The best stocks to buy are shares in companies that have a strong position in an important industry. And the time to buy them is when they trade at unusually good prices.
Despite a decent performance from the FTSE 100 so far this year, there are still UK stocks that look like opportunities. Two in particular stand out at the moment.
Bunzl
Bunzl (LSE:BNZL) is a distributor of consumables, including recyclable packaging, disposable cutlery, and hygiene equipment. Its biggest competitive advantage is its size.
The firm’s scale means it can get products from suppliers to customers faster and more reliably than its competitors. It therefore provides a value that other companies can’t match.
Bunzl has grown its revenues and profits impressively over the last decade. But the risk for investors is that this becomes more challenging as the business gets bigger.
Bunzl return on equity vs book value per share 2014-24
Created at TradingView
Over the last 10 years, returns on equity have fallen as the company has grown. That isn’t a problem, but investors should note the risk of future growth becoming more expensive.
To some extent, though, this is reflected in the share price. On a price-to-free-cash-flow (P/FCF) basis, Bunzl is trading at one of its lowest levels since 2014.
Bunzl P/FCF ratio 2014-24
Created at TradingView
I see this as an opportunity. Bunzl has a clear advantage over its competitors and operates in an industry where demand is likely to remain strong – that puts it on my list of shares to buy.
Diageo
Shares in Diageo (LSE:DGE) also look attractive. A price-to-earnings (P/E) ratio of 18 represents an unusually low valuation for the stock.
Diageo P/E ratio 2014-24
Created at TradingView
The company has been facing some difficulties with demand recently. In certain regions, customers have been trading down to cheaper alternatives.
A lack of switching costs is a structural risk for Diageo shareholders. But in this case – like so many – I think investors would be well-advised to pay attention to Warren Buffett.
Buffett says the most important thing about his investment in Coca-Cola isn’t anything about the macroeconomic environment. It’s the intrinsic properties of the business.
If that’s right, Diageo shareholders should feel good about themselves. The company has some unrivaled assets that could well put it in a strong position for years to come.
Category-leading brands combined with global distribution make a powerful combination. And I’ve been taking advantage of the low price tag and buying the stock for my portfolio.
Buying UK stocks
I think the best investment results come from owning the highest-quality companies. So there are a number of FTSE 100 stocks I wouldn’t consider buying.
A few, however, stand out to me as exceptional businesses. And within these, there are a couple that stand out as trading at attractive prices right now.
Both Bunzl and Diageo fit the bill. I think these are two above-average stocks at unusually low prices, so this is where I’m looking to focus my investing at the moment.
