Should I rush to buy these FTSE 100 giants at 52-week lows?

Dr James Fox presents arguments for and against buying shares in these FTSE 100 giants after their valuations crumbled to new lows.

| More on:

Image source: Getty Images

When investing, your capital is at risk. The value of your investments can go down as well as up and you may get back less than you put in.

Read More

The content of this article is provided for information purposes only and is not intended to be, nor does it constitute, any form of personal advice. Investments in a currency other than sterling are exposed to currency exchange risk. Currency exchange rates are constantly changing, which may affect the value of the investment in sterling terms. You could lose money in sterling even if the stock price rises in the currency of origin. Stocks listed on overseas exchanges may be subject to additional dealing and exchange rate charges, and may have other tax implications, and may not provide the same, or any, regulatory protection as in the UK.

You’re reading a free article with opinions that may differ from The Motley Fool’s Premium Investing Services. Become a Motley Fool member today to get instant access to our top analyst recommendations, in-depth research, investing resources, and more. Learn More.

Most of us will be aware that the FTSE 100‘s up and trading near all time highs — albeit not adjusted for inflation — but these two beast of the index are sinking. Diageo (LSE:DGE) and Rio Tinto (LSE:RIO) are stalwarts of the blue-chip index, but both stocks are trading just above their 52-week lows.

A discounted share price creates buying opportunities, potentially propelling a portfolio to new heights. However, some stocks are cheaper for a reason. So are we looking at bargains or value traps?

Diageo

Diageo’s a global leader in premium alcoholic beverages, with a portfolio stacked full of iconic brands including Johnnie Walker, Smirnoff, and Guinness. Founded in 1997, Diageo’s grown to become one of the world’s largest spirits and beer companies, with operations in over 180 countries.

However, despite its strong market position, the company reported a 0.6% decline in organic net sales for fiscal 2024, primarily reflecting weakness in Latin America and the Caribbean.

This has been compounded by inflationary pressures in recent years. In fact, running a soft drinks brand — Sumacqua — myself, I’ve seen this inflation first hand — extract costs surged 40% between recent batches.

Back to Diageo, there’s reason for optimism. The London-based company continues to benefit from premiumisation trends in the beverage sector, with its premium-plus brands growing 4% in the latest fiscal year.

Coupled with strong presence in emerging markets, particularly India and China, Diageo’s long-term growth potential remains intact.

As for valuation, with a forward price-to-earnings (P/E) ratio of 19.6 times and a price-to-earnings-to-growth (PEG) ratio of 7.4, it doesn’t scream value. However, this P/E ratio is lower than its been in recent years and the dividend yield has grown to 3.2%.

Finally, the average share price target is £27.66, representing a modest premium to the current price.

Source: TradingView — P/E ratio

Rio Tinto

Rio Tinto’s one of the world’s largest mining companies, with a portfolio of assets focus on iron ore, aluminium, copper, and other minerals.

Rio Tinto’s falling share price primarily reflects falling iron ore prices and demand uncertainty, especially from China. However, the company’s diversification into aluminium and copper offers growth potential, given the expected shift towards renewable energy.

While Chinese iron ore demand may have peaked, Rio Tinto’s well-positioned for future demand shifts noting its high-grade ore assets, especially its upcoming Simandou mine.

It’s not dirt cheap compared to its peers, trading at 8.2 times forward earnings. However, it’s a cyclical stock and the earnings forecast can change dramatically, and quickly.

And the average share price target’s £62.25, representing a 31% premium to the current share price. Coupled with a 7.3% dividend yield, it could be an interesting investment opportunity.

Source: TradingView — P/E ratio

The bottom line

So where do I stand on these two stocks? I think Diageo’s still a bit pricey but I’d expect it to bounce back eventually on long-term growth prospects.

And Rio? Well, it may be like trying to catch a falling knife. The stock clearly could recover, as it has previously. But there’s always a risk that this downward cycle will be worse than the last.

Personally, I’m not rushing into either of these stocks, but I’ll certainly keep a close eye on both.

Should you invest, the value of your investment may rise or fall and your capital is at risk. Before investing, your individual circumstances should be assessed. Consider taking independent financial advice.

James Fox has no position in any of the shares mentioned. The Motley Fool UK has recommended Diageo Plc. Views expressed on the companies mentioned in this article are those of the writer and therefore may differ from the official recommendations we make in our subscription services such as Share Advisor, Hidden Winners and Pro. Here at The Motley Fool we believe that considering a diverse range of insights makes us better investors.

More on Investing Articles

Investing Articles

3 FTSE 100 shares with ex-dividend dates next week!

Fancy grabbing some juicy dividends in the coming weeks? These FTSE 100 shares all go ex-dividend during the next seven…

Read more »

Young Woman Drives Car With Dog in Back Seat
Investing Articles

Can the Tesla share price beat September’s 22% climb in October?

All the techie attention seems to have drifted away from the Tesla share price at the moment. But October could…

Read more »

Investing Articles

Up 27% yesterday, but I think my favourite growth stock under $10 still has room to run

Our writer looks at why up-and-coming growth stock Joby Aviation (NYSE:JOBY) just exploded 27% higher on the New York Stock…

Read more »

Investing Articles

1 stock I’d love to buy from the FTSE 100 in October

I think this FTSE 100 business has great potential to perform well long term and the valuation looks attractive to…

Read more »

Investing Articles

If I’d put £1,000 in Lloyds shares 5 years ago, here’s what I’d have now

Lloyds shares are among the most closely watched on the FTSE 100. The stock might not have delivered for investors…

Read more »

Investing Articles

Top UK shares I’d consider buying for growing dividends

Some UK shares have been super-reliable when it comes to throwing cash back at investors. Paul Summers picks out some…

Read more »

Investing Articles

After a bumper first half gives the Tesco share price a boost, should I buy?

The Tesco share price is having a great year, and these first-half figures show us why. Here's how the stock…

Read more »

One English pound placed on a graph to represent an economic down turn
Investing Articles

Fear sends FTSE 100 stocks flashing red. But why are these two stocks winning?

The FTSE 100 continues to deliver a strong performance despite several stocks dipping earlier this week. Our writer looks at…

Read more »