The stock market has been moving up, with the FTSE 100 already 7% higher this year and 12% above where it stood a year ago. But I still think there are stocks to buy now in the market.
Here are two I would consider for my portfolio. With £1,000, I’d reduce my risk by putting £500 into each.
Defence recovery play
The defence contractor Babcock (LSE: BAB) is more used to refitting battleships than its own business model. But it has been a difficult couple of years for the company, which operates at dockyards including Devonport and Rosyth. That has led it to reassess its business. It has jettisoned some parts which it deems surplus to requirements.
Will moves such as disposing of its offshore helicopter division be enough to restore the company’s former financial health? That remains to be seen. Management is taking a cautious approach to an ongoing financial review, emphasising quality over speed. That seems prudent but meanwhile City enthusiasm remains lukewarm. The Babcock share price is exactly where it was a year ago, meaning it has missed out on the broader market recovery to date.
Where next for the Babcock share price
So why do I include Babcock among my stocks to buy? In short, I think its entrenched position in the defence industry gives it a strong competitive advantage. Very few competitors are able to offer what it does, which gives it pricing power and long-term prospects. The navy will need to keep servicing its fleet, for example, and Babcock is bound to win at least some of that work.
As with any recovery play, investing in Babcock involves risks. These include possible writedowns from the financial review, which is set to reduce reported earnings. The company said in its last trading statement that it had identified impairments and charges of around £1.7bn. That is a significant amount. Perhaps there is more to come in future. For now, a lot of investors are wary of Babcock’s prospects – but I see a buying opportunity. I rate Babcock among stocks to buy for my portfolio today.
Smoking hot yield
Another company I would buy for my portfolio today is tobacco manufacturer Imperial Brands (LSE: IMB). The Bristol-based company has global reach, selling a portfolio of brands including West and John Player Special.
While it is cheap to make cigarettes, they can be sold at a high price. That helps sustain large cash flows. Last year, for example, Imperial generated £4bn in net cash from operating activities. Compared to a market cap of £14.9bn, that is a massive amount. However, cash flowed out for investment activities and also for finance needs. In fact, the company’s finance activities alone saw £4.3bn of net cash go out the door.
Stocks to buy today: Imperial Brands
Partly that net cash outflow reflects the former dividend. A cut last year has saved money, and serves as a reminder of the perennial risk of a dividend cut. But the net cash outflow is also a reminder of the company’s debt pile. Imperial spent over £3bn last year repaying borrowings. The cost of servicing debt eating into profits remains a risk.
Still, if it can manage its balance sheet, the huge operating cash flow should be able to fund an attractive dividend. I remain a buyer of Imperial.
