I like to scour the UK stock market for once-popular companies that have temporarily fallen out of favour with investors. That way I can pick them up on the cheap, then sit tight for the recovery. Assuming they do.
The following two FTSE 100 stocks were much admired by investors (including me) after booming for years. When they crashed, I bought them. So what happens next?
The first stock is consumer goods giant Unilever (LSE: ULVR), which I added to my self-invested personal pension (SIPP) in June last year. This reliable dividend growth stock was suddenly under pressure on every front.
Share slippage
The cost-of-living crisis hit sales, activist investors demanded a structural overhaul while even the board’s social responsibility stance became controversial. In summary, it was a mess, and that’s why I bought it. The shares were way cheaper than during the glory growth years, and the dividend was higher, too.
I didn’t expect an instant return, and I didn’t get one. Instead, the shares fell 10% within days. Then they stayed there until a few weeks ago, when they started to show signs of life. I bought another tranche in short order.
The Unilever share price is now up 11.65% over the last month, boosted by April’s solid Q1 results. It’s still down 2.3% over 12 months, so I reckon there’s still an opportunity here.
While today’s trailing price-to-earnings ratio of 19.6 times earnings is much higher than the FTSE 100 average of 12.4 times, it’s cheap for Unilever, which traded around 25 times during the good times. If interest rates are cut, and consumers feel better off, sales should rise.
Unilever still has to sort itself out and shoppers are still suffering, but there’s no rush. Now I’ve bought the stock at a decent price, I hope to hold it through thick and thin.
Spirits giant Diageo (LSE: DGE) is another FTSE 100 blockbuster stock that had fallen from grace. Its collapse was triggered by a shock profit warning in November, as Latin American sales plunged with drinkers downgrading to cheaper brands. When the dust settled, I bought it.
Another FTSE 100 flop
I’ve learned the hard way that buying a company after a profit warning can be risky. They often come in twos and threes. Diageo isn’t out of the woods yet, that’s for sure. As if I needed a reminder, Citi recently said there was “no compelling case” to own the shares right now.
Yet there’s a glimmer of hope. The shares are up 3.98% over the last month. I’m glad I didn’t buy a year ago. Diageo is down 21.99% since then. The board must work hard to turn around its Latin American performance. It must then hope that its premium brands strategy pays off, rather than driving cash-strapped drinkers away.
Yet I believe Diageo will recover once the cost-of-living crisis eases. Trading at 17.35 times trailing earnings, it’s cheap by its former standards. However, the trailing 2.82% yield is only modest.
I think the stock market will rediscover its charms, but accept I’ll have to wait. That’s fine by me. I invest for years, not months. Given time, I reckon both Unilever and Diageo will make me richer.
