This has been a great year for US stocks and growth/tech shares, while the FTSE 100 and value shares have underperformed again.
Over one, five, 10, and 15 years, the UK’s Footsie has seriously underperformed the all-conquering S&P 500 index. So why keep backing value shares? Because I think it’s my best bet for above-market returns in the years ahead.
Two FTSE 100 stocks I want to own
Here are two undervalued companies I aim to buy into in December:
1. Diageo
At times over the decades, I’ve owned global drinks giant Diageo (LSE: DGE), though not recently. But following recent price falls, I’m mad keen to buy into this 396-year-old business.
Diageo sells 200+ global booze brands in 190+ countries. Here are just six: Johnnie Walker whisky, Smirnoff vodka, Captain Morgan rum, Baileys Irish cream, Gordon’s gin, and Guinness stout.
On 1 December 2022, the share price hit 3,881.5p. Today, it’s 2,747p — 29.2% below this high. This values the business at £61.4bn — a heavy hitter in London. This decline was partly due to recent sales slowdowns in Latin America and the Caribbean.
Diageo has been a long-term winner for shareholders, but its shares are down 2.7% over five years. Though this return excludes cash dividends, which total billions of pounds a year.
At present, this FTSE 100 stock looks a big, beautiful bargain to me. It trades on 16.7 times earnings, producing an earnings yield of 6%. Thus, the dividend yield of 2.9% is covered 2.1 times by trailing earnings. Also, I don’t imagine Diageo will cut this payout and may even raise it in 2024.
However, what if sales keep sagging, driven down by declining demand for alcohol among younger consumers? Or marketing expenses surge, hitting earnings and cash flow? After all, consumers are struggling with rising interest rates, high inflation, and steep energy bills.
Despite these risks, my goal is to raise some cash in December to become a Diageo shareholder once more. This time, I hope not to sell out too early…
2. Shell
In August, my wife and I bought shares in BP, which I saw as a useful hedge against higher energy prices. The oil price has since fallen, dragging down oil stocks.
Rather than buy more BP shares, I’d add diversification by investing in oil & gas behemoth Shell (LSE: SHEL). At its 52-week high on 18 October, the share price peaked at 2,801p. Today, it stands at 2,551.5p, down 8.9% since and valuing this Goliath at £166.7bn.
As a value investor, Shell shares look attractive to me today. They trade on a multiple of 7.7 times earnings, delivering an earnings yield of 13%. The dividend yield of 4% a year — in line with the FTSE 100 — is covered a solid 3.3 times by earnings.
To me, these fundamentals are classic hallmarks of long-term winners. However, investing in oil & gas groups is problematic today. As major planetary polluters, these firms face increasingly negative public opinion. Also, these stocks are driven by oil prices, which are notoriously volatile.
Even so, I’d aim to buy a stake in this FTSE 100 giant before 2023 is out, cash permitting!
