Although the future for the economy remains uncertain, I believe now could be a great time to buy FTSE 100 shares.
Each market crash creates buying opportunities for value investors. However, these are exceptional circumstances. Businesses are likely to be affected in different ways by the coronavirus lockdown and no one can accurately predict what the future holds.
That is why I am still exercising caution. It is unwise to buy stocks just because they are ‘cheap’. An investor needs to evaluate the underlying fundamentals of a company before purchasing its shares.
Why I’d buy FTSE 100 shares
The FTSE 100 contains the UK’s top 100 listed businesses. Its components trade in varying industries.
Warren Buffett’s first rule of investing is to “never lose money”. That is why I prefer looking at consumable company shares over other industries in the FTSE 100. I believe that customers will still buy affordable, branded items, even in times of economic uncertainty. Investing in consumable companies at the moment seems less risky than other industries, like aviation or leisure.
These two companies are often highly-priced. But today they look as though they might be trading at a price below intrinsic value, and might offer good returns for long-term investors.
Unilever (LSE: ULVR) is one of the stars of the FTSE 100 index. Its portfolio comprises brands such as Marmite, Dove and Ben & Jerry’s. Over the past five years, its stock price has grown by roughly 35%.
However, in the last six months, Unilever’s share price has dropped by 11%. With a price-to-earnings ratio of 18, this could be prime territory for value investors who are looking to buy part of a wonderful company at a great price.
Fellow Fool Roland Head has pointed out that over the past 20 years, Unilever’s share price has grown by approximately 370%, whereas over the same time, we have seen a 25% fall for the FTSE 100 index.
With a prospective dividend yield of over 3% and the recent drop in its stock price, Unilever shares could be a great buying opportunity for both FTSE 100 value and income investors alike.
Like Unilever, Diageo’s (LSE: DGE) share price has slumped over the past six months. Diageo’s investors have been hit slightly harder, with a drop of 13%. However, over the previous five years, its stock price is up by over 40%.
In April, Diageo announced that it was pausing its share buy-back programme. However, the drinks giant has confirmed it will pay its interim dividend as scheduled. Investors should be aware that some FTSE 100 companies have announced a stop to dividend payments, in order to meet other obligations.
With the coronavirus lockdown meaning the closure of bars and restaurants, drinks companies like Diageo will clearly be affected. However, with the business owning brands like Guinness, Johnnie Walker and Gordon’s, I believe the market is under-pricing Diageo. Currently, it has a price-to-earnings ratio of 20.
For long-term investors hoping to benefit from the economy’s likely recovery, now could be a great time to buy shares in this standout FTSE 100 star.
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T Sligo has no position in any of the shares mentioned. The Motley Fool UK owns shares of and has recommended Unilever. The Motley Fool UK has recommended Diageo. 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.