The FTSE 100 is home to many high-quality, mature, and established companies. Nonetheless, picking the best of the best FTSE 100 shares can sometimes be a challenge.
Where to start? What to look out for? It can be a minefield selecting individual shares without knowing the answers to these questions. First, I’d look at the share characteristics. For instance, there are cyclical, value, defensive and growth types. Every company might have one or more of these styles.
If I were to select four top picks, I’d like to balance them across these four styles.
My first FTSE 100 pick
To start my search for the best FTSE 100 shares, I’d look for companies that I frequently use and can see myself continuing to do so over the coming years. This type of observational stock-picking is underrated in my view. Popular investor Peter Lynch made specific reference to it in the book One up on Wall Street.
Often the best companies are right under our noses (or tastebuds in this case). For my Stocks and Shares ISA, I’d first consider drinks maker Diageo (LSE:DGE). It owns hundreds of spirits and beer brands, many of which are globally recognisable. Guinness, Smirnoff, and Johnnie Walker are just a few of the brands it owns.
Diageo is a consumer goods company. As such, I’d say it falls into the defensive bucket. It’s typically counter-cyclical. So whether the economy is strong or weak, the drinks brands it owns remain relatively resilient.
Diageo should benefit from rising population growth. That said, it will still need to ensure it looks after its brands to keep them popular. There are also risks of counterfeit goods. The pandemic led to a rise in illicit goods in areas that saw alcohol sales bans.
Overall though, it’s a reputable company with both decent returns and profit margins.
Digging for returns
My top cyclical FTSE 100 share is currently Ashtead (LSE:AHT). This equipment rental company operates in the building sector. As such, it’s relatively cyclical. This is great when the economy is doing well and spending on construction projects is rising. But the opposite is also true.
Currently, I’d say the economy is still bouncing back from the pandemic, and construction spending is on the rise. That makes me think Ashtead could be a great addition to my portfolio.
Despite being a UK-based firm, over 80% of its sales take place in the United States. That bodes well for Ashtead as US politicians are close to passing a $1trn infrastructure bill. This could mean upgrades for roads, bridges and train tracks.
All of that additional construction work needs diggers, tractors, and various other heavy machinery that Ashtead supplies.
Even without those new projects, business is picking up and its last results report was encouraging. With a 24% profit margin, and plenty of room for growing sales, I like these shares.
In the longer term though, robotic machines could be a threat to its business. But it remains to be seen how well Ashtead can adapt and innovate.
Growth with data
My favourite FTSE 100 growth share right now is credit and data analytics company Experian (LSE:EXPN). This has been a great year for Experian. Its revenues increased substantially as economies around the world opened up post-lockdowns.
Experian has several business areas and operates across many geographies. Most of its business comes from North America, at 65% of total sales. Latin America and the UK are the next most important regions. In North America, the three main divisions, Data, Decisioning, and Consumer Services all showed robust sales growth.
In its Q1 trading update, CEO Brian Cassin said that “we delivered a strong performance through a combination of successful delivery of our innovation-led strategy and faster than expected recovery as economies emerge from the Covid-19 pandemic.”
What I most like about Experian is that it’s a global leader in the markets in which it operates. Its business model is scalable so it can add new innovative features and products at little additional cost. It has also identified large market opportunities and is well-placed to take advantage.
Despite the positive signs I’m seeing, there are some factors to be aware of. Like many data companies, any changes in data regulation could have an impact on the business. The regulatory focus on customer data has been increasing in recent years. Also, as Experian operates mainly in the US, UK and Brazil, any changes in their credit markets could reduce some of its growth potential.
But financially, I like that Experian has a return on capital of 15% and a 20% profit margin. These are exactly the types of metrics I look for when looking for long-term quality shares. I’m definitely going to consider these shares for my ISA.
Value for money
Buying value shares can often require patience. Value shares are typically very cheap. But cheap shares can stay cheap for quite some time. So it’s vital that I pick selectively.
My top value share at the moment is Rio Tinto (LSE:RIO). Rio is one of the largest companies in the FTSE 100. Yes, as a global mining company it’s pretty cyclical. But I’d say it’s also very cheap. It trades at a price-to-earnings ratio of just 4.6x. That’s appealing, especially considering its double-digit return on capital, solid profit margin, and generous dividend.
I calculate that Rio has a dividend yield of a whopping 14%. This does, however, include special dividends that may not be paid every year. Despite Rio’s splendid track record in paying dividends to shareholders, I tend to be wary of particularly high dividends such as this. I find that they’re not always sustainable in the long-run.
That said, Rio’s earnings have been boosted by higher commodity prices. It could be a good share to buy to protect against rising inflation. But I’m aware that falling commodity prices could have the reverse effect on Rio’s earnings and dividend payments.
Overall, I reckon Rio would provide balance to my other selections and I’d consider buying it for my stocks portfolio.