Rolls-Royce has been one of the most popular FTSE 100 shares for retail investors over the past year. Up 116% over the period, it’s clear why! However, there are other red-hot stocks in the index that some might be missing out on.
In fact, when I consider the year ahead, I think there are at least two contenders to think about that could outperform Rolls-Royce going forward.
Dominating the sector
First up is Tesco (LSE:TSCO). The stock’s up 32% over the past year and has strong momentum right now. Last month, CEO Ken Murphy pointed to “our investments in value, quality and service” as reasons for higher customer loyalty and growing market share. As of the end of last year, it had a market share of 28.7%, its highest level since 2015.
Another source of help right now is lower inflation. Here in the UK, headline inflation has fallen to a 10-month low. Grocery inflation is a subset here that’s also been moving lower. This is good news for Tesco, as it boosts profit margins and allows the company to be more flexible with pricing.
Looking ahead, profit’s being guided towards the top end of full-year forecasts. Continued outperformance of financials should support the stock to head higher still. The price-to-earnings ratio’s at 17.85. This contrasts with Rolls-Royce at 65.85. It suggests Tesco could outperform, as it’s perceived as more undervalued (or less overvalued) by investors.
However, one risk is the thin profit margins that Tesco and the rest of the sector operate on. It doesn’t take much via unexpected costs to negatively impact the business, and this remains an ongoing risk.
Time for a drink
Another company is Diageo (LSE:DGE). This is more of a controversial call, given that the stock’s down 13% in the past year. However, a 13% spike in the past month leads me to believe that the company might be primed for a longer-term recovery rally.
The stock’s been beaten up due to poor financials stemming from both inflation and the general cost-of-living crisis experienced over the past year in many developed countries. However, the future looks brighter, in part due to the likely restructuring actions under new CEO Dave Lewis. He’s a formidable leader, having previously helped Tesco to become more efficient.
If investors start to see progress on his changes at Diageo, it could act to support a larger share price move. We should also add in the mix the potential for continued outperformance from Guinness and Johnnie Walker, brands that are experiencing a resurgence in demand.
In some ways, the stock reminds me of where Rolls-Royce was back in 2020. It was beaten up, unloved and seen by some as a long-term value play. Of course, I’m not saying Diageo will replicate what Rolls-Royce has done since then. But the scope for a large move higher is easier for Diageo, given its lower valuation relative to Rolls-Royce.
One concern is the fact that young people seem to be turning away from alcohol in favour of a healthier lifestyle. If this trend continues, it could impact Diageo for the long run. Even with that, I think it’s a good stock for investors to consider.
