This FTSE 100 stock looks like a fantastic dip buy to me

Royston Wild looks at a brilliant FTSE 100 (INDEXFTSE: UKX) company for contrarian stock selectors.

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Investor demand for Associated British Foods (LSE: ABF) has been pretty thin on the ground in recent weeks.

Since hitting 18-month highs above £33.70p per share back in October, the Primark owner’s share price has been locked in a heavy downtrend and it has shed almost a fifth of its value since then.

Stock pickers have taken fright at the clear decline in retail conditions since the start of the autumn (just today researcher GfK announced that consumer confidence slumped to a four-year low of -13 in December, causing plenty of concern for Britain’s retail sector as we enter 2018).

But rather than sink in the current climate, I reckon ABF’s profits could thrive. I see current weakness as a prime buying opportunity.

Primark powers on

Full-year financials released in November certainly didn’t smack of a business in distress. At actual currencies the FTSE 100 firm saw revenues rise 15% in the 12 months to September, to £15.4bn, or 6% at constant exchange rates. As a result, adjusted pre-tax profit rose 22% to £1.31bn. And there is plenty of reason to expect turnover to keep on booming.

The rising pressure on shoppers’ wallets saw sales at its low-cost Primark stores in the UK rise 10% year-on-year, the company noting that its share of the market grew “significantly” in the period. UBS estimates that the chain commands just 15% of the British clothing market, leaving plenty of room for further growth.

And of course, expansion in Europe and the US also creates splendid revenues opportunities in the years ahead (sales at Primark leapt 16% in Continental Europe in the last year).

City analysts do not expect the troubles on the high street to put paid to future earnings expansion, and are predicting a 7% bottom line improvement during fiscal 2018.

And in this environment, it is expected to keep lifting dividends at a rapid rate. The company lifted the full-year payout 12% last year, to 41p per share, and another hefty hike — to 44.7p — is predicted for the current year. This yields a very handy 1.6%.

Investors may consider a forward P/E ratio of 20.6 times too expensive, but in my opinion ABF is worthy of such a premium rating given the brilliant growth opportunities over at Primark, not to mention the brighter outlook for its Sugar division.

Tech titan

Sophos Group (LSE: SOPH) is another great growth share that has been on the back foot more recently. Its market value has dipped 15% since punching record peaks of 646p per share just a month ago following a share placing.

Demand for the online security specialist’s services continues to strengthen, the business witnessing a 22% jump in billings between April and September (and 29% in the final three months of the period), and 280,000 more clients added during the period.

And this growth is broad based too, Sophos reporting double-digit percentage sales across all of its major regions.

With sales steadily taking off, the City is expecting the FTSE 250 firm to bounce from a 63% earnings decline in the year to March 2018 — the third drop in a row if realised — with a 133% improvement next year.

A forward P/E ratio of 100.3 times may be too rich for many investors, although a sub-PEG reading of 0.8 suggests Sophos is actually attractively priced relative to its growth prospects.

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.

Royston Wild has no position in any of the shares 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.

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