1 FTSE 100 stock I’d buy today and 1 I’d avoid

I’d buy this FTSE 100 stock based on its growth potential and rising profits, but I’d also avoid its blue-chip peer, which is struggling.

| 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.

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.

FTSE 100 business Informa (LSE: INF) has suffered virtually more than any other blue-chip business in the pandemic. However, despite its problems, the market is currently placing a high value on the shares. But I don’t think the business is worth this premium valuation. 

A FTSE 100 stock to avoid 

Informa is one of the world’s largest events businesses. It also provides business intelligence services. 2019 was a bumper year for the group. Sales hit an all-time high of nearly £3bn and net income rose to £225m. 

Unfortunately, the music stopped in 2020. The global pandemic forced event organisers to cancel their plans virtually overnight. As a result, sales at the FTSE 100 business fell off a cliff. City analysts reckon the company will report a 50% decline in revenues for its 2020 financial year. 

Based on these projections, shares in the group are currently changing hands at a forward price-to-earnings (P/E) multiple of more than 50. I think that’s far too high. Investors seem to be very optimistic that Informa will be allowed to restart its events next year and earnings will quickly recover. In my opinion, this valuation leaves no room for error if the business isn’t able to meet these expectations. 

As such, I think the risk/reward ratio of owning the stock at current levels isn’t appealing. That’s why I’d avoid this FTSE 100 stock right now. 

Booming sales 

At the other end of the spectrum, I think the outlook for paper and packaging producer Smurfit Kappa (LSE: SKG) is highly encouraging. 

The e-commerce market is booming. Online retail sales as a percentage of overall sales have jumped to around 36%, from 20% before the pandemic. All of these items need to be packaged. Smurfit is one of the largest providers of this packaging in the world. 

Over the past decade, the FTSE 100 group has bulked up with a series of acquisitions. These deals have helped the company achieve economies of scale, pushing down costs and increasing profit margins. 

The group also has a competitive advantage because it owns its own forestry and recycling operations. This helped the firm navigate the pandemic’s impact on its supply chain. 

City analysts are forecasting €563m of net income for the group for 2020. That’s compared to €476m for 2019. I think that shows how the booming e-commerce market has been a boon for the business over the past 12 months. Earnings are projected to increase further to €640m for 2021. 

These growth estimates are exciting, and I think they pale compared to Informa’s mixed and uncertain future. Based on its growth potential, I believe Smurfit deserves a higher valuation than Informa. That’s not the case. Shares in the packing company are trading at a forward 2021 P/E of 16.4. That seems far too cheap to me. What’s more, the FTSE 100 business offers a dividend yield of 3.1%, at the time of writing. 

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.

Rupert Hargreaves has no position in any of the shares mentioned. The Motley Fool UK has no position in any of the shares mentioned. 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

Investing Articles

3 of my top FTSE 250 stocks to consider buying before April

Buying undervalued UK shares can be a great way to generate long-term wealth. Here, Royston Wild reveals a handful on…

Read more »

Ice cube tray filled with ice cubes and three loose ice cubes against dark wood.
Investing Articles

Just released: our 3 top income-focused stocks to buy before April [PREMIUM PICKS]

Our goal here is to highlight some of our past recommendations that we think are of particular interest today, due…

Read more »

Investing Articles

Is this the best chance to buy cheap FTSE 100 shares in a generation?

I want to buy shares when they're cheap, and sell... never, just keep taking the dividends. And the FTSE 100…

Read more »

Man putting his card into an ATM machine while his son sits in a stroller beside him.
Investing Articles

Could NatWest shares be 2024’s number one buy for passive income?

For those of us looking to earn some long-term passive income, how does NatWest's 7% dividend yield sound? It sounds…

Read more »

Investing Articles

£12K in savings? Here’s how I could turn that into £13K annual passive income

This Fool explains how investing a lump sum can help her build a passive income stream to enjoy in her…

Read more »

Aerial shot showing an aircraft shadow flying over an idyllic beach
Investing Articles

Here’s why Rolls-Royce shares are now set to fly over the £4 mark

Once again, Rolls-Royce shares are crushing the FTSE 100. Should I add to my holding of this stock at the…

Read more »

Investing Articles

1 under the radar FTSE 100 AI stock investors should consider buying

Our writer explains why this FTSE 100 pick could be a shrewd investment with its established experience of using AI…

Read more »

Investing Articles

Does the beaten-down Diageo share price make it a no-brainer buy?

Harvey Jones spent years waiting for the Diageo share price to look like good value, before finally buying it in…

Read more »