Stocks trading at 52-week lows present an interesting dilemma for investors. On the one hand, being at the cheapest level in a year could be a smart time to buy for future appreciation. Yet if the company is genuinely struggling, the stock could continue to fall. FTSE 100 stock Diageo (LSE:DGE) currently offers investors such a decision. So what should I do?
Fundamentally strong
If I didn’t know that the share price had fallen by 14% over the past year, I wouldn’t have guessed it based on financial performance.
The 2022/23 results (published in August) showed net sales grew 11% from last year. Earnings per share jumped by 18%, helping the dividend to also increase by 5%, comparing it to the previous year.
What impresses me is the split of revenue from the different brands. There’s no one name that is essential to the company. Various brands are equally important which is great because it reduces reliance and creates a more sustainable business model.
A good defensive addition
Few can doubt that Diageo is a solid defensive stock to have in a portfolio. Defensive stocks are ones that typically hold their value best during periods of uncertainty in the stock market. For those that believe we’re due a stock market crash soon, adding defensive stocks to the portfolio would make sense.
For Diageo, it’s able to generate constant revenue due to the diversification of brands and also the nature of alcohol. Given that it has both high-end and more everyday brands (all around the world), it can do well whether people can afford to buy a pint or a special bottle of whisky.
Further, alcohol is a product that people buy almost irrespective of the price. So if we do see economic underperformance, Diageo should still be in an OK position.
Reasons to stay away
The business and strategy will take some time to recover from the sudden death of its CEO back in June. Ivan Menezes had been a big figure at Diageo since he joined 25 years back, with the last 10 as chief exec. Whenever a company loses such a key person, it’s natural that some shareholders will be unsure as to how the future of the business will be.
Another point to note is that even with the share price drop, Diageo shares aren’t cheap. The price-to-earnings ratio currently is 19.84. I don’t really view any stock that has a ratio of 10 or above as undervalued. To be at nearly 20 tells me this is no way a value purchase, even at 52-week lows.
So will I be rushing to buy the stock this week? Not really. It does have its merits, but I’ll only get interested in buying if we see it continue to drop in the coming months.
