If I could only buy 3 UK stocks for my SIPP, I’d pick these winners

If Ed Sheldon could only select three UK stocks for his SIPP, he’d go for companies with strong competitive advantages and a lot of growth potential.

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Recently, I highlighted the stocks I’d buy if I could only choose three for my SIPP (Self-Invested Personal Pension). The stocks were Microsoft, Alphabet (Google), and Nvidia – all US-listed tech giants with significant growth potential.

Now I’m going through the same exercise with UK stocks. I’d pick these LSE shares for my SIPP.

20+ consecutive dividend increases

I’d want to invest in companies with strong competitive advantages and substantial long-term growth potential.

And one company that fits the bill is alcoholic beverages giant Diageo (LSE: DGE).

The competitive advantage of this business comes from its brands. Names like Johnnie Walker, Tanqueray, and Smirnoff have been around for a long time, and they’re unlikely to go away any time soon.

Meanwhile, the company’s exposure to the world’s emerging markets provides the growth potential. Today, the group generates around 40% of its sales in emerging market countries.

Now, Diageo is experiencing a few challenges right now due to the fact that consumers are reining in their spending. These challenges could persist in the short term so I’d look to build up a position here over time.

Taking a long-term view, however, I see a lot of potential, especially after the stock’s recent pullback.

It’s worth noting that Diageo has a strong dividend growth track record (20+ consecutive dividend increases) and is buying back shares.

A digital transformation play

Another UK company that has both competitive advantages and long-term growth potential is Sage (LSE: SGE). It’s a leading provider of cloud-based accounting and payroll software.

The competitive advantage here comes from the fact that once an organisation selects accounting software, it’s unlikely to switch to another provider due to the high costs of switching. As a result, Sage has a high level of recurring revenues.

As for the growth potential, Sage is well placed to benefit from the ‘digital transformation’ theme. It also has the potential to regularly increase its prices, given the competitive advantage I mentioned above.

The downside to this stock is that, like a lot of software companies, it has a higher valuation. Currently, the forward-looking price-to-earnings (P/E) ratio here is about 28.

I’m comfortable with the above-average valuation though, given the company’s recurring revenues and long-term growth potential.

Tailwinds from the ageing population

Finally, my third pick would be Smith & Nephew (LSE: SN.). It’s a healthcare company that specialises in joint replacement solutions and advanced wound care.

I think this stock would complement my other two UK SIPP holdings nicely.

First, it’s in a very different sector to the other two.

It has a much lower valuation than those stocks. Currently, the P/E ratio here is just 12. I see a lot of value at that multiple.

What I really like about Smith & Nephew, however, is that it’s a play on the world’s ageing population.

According to Fortune Business Insights, the global orthopaedic joint replacement market is projected to grow by around 8% per year between now and 2030, thanks to the ageing population.

So, the company should have some big tailwinds behind it in the coming years.

It’s worth pointing out that some investors believe weight-loss drugs are a major threat to this company.

I’m not convinced they are, however.

In a world that’s getting older, I think this healthcare stock has bags of potential.

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 assessed. Consider taking independent financial advice.

Edward Sheldon has positions in Alphabet, Diageo Plc, Microsoft, Nvidia, Sage Group Plc, and Smith & Nephew Plc. The Motley Fool UK has recommended Alphabet, Diageo Plc, Microsoft, Nvidia, Sage Group Plc, and Smith & Nephew Plc. Suzanne Frey, an executive at Alphabet, is a member of The Motley Fool’s board of directors. 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.

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