When it comes to seeking out the best quality stocks in the FTSE 350, many investors would include Unilever (LSE: ULVR) in their top picks. That’s because the company offers a potent mix of long term growth potential as well as defensive qualities owing to its high degree of diversity.
Evidence of Unilever’s defensive nature can be seen in its share price performance since the turn of the year. Its shares are up by 7% at the same time as a number of its consumer goods peers have posted severe declines in their valuations. That’s despite Unilever deriving the majority of its revenue from the emerging world and, even though the growth outlook for China is less appealing than it was in January, investor sentiment in the company is still strong as a result of its wide geographical spread.
Of course, Unilever also offers excellent growth potential, too. With millions of Chinese expected to see their incomes surge in the coming years, Unilever’s premium priced foods, personal care and luxury items are well-positioned to take advantage of increasing demand from the growing middle class of the emerging world. This, plus potential improvements in the economies of the developing world, means that the company’s long term growth outlook is very upbeat. With Unilever trading on a price to earnings growth (PEG) ratio of 1.5, it appears to offer good value for money at the present time.
Similarly, Investec (LSE: INVP) is also keenly priced, with it having a price to earnings (P/E) ratio of 12.7 despite the bank being forecast to increase its net profit by 7% this year and by a further 13% next year. In addition, Investec also has excellent dividend prospects, with it currently yielding 4.2% despite paying out just 54% of profit as a dividend.
Furthermore, Investec released a positive update today which shows that the company is moving in the right direction despite the weakness of the South African Rand and continued market volatility. With Investec seeking to digitise and internationalise its wealth and investment operation, as well as posting strong net inflows to its asset management division, it appears to be well-placed to continue the run which has seen its bottom line rise in each of the last three years.
Meanwhile, consumer goods company PZ Cussons (LSE: PZC) also has significant long term growth potential. Like Investec, it has considerable focus on one market: Nigeria (Investec is South Africa focused) and, in the long run, Africa’s largest economy provides an excellent platform for growth, with the wealth of its population likely to increase substantially in future years.
The problem, though, is that PZ Cussons’ short term earnings growth rate appears to be rather low given its current valuation. For example, it is forecast to increase its bottom line by just 3% this year and by a further 8% next year. This, when combined with a P/E ratio of 17.4, equates to a PEG ratio of 2, which indicates that its share price may come under pressure in the short run. So, while it may have a bright long term future, investors may be better off waiting for a lower share price before considering its purchase.
Peter Stephens owns shares of Unilever. The Motley Fool UK owns shares of and has recommended Unilever. The Motley Fool UK owns shares of PZ Cussons. We Fools don't all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors.