Earlier today, my colleague Robert Faulkner wrote an interesting article on portfolio manager Nick Train. Often compared to Warren Buffett, Train is widely regarded as one of the UK’s top money managers, and in recent years his funds have performed spectacularly. For example, over the last five years, his UK equity fund has returned nearly 70%, which is far higher than the return from the FTSE 100.
Today, I want to take a closer look at two of Train’s top holdings. Both are FTSE 100 dividend stocks that have excellent track records of generating shareholder wealth. But are they worth buying right now?
Diageo
Alcoholic beverage group Diageo (LSE: DGE) is a stock that he is clearly bullish on. Indeed, according to Hargreaves Lansdown, it’s currently the top holding in his UK equity fund, with a weight of around 10.2%.
I can see why Train is happy to have a large overweight position in Diageo, as it really is a classic example of a ‘high-quality’ stock. For example, Diageo is a leader in its industry with an outstanding portfolio of brands including Johnnie Walker and Smirnoff. The group also has a fantastic long-term track record of generating growth in sales, profits, and dividends. It also has an excellent return on capital employed (ROCE), meaning that it’s very effective at generating profits for shareholders. Moreover, with significant exposure to the world’s emerging markets, there’s an exciting growth story ahead.
Looking at the investment case for Diageo, I think it’s a brilliant stock to own for the long term. But is it a ‘buy’ right now?
Crunching the numbers, Diageo currently trades on a forward P/E of 22.9. While that’s not a cheap valuation in a traditional sense, I also don’t think it’s outrageous. High-quality stocks that can consistently generate shareholder wealth do deserve to trade at a premium, in my opinion. That said, Diageo shares are within a whisker of their all-time high, so I think it could be prudent to wait for a pullback. I’m sure that with a little patience, 2019 will present opportunities to acquire Diageo at a slightly cheaper price.
Hargreaves Lansdown
Another FTSE 100 stock that Train rates highly is Hargreaves Lansdown (LSE: HL), which operates the UK’s largest investment platform. It’s currently the fifth-largest holding in his UK equity fund, with a weight of 8.3%.
I can see the appeal of owning Hargreaves Lansdown within a portfolio. There’s no doubt that the company is a market leader, as it has over one million clients on its books, and has an investment platform market share of around 40%. The company is also growing at a rapid rate as funds continue to flow in. And with the UK facing a retirement savings crisis, the company looks well-placed to benefit in the next few decades as people save more.
Should investors buy now? Like Diageo, Hargreaves also trades at a lofty valuation. In fact, it’s more expensive than Diageo as its forward P/E is 32.5. However, I actually think the stock could still be worth a look at that valuation, simply because earnings are growing at such a prolific clip (five-year growth: 58%). Given that the stock has corrected by almost 20% in the last two-and-a-half months, I think that now could be the time to have a nibble.
