Falling FTSE 100 stocks: 1 to buy, 1 to avoid

With share prices falling, our writer is seizing his opportunity with a top-quality FTSE 100 stock. But he’s steering clear of another one.

| 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.

Mature people enjoying time together during road trip

Image source: Getty Images

Key Points

  • Rightmove's share price has fallen 32% this year, with the shares now offering a 4.38% cash flow yield
  • Diageo shares are currently offering a 2.86% cash flow yield, having only fallen 8% since January

Fears of inflation, recession, and rising interest rates have been pushing down share prices this year. The FTSE 100 is down around 2% since the beginning of January (although up over 4% in a year).

Sometimes, falling share prices can provide investors with great opportunities. But the fact that a business is selling for less than it was before doesn’t automatically mean that it’s worth buying. 

Inflation Is Coming

Inflation is out of control, and people are running scared. But right now there’s one thing we believe Investors should avoid doing at all costs… and that’s doing nothing. That’s why we’ve put together a special report that uncovers 3 of our top UK and US share ideas to try and best hedge against inflation… and better still, we’re giving it away completely FREE today!

Click here to claim your copy now!

Two companies in the FTSE 100 have been catching my eye lately. Both have falling share prices. One of them I’d buy today, the other I’d stay away from. 

I’d buy Rightmove

I’ve had an eye on Rightmove (LSE:RMV) shares for some time now, but I’ve never been convinced by the price its stock was trading at. The share price has come down 32% since January though, and it’s now at a level where I’m comfortable buying.

At current prices, Rightmove shares value the entire business at £4.468bn. In exchange, an investor would get a company that’s generating around £195m in free cash each year, with just under £32m in net cash on its balance sheet.

From an investment perspective, that looks to me like I can expect a return of around 4.38% per year at today’s prices. When the share price was around 790p at the start of the year, the equation looked different to me. But at 530p per share, I’d buy shares for my portfolio.

There’s a real risk that Rightmove’s share price might be heading lower in the next few months or even years as the UK housing market comes under pressure. For me though, investing isn’t about buying shares when they’re at their lowest point, it’s about buying shares when I’m getting enough for my money in return. And at these prices, I think Rightmove is offering me enough for it to be worth buying shares for my portfolio.

I’d avoid Diageo

On the other side, I’m staying away from shares in Diageo (LSE:DGE). The share price is down around 8% since the beginning of the year, but I still don’t see that there’s enough value for me at current levels.

[Fool_stock_chart ticker=LSE:DGE]

Diageo’s current share price implies a total valuation for the company of just under £87bn. In return, an investor buying shares today would acquire a company with a further £12bn in debt generating £2.8bn in free cash per year.

From an investment perspective, that looks to me like a return of around 2.86% per year. Compared to Rightmove, that’s just not attractive to me. 

I think Diageo is a fantastic business. The company has some superb brands, which allow it to generate £4.2bn in operating income using £4.8bn in fixed assets. 

I’d love to own its shares. But even though the price has come down since January, Diageo shares just aren’t attractive enough to me from an investment perspective at current levels.

Conclusion

Both Rightmove and Diageo have seen significant declines in their share prices since the start of the year. But I think the decline in Rightmove’s price is a buying opportunity for me. Diageo? Not so much.

Where Rightmove’s shares has fallen to a level that implies a free cash flow yield over over 4%, Diageo’s stock is priced for a return of under 3%. So I’m putting my money into Rightmove.

FREE REPORT: Why this £5 stock could be set to surge

Are you on the lookout for UK growth stocks?

If so, get this FREE no-strings report now.

While it’s available: you'll discover what we think is a top growth stock for the decade ahead.

And the performance of this company really is stunning.

In 2019, it returned £150million to shareholders through buybacks and dividends.

We believe its financial position is about as solid as anything we’ve seen.

  • Since 2016, annual revenues increased 31%
  • In March 2020, one of its senior directors LOADED UP on 25,000 shares – a position worth £90,259
  • Operating cash flow is up 47%. (Even its operating margins are rising every year!)

Quite simply, we believe it’s a fantastic Foolish growth pick.

What’s more, it deserves your attention today.

So please don’t wait another moment.

Get the full details on this £5 stock now – while your report is free.

Stephen Wright has positions in Rightmove. The Motley Fool UK has recommended Diageo and Rightmove. 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.

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 considered, so you should consider taking independent financial advice.

More on Investing Articles

Black father holding daughter in a field of cows
Investing Articles

Could my Stocks and Shares ISA generate £30,000 a year?

Over 2m UK citizens make some use of a Stocks and Shares ISA every year. Our writer considers if it’s…

Read more »

Surprised Black girl holding teddy bear toy on Christmas
Investing Articles

4 dividend stocks that can help me fight inflation!

I'm looking at dividend stocks to help my portfolio grow and overcome the impact of high inflation. Here are the…

Read more »

Black woman using loudspeaker to be heard
Investing Articles

2 bargain UK shares trading at less than book value

Book value is a great way to value a stock. These UK shares are trading at a price-to-book ratio of…

Read more »

Happy young female stock-picker in a cafe
Investing Articles

A FTSE AIM stock I’d add to my Stocks & Shares ISA in July

Henry Adefope highlights a FTSE AIM stock he believes could generate significant upside for his portfolio if he buys this…

Read more »

Warren Buffett at a Berkshire Hathaway AGM
Investing Articles

I’m following Warren Buffett and buying cheap dividend shares to build my wealth

I think this cheap dividend stock exhibits similar qualities to the companies Warren Buffett has in his investment portfolio.

Read more »

Smiling young man sitting in cafe and checking messages, with his laptop in front of him.
Investing Articles

2 cheap FTSE 100 shares I’m buying during the dip!

Andrew Woods explains that low P/E ratios and profitable businesses attract him to these two FTSE 100 shares.

Read more »

Hand of person putting wood cube block with word VALUE on wooden table
Investing Articles

Down 45% in a year, is now the time to buy Scottish Mortgage shares?

Jon Smith explains why Scottish Mortgage shares appear to him to be good value given their post-pandemic fall.

Read more »

Tabletop model of a bear sat on desk in front of monitors showing stock charts
Investing Articles

3 reasons why the stock market is falling today

Jon Smith explains several factors that are contributing to the stock market falling today, and his thoughts on them.

Read more »