The Diageo (LSE:DGE) share price might only be down 8% over the past year, but the bulk of the fall has come in recent months. This means that it’s currently sitting at 52-week lows just above 3,300p. Given the sheer size and financial muscle of the global alcohol giant, could this be a smart time for investors to get involved with Diageo shares?
How we got to this point
Clearly, for a stock to be at the lowest point of the past year, we’d be forgiven for thinking that business can’t be going that well. Yet the half-year results released back at the beginning of the year showed quite the opposite.
In comparison to the same period the year before, net sales jumped by 18%, with operating profit up by 15%. CEO Ivan Menezes made an interesting comment that “Diageo is 36% larger than it was prior to Covid-19, reflecting the strength of our diversified footprint and advantaged portfolio.”
So if the finances are good, what’s the catch? One key element is with the CEO himself. After a decade at the helm, Menezes announced his retirement earlier this year. Even though COO Debra Crew will be a great replacement, the leadership and strategy Menezes provided will undoubtedly be missed. Some investors are likely concerned about the direction of the company from here.
Another reason for the weak share price this year is where investors are putting their money. After being unloved for a large part of 2022, higher-risk growth stocks have done well in 2023. On the flipside, money has rotated out of more defensive and value-oriented companies. Diageo is in the latter camp and so has struggled to make gains.
Why I like the business
I feel that this is a good opportunity to purchase the stock. To begin with, the risk of it being a defensive stock can be flipped to a positive. Given the uncertain backdrop of the UK and global economy, having a share that should hold value better than others if we get a stock market crash later this year is a big bonus.
I think that the diversified nature of products should enable revenue and profitability to increase further. It saw half-year sales of super-premium-plus brands grow by 12%. This includes high-end spirits such as Don Julio. Yet on the other end of the scale, a business could buy still-in-demand Guinness wholesale for just a few pounds.
It continues to acquire new brands to further deepen ties to particular locations or client segments. Not only will this help to build momentum but it should also futureproof the business to changing tastes.
How I’d play it from here
With a price-to-earnings ratio of 22, it’s above the FTSE 100 average. The fall to 52-week lows hasn’t put the stock in undervalued territory by any means. Yet it does provide a good entry point for investors to start pound-cost-averaging.
This involves purchasing some shares on a regular basis (say, monthly), to average the buying price over time. This way, if the stock does continue to fall, the average price will be lower than simply buying in one go.
