The FTSE 100 experienced a massive sell-off on Monday as traders fretted about the implications of a potential collapse of Evergrande. While that risk hasn’t entirely gone away, much of the week so far has reversed those losses.
With the FTSE 100 recovering, what are some of the best stocks from the index for me to buy right now? I’m going to go with two shares I’ve liked for a long time. They are housebuilder Persimmon (LSE: PSN) and warehousing group Segro (LSE: SGRO). The former may seem counterintuitive as the stamp duty holiday ends (which will be at the end of this month), but I think it’s a great company trading cheaply. Segro is well positioned to keep growing as e-commerce expands.
A high yielding and cheap FTSE 100 share
A dividend yield of 8% makes Persimmon ideal for me as an income-seeking investor. Yet there’s more to the housebuilder than simply passive dividend income. There’s great value too and therefore the potential for share price growth. The shares trade on a price-to-earnings ratio of just 10. This makes it cheaper than London-focused Berkeley Group but a tad more expensive than Bellway and Barratt Developments.
Persimmon arguably has more quality though than the latter two and therefore deserves a higher P/E to compensate for the fact it’s a better business. Its return on capital employed (ROCE) is 21. Bellway and Barratt are eight and 14 respectively. This measure is important and the higher the better. It’s important because it shows how efficiently a company uses its capital to generate profits.
Persimmon also has higher margins than all these competitors. It’s a FTSE 100 company that combines being cheap with a high dividend yield and better operations and financial performance than its competitors.
To me, that’s a potent mix and should see the shares do well even as the stamp duty holiday for the sector ends. Remember there is also the possibility of an interest rate rise which could hit mortagge and in turn new housing demand. Despite that, I’m keen to add Persimmon once again to my portfolio for these reasons.
Going for growth
Segro is more of a FTSE 100 quality-and-growth type of investment. It’s not cheap but I think the long-term growth of e-commerce could well see the share price keep on rising.
It also has a ROCE of around 20, indicating that management invest shareholder funds well. Incidentally this is something Warren Buffett values very highly, so it’s an indicator of a potentially very good company and management team.
On top of that, it has had strong revenue growth most years and that’s very likely to continue into the future, which is good news for shareholders.
The principal concern would probably be competition. Making money from warehousing is not new and high margins could attract a lot of competition. But overall, given how well Segro is managed and the fact it already has massive scale and strong customer relationships, it’s a FTSE 100 company I’d feel confident investing in.
Persimmon and Segro then are two of my best opportunities from the FTSE 100 as it recovers from Monday’s slump.
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Andy Ross owns no share 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.