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Would You Be Better Off Investing In BAE Systems plc, Burberry Group Plc & Ted Baker plc Than In The FTSE 100?

Burberry (LSE: BRBY) and Ted Baker (LSE: TED) are up 16% and 24% year to date, respectively — and their six-month performances read +24% and +48%. BAE Systems (LSE: BA) has also risen 15% this year, and its six-month performance reads +17%.

The FTSE 100 is flat over the last six months, and has risen only 4% so far this year.

£5,000 Portfolio

If you were to invest, say, £5,000 right now, would it make any sense to bet on these three companies or should you instead invest in the FTSE 100? 

I am not sure whether I would prefer to invest all my savings in a small portfolio comprising only Ted, Burberry and BAE Systems rather than in a fund tracking the FTSE 100, but what I know is that those three companies are likely to do better than the index for a long time, although their stocks may not be perceived as being a bargain right now based on their relative valuations.

Moreover, I don’t want to bet on a sustained recovery for banks and resources, so the FTSE 100 is not really a valid alternative in my opinion. 

Ted Baker Is On A Roll 

I am a big fan of the brand, and I think there’s a lot to like in the way the business is run. Its fundamentals are strong, the balance sheet carries no debt and operating profitability has been holding up well in recent years, and is expected to expand into 2016. 

Ted Baker is looking to diversify its offering, and “has made a move into interior design with ‘Ted styled’ apartments,” Reuters reported last week. This could heighten its risk profile and, similarly, Ted’s ambitious plans for international expansion may concern some investors. In truth, returns are excellent and sharehoders have made a killing in recent times. Although the shares are not cheap, Ted remains one of my top picks in the market. 

Keep An Eye On Burberry 

Its shares had long been perceived as a terrific bet on growth in emerging markets, luxury stuff and rising disposable income there, so Burberry has become a less obvious pick since the second half of 2011, after a +700% rally in less than three years. Still, since the growth premium in emerging market has fallen, shareholders have continued to enjoy very healthy returns and rising income.

Currency risk can bring short-term volatility in the stock — a strong pound is bad news for this fashion retailer — and must not be underestimated, but the underlying business is solid, and boats a higher operating margin and a slightly higher dividend yield than Ted Baker.

Furthermore, Burberry’s stock trades at 20% discount versus Ted Baker’s, based on most trading metrics. 

BAE Looks Good

Defence spending is tight, but BAE has proved to be a less cyclical business that many investors thought it would be in recent quarters, and that also goes down to favourable currency trends. The stock is up 13% year to date, and I believe upside could be in the region of 10% to 15% to the end of the year.

One caveat is that the shares trade at their multi-year highs and, while that may scare you, it looks like fundamentals and trading multiples still point to an attractive value play. Its balance is strong, and recent strength in the stock combines with an attractive dividend, which is covered by net earnings and could be financed by alternative sources, if needed. 

I think you'd do well to add 2% of BAE stock to your diversified portfolio at these prices, but if you are looking for value elsewhere and you are after a steeper growth rate for income, then you must learn more about a medical business whose shares have risen more than 80% in the last two years alone and have recorded a 60% annual performance since 2010! It's recently announced an increase in the payout, too!

This income and growth stock can be found in this FREE report, and is much cheaper than Burberry and Ted Baker, based on its relative valuation. Our latest free report investigates the prospects of many other stocks that have appreciated fast over time, but based on their fundamentals they still look like a bargain in this market. To find out more, download our report now, which is completely free for a limited amount of time!

Alessandro Pasetti has no position in any shares mentioned. The Motley Fool UK has recommended Burberry. We Fools don't all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors.