in the price of oil. As such, there seems to be little justification for Rotork to have a price to earnings (P/E) ratio of 18.1 and, therefore, it seems likely that its share price will come under pressure over the medium term.

Similarly, high-street baker Greggs (LSE: GRG) also trades on a rating that is difficult to justify. Certainly, its strategy is very sound and it is focusing on the core elements of what made Greggs successful in the first place; good value food in convenient locations. And, as has been seen in recent years, the closing of unprofitable stores has had a positive impact on Greggs’ bottom line, with its net profit rising by a whopping 43% last year. And, looking ahead, further earnings growth of 18% this year and 7% next year is currently being pencilled in by the market.

However, with Greggs trading on a P/E ratio of 25.3, it appears to be hugely overvalued. In fact, it has a price to earnings growth (PEG) ratio of 3.6, which is difficult to justify given that it is not a particularly defensive stock. As such, the 80% share price growth year-to-date may not be repeated in future.

Of course, some stocks do deserve higher ratings. That’s especially the case if they offer a potent mix of defensive attributes and strong growth prospects. One such stock is beverage company Diageo (LSE: DGE). It is expected to grow its earnings by just 5% this year, but is suffering from weak demand in emerging markets, with China in particular continuing to disappoint.

However, in the long run Diageo has huge potential, with its vast exposure to the developing world likely to mean a rapid rise in sales and earnings as the middle class grows and demands more premium alcoholic beverages. As such, and while Diageo has a P/E ratio of 19.2, it appears to be well-worth buying at the present time.

More on Investing Articles

Shot of a young Black woman doing some paperwork in a modern office
Investing Articles

4 no-brainer stocks to buy for chunky dividends in July

Jon Smith outlines some of the stocks he's looking to buy for the upcoming month that pay out above average…

Read more »

Mindful young woman breathing out with closed eyes, calming down in stressful situation, working on computer in modern kitchen.
Investing Articles

2 beaten-down UK shares I just bought in a heartbeat

UK shares have outperformed other global stocks in recent months. However, here are two that have been beaten down recently…

Read more »

Engineer Project Manager Talks With Scientist working on Computer
Investing Articles

This FTSE stock has defensive traits! Should I buy shares?

Due to the current economic volatility, this Fool is looking for FTSE stocks with defensive capabilities to boost his holdings.

Read more »

Electric cars charging in station
Investing Articles

Lithium stocks could be set to soar! Here’s 1 I like

Lithium stocks are rising in prominence. This Fool delves deeper into this penny stock to see if it could be…

Read more »

Preparing a budget during a pandemic
Investing Articles

With the Jupiter dividend over 11%, should I keep buying?

With the Jupiter dividend yield now north of 11%, should our writer load up on the fund manager's shares?

Read more »

Lady wearing a head scarf looks over pages on company financials
Investing Articles

Am I missing something about Royal Mail shares?

Jon Smith scratches his head at the continued fall in Royal Mail shares and tries to find out what's going…

Read more »

Warren Buffett at a Berkshire Hathaway AGM
Investing Articles

This Warren Buffett gamble could return over 20% in the next year

Warren Buffett has loaded up on Activision Blizzard stock, aiming to make a handsome profit in the next 12 months.

Read more »

A beach at sunset where there is an inscription on the sand "Breathe Deeeply".
Investing Articles

IAG shares fall again! Is this stock now too cheap to miss?

IAG shares have not been kind to shareholders this year. And losses were compounded on Thursday amid more bad news.

Read more »