Forget buy-to-let! I’d rather invest in the BAE share price today

BAE Systems plc (LON: BA) could offer a superior risk/reward opportunity than buy-to-let.

| 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.

When investing, your capital is at risk. The value of your investments can go down as well as up and you may get back less than you put in.

Read More

The content of this article is provided for information purposes only and is not intended to be, nor does it constitute, any form of personal advice. Investments in a currency other than sterling are exposed to currency exchange risk. Currency exchange rates are constantly changing, which may affect the value of the investment in sterling terms. You could lose money in sterling even if the stock price rises in the currency of origin. Stocks listed on overseas exchanges may be subject to additional dealing and exchange rate charges, and may have other tax implications, and may not provide the same, or any, regulatory protection as in the UK.

You’re reading a free article with opinions that may differ from The Motley Fool’s Premium Investing Services. Become a Motley Fool member today to get instant access to our top analyst recommendations, in-depth research, investing resources, and more. Learn More.

While the FTSE 100 has come under severe pressure in recent months, it could offer superior investment opportunities when compared to buy-to-let. Stocks such as BAE (LSE: BA) may now offer wide margins of safety, as well as improving growth prospects.

In contrast, buy-to-let could experience further tax changes, while housing affordability may remain challenging for first-time buyers. As such, now could be the right time to buy the defence stock in my opinion alongside another industrial company which released an encouraging update on Wednesday.

Consistent performance

The stock in question is technical products and services specialist Diploma (LSE: DPLM). Its first quarter trading update showed that it has been able to trade in line with expectations. Revenue in the period increased by 9%, while its operating margin was as per expectations.

The company’s Life Sciences sector delivered sales growth of 4%, also recording encouraging growth across several revenue streams. Its Seals segment reported 2% sales growth which was driven by strong trading in its international business. Its Industrial OEM (original equipment manufacturer) business was hit by delays in deliveries, although demand remained robust during the quarter. In its Controls segment, revenue increased by 24% as a result of previous acquisitions.

With Diploma having recorded five successive years of earnings growth, it appears to offer a robust financial outlook. It is expected to deliver a 9% rise in net profit in the current year, and this could help to improve investor sentiment. With the company also reporting a change in CEO alongside its trading update, it could record improving financial performance over the long term.

Low valuation

Also offering improving financial prospects is BAE. The company is expected to report a rise in earnings of 9% in the current financial year. Since its shares have fallen by 15% in the last year, they now trade on a price-to-earnings (P/E) ratio of around 10.8. This suggests that they could offer a wide margin of safety and may be able to deliver improving performance over the long run.

Of course, there are risks facing the company. Notably, there is still geopolitical uncertainty regarding one of its key customers, Saudi Arabia. As well as this, the prospects for the world economy continue to be uncertain, with the potential for a full-scale trade war having the capacity to hurt the company’s financial outlook. And, following US mid-term elections, defence budgets may not rise as quickly as had been expected by the market.

Despite these risks, BAE appears to offer growth potential as defence budgets across a number of major economies are forecast to rise over the medium term. Certainly, further share price volatility could be ahead. But at a time when interest rates in the UK are expected to rise and tax changes are reducing the appeal of buy-to-let properties, buying a slice of the FTSE 100 defence stock could prove to be a sound long-term move.

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. 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.

More on Investing Articles

Investing Articles

Up 14% in 2024, what’s next for the Lloyds share price?

This Fool takes a closer look at what prompted the Lloyds share price to rise this year, and offers her…

Read more »

Investing Articles

5 FTSE 100 stocks to consider for a lifetime of passive income

I see lots of cheap dividend stocks in the FTSE 100 right now, but prices are starting to rise. Here's…

Read more »

Man writing 'now' having crossed out 'later', 'tomorrow' and 'next week'
Investing Articles

3 growth stocks I’m desperate to buy as the FTSE 100 dips

Never waste a dip, says Harvey Jones. Three of his favourite growth stocks have fallen over the last month and…

Read more »

Investing Articles

I’d use a £10K ISA to try and generate £900 in dividends annually like this!

Christopher Ruane explains how he would invest a Stocks and Shares ISA in blue-chip companies to try and set up…

Read more »

Investing Articles

Here’s how I’d build a second income stream worth £1,228 a month by investing £10 a day!

A second income stream could come in handy later in life. This Fool explains how she’d build one by investing…

Read more »

Investing Articles

5 FTSE 250 stocks I’d buy for a lifetime of passive income

Here's why I think the FTSE 250 could be the best UK stock market index to go for in 2024…

Read more »

Union Jack flag triangular bunting hanging in a street
Investing Articles

Buy cheap FTSE shares, says HSBC

Analysts at HSBC have upgraded their rating of FTSE stocks and reckon the blue-chip UK index could carry on powering…

Read more »

Couple working from home while daughter watches video on smartphone with headphones on
Investing Articles

It could be worth buying the dip for this FTSE 250 stock, down 7% today

Jon Smith spots a sharp drop in a FTSE 250 stock but explains why this could just be a blip…

Read more »