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

Here’s why I’m more bullish on Persimmon plc (LON: PSN) and Sports Direct International Plc (LON: SPD) than Diageo plc (LON: DGE)

| More on:

The content of this article was relevant at the time of publishing. Circumstances change continuously and caution should therefore be exercised when relying upon any content contained within this article.

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.

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.

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.

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.

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.

More on Investing Articles

Mature couple at the beach
Investing Articles

6 stocks that Fools have been buying!

Our Foolish freelancers are putting their money where their mouths are and buying these stocks in recent weeks.

Read more »

Black woman using loudspeaker to be heard
Investing Articles

I was right about the Barclays share price! Here’s what I think happens next

Jon Smith explains why he still feels the Barclays share price is undervalued and flags up why updates on its…

Read more »

Investing Articles

Where I’d start investing £8,000 in April 2024

Writer Ben McPoland highlights two areas of the stock market that he would target if he were to start investing…

Read more »

View of Tower Bridge in Autumn
Investing Articles

Ahead of the ISA deadline, here are 3 FTSE 100 stocks I’d consider

Jon Smith notes down some FTSE 100 stocks in sectors ranging from property to retail that he thinks could offer…

Read more »

Young female business analyst looking at a graph chart while working from home
Investing Articles

Why I think Rolls-Royce shares will pay a dividend in 2024

Stephen Wright thinks Rolls-Royce shares are about to pay a dividend again. But he isn’t convinced this is something investors…

Read more »

Investing Articles

1 of the best UK shares to consider buying in April

Higher gold prices and a falling share price have put this FTSE 250 stock on Stephen Wright's list of UK…

Read more »

Person holding magnifying glass over important document, reading the small print
Investing Articles

The market is wrong about this FTSE 250 stock. I’m buying it in April

Stephen Wright thinks investors should look past a 49% decline in earnings per share and consider investing in a FTSE…

Read more »

Black father and two young daughters dancing at home
Investing Articles

1 FTSE 250 stock I own, and 1 I’d love to buy

Our writer explains why she’s eyeing up this FTSE 250 growth phenomenon, and may buy more shares in this property…

Read more »