I don’t believe in buying shares to hold for a short period. Even the best FTSE 100 stocks can experience periods of prolonged price weakness, according to broader economic conditions and market sentiment.
Investing guru Warren Buffett famously said that you should “only buy something that you’d be perfectly happy to hold if the market shut down for 10 years.” This way, an investor has a chance to eliminate the impact of market volatility on their eventual returns.
Circumstances can change, and a stock that looks attractive one day may become a ‘dog’ within a few years. Sudden regulatory changes may put a utilities stock’s profitability in danger, for instance. Evolving consumer tastes could damage a luxury goods stock’s sales.
However, the best strategy is to buy shares that — at the time of purchase — look like they’re set to reign for the next decade or more. With this in mind, here is one of my favourites from the FTSE 100.
Fallen angel
Drinks giant Diageo‘s (LSE:DGE) has struggled of late as weak consumer spending — and especially in its Latin America and Caribbean region — has smacked sales volumes.
A bigger challenge over the long term could be rising levels of ‘teetotalism’ in the West. In the UK, for instance, some 27% of adults now consume zero alcohol. That’s up from 13% two years ago, according to ad agency Red Brick Road.
But despite this trend, I still bought Diageo shares in 2020. And then again in 2023. And I plan to hold them for the rest of my life.
Geographical reach
One reason is because of the spectacular profits it could make from fast-growing emerging regions. I’m confident a blend of rising personal income levels and population growth will supercharge sales from its African, Asian and Latin American markets over time.
To underline this point, I’ll quote from the International Wine and Spirits Record’s (IWSR) latest study, which suggests developing markets will drive the global drinks industry’s rebound in the next several years.
The body says that “India, China (including national spirits) and the US are expected to add US$30bn in incremental value (at 2023 prices) by 2028.”
According to IWSR, the next two value-adding markets will be Brazil and Mexico. These are two territories where Diageo also has considerable exposure.
Powerful labels
The other reason I plan to hold onto my Diageo shares is the timelessness of its product portfolio. Beloved brands like Captain Morgan rum, Johnnie Walker whisky, and Smirnoff vodka are more popular now than they’ve ever been.
Their immense popularity is powered by the company’s enduring marketing expertise and track record of product innovation. Speaking of which, sales of Guinness 0.0 — a non-alcoholic version of its popular beer — more than doubled in Europe last year.
This not only illustrates the huge pulling power of Diageo’s labels. It also, just as interestingly, suggests that the company has the tools to grow profits even as Western alcohol consumption dips.
Diageo shares have traded on an average price-to-earnings (P/E) ratio of 31.4 times during the past five years. Today they deal on a multiple of just 18 times. Given this huge discount, I’m tempted to increase my stake in the company.
