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Why I’d buy these 2 overlooked FTSE 100 stocks today

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It’s all too easy to stick to the same big familiar names when hunting down FTSE 100 stocks for your portfolio. You know the usual suspects, BP, Lloyds Banking Group, GlaxoSmithKline… all good companies, of course, but it’s worth looking a little further as well.

Here are a couple that I have to confess I haven’t paid much attention to myself. So have I missed out on a brace of hidden gems?

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International sales, marketing and support services group DCC (LSE: DCC) has seen its stock more than double in the past five years, turning it into a £7bn business. However, the share price trajectory has flattened out lately, with the share price now trading at roughly similar levels to three years ago.

The group has been a strong and steady grower, with earnings per share rising by double digits for each of the last five years although, again, there are signs of a slowdown. EPS growth is expected to slow to 4% both this year and next.

This looks like a growth stock rather than play, as the yield is just 2.1%, although nicely covered 2.5 times by earnings. The group’s four divisions – LPG, Retail & Oil, Technology and Healthcare – look set to continue growing quite nicely, according to management, which said in July’s Q1 statement that profits are significantly weighted towards the second half of its financial year, which is expected to be “another year of profit growth and development.” Markets will know more when it reports its interims on Monday (30 September).

This acquisition-hungry business now operates across 18 countries, which gives it continued growth opportunities, and Rupert Hargreaves reckons it could double your money over the next three-to-five years. DCC has an excellent track record for delivering shareholder returns, although that’s reflected in its valuation, which is currently 18.8 times forward earnings. Sometimes you have to pay for quality.

Melrose Industries

This company’s motto is “Buy, Improve, Sell”, a nice, pithy description. Melrose Industries (LSE: MRO) aims to buy good manufacturing businesses with strong fundamentals, whose performance it reckons can be improved.

That’s worked out astonishingly well for investors. They’ve seen the share price graph 350% over five years, driving its market-cap to almost £10bn, making it one of the fastest growing stocks on the entire FTSE 100.

Earlier this month, Melrose’s interims showed a 75% increase in adjusted pre-tax profit to £428m, from £244m in the first half of last year, while revenue doubled to £6bn. It still hosted a pre-tax loss, although this narrowed from £372m to £128m on a statutory basis. If that looks odd, it’s due to the nature of the business, as acquisitions and sales can lead to massive lurches in both profits and losses. Happily, the overall trajectory has been positive.

As Alan Oscroft has pointed out, you need to be patient and have long-term horizons and like your profits lumpy. Melrose also aims to reduce risk by financing its acquisitions with a low level of leverage.

The stock trades at 15.2 times forecast earnings, with a forecast yield of 2.7%. Again, this is a growth rather than an income play. Melrose looks a strong buy and hold to me.

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Harvey Jones has no position in any of the shares mentioned. The Motley Fool UK owns shares of and has recommended GlaxoSmithKline. The Motley Fool UK owns shares of Melrose. The Motley Fool UK has recommended Lloyds Banking Group. 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.

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