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Why I’d Buy Persimmon plc And Sports Direct International Plc Before Diageo plc

For investors in Diageo (LSE: DGE) (NYSE: DEO.US), the last year has been rather disappointing. That’s because the alcoholic beverages company has seen its share price fall by 8%, with its bottom line slumping by 7% in the last financial year. Looking ahead, there is likely to be more pain to come, with Diageo expected to report a further 6% drop this year in its bottom line, as weakness in emerging markets takes its toll on demand for its wide range of premium brands.

Improved Prospects

Of course, a key market for Diageo is China and, with the authorities in the midst of an attempt to stimulate the economy through interest rate cuts, it is likely that demand for Diageo’s products will pick up. Certainly, that’s what the market is anticipating, with the company’s earnings forecast to grow by as much as 8%. Still, this is only in-line with the rest of the market and, while it may help to stabilise Diageo’s share price fall of the last year, it may not prove to be enough of a catalyst to boost investor sentiment so as to push the company’s share price considerably higher.

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Growth Potential

That’s a key reason why I’m more bullish on the outlook for Persimmon (LSE: PSN) and Sports Direct (LSE: SPD). Clearly, both companies are less diversified than Diageo in terms of their geographic spread and also their range of products/services. This, then, inevitably means that they offer less robust financial performance and reduced consistency over the long run.

However, looking ahead to the next couple of years, both Persimmon and Sports Direct are expected to deliver excellent growth numbers. For example, Persimmon’s bottom line is due to rise by 18% in the current year, followed by further growth of 13% next year. That’s considerably higher than Diageo’s growth rate and, despite this, Persimmon trades on a rating that is a fraction of that currently awarded to the beverages play. In fact, Persimmon has a price to earnings (P/E) ratio of just 13, while Diageo has a P/E ratio of 19.5, which indicates that Persimmon offers better growth prospects at a lower price.

Similarly, Sports Direct may not be the most popular company in the City (especially after it only recently announced a permanent CFO), but its growth rate should please investors since its bottom line is due to rise by 16% this year, followed by 12% next year. And, despite trading on a P/E ratio of 15.8, Sports Direct’s price to earnings growth (PEG) ratio of 1 holds considerable appeal.

Looking Ahead

Of course, Diageo remains a very appealing stock that is a relatively sound defensive play. Furthermore, when compared to other global consumer stocks it seems to offer appealing value for money. However, its lack of above average growth prospects means that it is difficult to see a clear catalyst to push its share price higher and, as such, the likes of Persimmon and Sports Direct could be better performers and offer greater capital gains.

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Peter Stephens owns shares of Persimmon. The Motley Fool UK has recommended Sports Direct International. We Fools don't all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors.