1 FTSE 100 stock and 1 mid-cap I’d buy right now

This FTSE 100 (INDEXFTSE:UKX) stock and this mid-cap have the potential to deliver strong returns for investors buying today, argues G A Chester.

| 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.

Gold and silver miner Fresnillo (LSE: FRES) has been a frustrating stock for investors in recent years. Indeed, with its share price having more than halved from three summers ago, it ranks second only to British Gas owner Centrica as the FTSE 100‘s worst performer over the period.

Meanwhile, FTSE 250 utility Drax (LSE: DRX), which released its half-year results today, hasn’t done a great deal better. Its share price is down around 20% over the three years.

However, I think both Fresnillo and Drax have the potential to deliver strong returns for investors buying at today’s depressed share prices.

Power play

When Drax posted its 2018 results in February, and commented on the outlook for 2019, it said: “We are confident in our ability to continue growing our earnings and advancing our strategy through the year.”

Today, the company reported strong growth in the first six months, with adjusted earnings before interest, tax, depreciation and amortisation up 35% to £138m. Of this, £36m came from pumped storage, hydro and gas-fired generation assets acquired from Scottish Power for £700m at the start of the year. Management said: “Integration is progressing well and we have been pleased with the performance of these assets.”

The shares are up around 3% on the day at 295p, as I’m writing. City analysts’ earnings forecasts for the full year put the stock on a price-to-earnings (P/E) ratio of 11.3. Meanwhile, having hiked the interim dividend 12.5% today, the board said investors can look forward to the same uplift in the full-year payout. This gives the stock a yield of 5.4%.

Already one of the leading generators of flexible, low carbon and renewable electricity in the UK, Drax says it has attractive investment options for growth on the back of the UK’s target of achieving net zero carbon emissions by 2050. I think the modest P/E and generous dividend yield have huge appeal. This is a stock I’d be happy to buy and hold for the long term.

Silver lining long term

Gold and silver prices have a big impact on the revenues and profits of companies that mine the metals. However, operational performance is also key for miners. And on this front, Fresnillo disappointed in 2018. Lower ore grades than expected and operational issues saw the company reduce its silver production guidance through the year.

I was hopeful Fresnillo would put its problems behind it in 2019. However, a Q1 update in April revealed production “slightly weaker than anticipated,” and this was followed by a Q2 update last week in which the company reduced its previous full-year guidance.

Silver production is now expected to be 55-58m ounces (previously 58-61m), mainly due to “lower-than-expected ore grades and ore throughput at the Fresnillo mine.” Gold production guidance has been decreased to 880-910k ounces from 910-930k, mainly due to “a delay in the construction of a leaching pad at Herradura and the lower ore throughput at the dynamic leaching plant.”

I can understand investors’ frustrations, but I think this is the wrong time to give up on Fresnillo. Indeed, I reckon the depressed share price represents an opportunity to buy into the world’s biggest silver producer for the long term. City analysts expect earnings and dividends to fall over 30% this year, but bounce back over 40% in 2020, giving a P/E of 21.9 and a 2.4% yield at a current share price of 773p.

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.

G A Chester has no position in any of the shares mentioned. The Motley Fool UK has recommended Fresnillo. Views expressed on the companies mentioned in this article are those of the writer and therefore may differ from the official recommendations we make in our subscription services such as Share Advisor, Hidden Winners and Pro. Here at The Motley Fool we believe that considering a diverse range of insights makes us better investors.

More on Investing Articles

Passive income text with pin graph chart on business table
Investing Articles

Yields of up to 7%! I’d consider boosting my income with these FTSE dividend stocks

The London market has some decent-looking dividend stocks right now, and I’m tempted by these two for growing income streams.

Read more »

Young mixed-race couple sat on the beach looking out over the sea
Investing Articles

I’d put £20K in an ISA now to target a £1,900 monthly second income in future!

Christopher Ruane shares why he thinks a long-term approach to investing and careful selection of shares could help him build…

Read more »

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 »