In recent weeks, ‘reopening’ stocks have been in focus. With vaccines being rolled out rapidly, investors are looking for stocks that could benefit as the world returns to normal.
My view on such stocks is a little bit of caution’s warranted. Plenty of these stocks, particularly those in the travel sector, have already had incredible runs leading me to believe that good news is priced in. Others, such as some airlines, have very weak balance sheets. This means they may need to raise more capital.
Here, I’m going to highlight two reopening stocks I’d buy for my own portfolio today. These stocks should benefit as Covid-19 restrictions are lifted. However, they’re also poised to benefit from long-term trends as well, meaning they offer long-term investment appeal too.
A top UK reopening stock
One FTSE 100 stock that strikes me as a good reopening play is Diageo (LSE: DGE). It owns Tanqueray, Johnnie Walker, Smirnoff, Guinness and a whole lot of other well-known alcoholic beverage brands. If restaurants, pubs, and bars reopen soon, and travel picks up, Diageo’s bottom line should get a massive boost.
Diageo isn’t the cheapest stock around. Currently, its forward-looking P/E ratio using the earnings forecast for the year ending 30 June 2022 is about 22. This means there’s some valuation risk. If there are Covid-19 setbacks this year and we face more lockdowns, the stock could underperform.
However, I’m not particularly worried about these short-term risks as DGE has long-term growth potential. By 2030, the company expects hundreds of millions of extra consumers in developing countries to be able to afford its products.
With Diageo’s share price still around 20% below its all-time high set in 2019, I think it’s a good time to be building a position in this legendary FTSE 100 stock.
A top payments stock
Another top reopening stock, in my view, is credit card giant Mastercard (NYSE: MA). A leader in the payment space, it connects billions of consumers, millions of merchants, and thousands of financial institutions worldwide.
The reason I think Mastercard will benefit from the reopening of the global economy is that it generates a large proportion of its revenues from travel spending. If we all start travelling again in the near future, its top line should get a significant boost. And there’s certainly a lot of pent-up demand to travel.
However, Mastercard’s quite an expensive stock. Currently, it sports a forward-looking P/E ratio of 43. This high valuation adds risk. Another risk to consider is that the payments industry is evolving rapidly. FinTech companies such as PayPal and Square could steal market share.
However, in my opinion, the long-term risk/reward proposition remains attractive. In the next 10 years, nearly 3trn transactions globally are expected to move from cash to credit cards and e-payments. So there looks to be a substantial growth runway ahead for Mastercard.
Edward Sheldon owns shares in PayPal, Mastercard, and Diageo. The Motley Fool UK owns shares of and has recommended Mastercard, PayPal Holdings, and Square. The Motley Fool UK has recommended Diageo and recommends the following options: long January 2022 $75 calls on PayPal Holdings. 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.