Down 25%! Is this former FTSE favourite now the very best stock to buy today?

I often think the best stock to buy today is the one that performed worst yesterday, for two reasons. First, it’s usually cheap as a result (and I do love a bargain). Second, it greatly reduces the risk of overpaying for yesterday’s big winner.

Naturally, I don’t buy any old stock just because it’s crashed. I target strong, diversified, profitable companies with a large customer base, a brilliant track record of rewarding investors, and has just suffered a temporary hiccup. Which I think is a pretty good description of FTSE 100 spirits giant Diageo (LSE: DGE).

Smashed

Diageo is certainly strong and diversified, selling more than 200 brands in nearly 180 countries, including big names such as Johnnie Walker, Smirnoff, Guinness and Tanqueray.

This global spread usually works in its favour, because when one market underperforms, another usually compensates.

Unfortunately, the board started the year by reporting problems in its biggest market of all, North America, which accounts for nearly 30% of total sales. With lockdowns over, fewer drinkers were amusing themselves making premium cocktails at home.

In January, Diageo reported first-half organic sales of just 3%, well below the 6% analysts had expected. Things picked up in August as full-year 2023 net sales grew 10.7% to £17.1bn, despite another 1% decline in US spirits sales.

The big one dropped on Friday 13 November. Diageo’s shares suffered their biggest one-day fall ever, 16% at one point, after warning of a drop in first-half operating profit growth. 

This time the culprit was Latin America and the Caribbean, which delivered a “materially weaker performance”. While the region only generates nearly 11% of Diageo’s total sales, they’re expected to decline by a thumping 20%.

Markets took their revenge, with Citi slashing Diageo’s target price by 15%, from 3,600p to 3,050p, warning that “it is tough to see a catalyst for the shares”. But has the backlash been overdone? I think it has.

Yes, the update was a shock. And yes, we could see further downgrades. I’ve learned from experience that even big companies do not spring back from a body blow overnight. On the other hand, as a private investor, I can afford to take a longer view than the pros, because I don’t answer to anybody but myself.

Back on track

Diageo hasn’t suddenly turned into a terrible company overnight. People are still drinking (although I’m told younger people are drinking less). The stock is down 23.75% over a year, which makes me think two things. First, I’m glad I didn’t buy it a year ago (I nearly did). Second, that’s a big discount and I want to take advantage.

Diageo doesn’t look dirt cheap, trading at 17.2 times earnings. However, that’s well below its usual valuation of around 22-23 times. At 2.8%, the yield isn’t particularly high (and future yields are never guaranteed) but it boasts a solid track record of increasing shareholder payouts, as my simple table shows:

Diageo may not be the very best FTSE 100 stock to buy today, but I think it’s right up there. Last month, it announced another $1bn of share buybacks, which should lift spirits.

I plan to buy it before Christmas, and hold for years.