I have £1,700 of my tax-free allowance left for this year in my Stocks and Shares ISA. And I think that there are some great opportunities for me to invest that money in October.
Filling out my ISA this month is a bit of a risk, since I won’t be able to add funds to that account again until April. But share prices to me look attractive enough to justify buying now, rather than waiting for bigger dips.
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Great businesses
I’m concentrating my attention on what I think are the highest quality UK stocks. And there are two metrics I’m using to measure this.
The first is how much operating income a company can generate using its tangible assets. The second is what proportion of their operating income becomes free cash.
I’ve got quite a few UK stocks on my radar, but I’ll concentrate on two here. They are FTSE 100 stock Experian and FTSE 250 stock Diploma.
These generate strong profits. Crucially, though, they don’t have to reinvest much of the money they make, allowing them to provide a return to their shareholders.
Experian has a 329% return on its tangible assets and 94% of its operating income becomes free cash. Diploma returns 144% on tangible assets, 92% of which is available to shareholders.
Stocks to buy in October
These are the kinds of great businesses that I like to own in my Stocks and Shares ISA. And I’m especially interested in buying them in October.
Experian now has a market cap of £24bn. Given the company’s debt and assets, it generates a free cash return of over 4%.
There’s clearly risk with this business with the number of mortgage applications declining. But I think that this could be a great value proposition for the long term.
With a market cap of £2.8bn, Diploma currently offers a return of just over 3.5%. I’m extremely confident in the company’s ability to grow its earnings over time, which makes the stock attractive to me at these levels.
As with Experian, Diploma shares carry a risk with the prospect of an economic slowdown. But this is another stock that I’m keen to buy while I think that the market is mispricing the company’s longer-term prospects.
Following Warren Buffett
Warren Buffett says that it’s better to buy a great business at a fair price than a fair business at a great price. So I’m focusing on quality UK companies, like Experian and Diploma.
But Buffett also says that it’s possible to pay too much for a wonderful business. That’s why I wasn’t buying Experian shares when they were priced at £36 or Diploma shares at £35.
At today’s prices, though, I think that these companies offer promising returns for shareholders. As such, I’m looking to buy both in October to fill my Stocks and Shares ISA.
