I like to look at the UK stock market and look for companies that were once popular but have temporarily fallen out of favor with investors. That way, you can get it cheaply and wait patiently until it recovers. Assuming they are.
next two FTSE100 The stock received much praise from investors (including myself) after years of rapid growth. I bought them when they broke. So what happens next?
The first stock is a major consumer goods company. unilever (LSE: ULVR), which I added to my self-invested personal pension (SIPP) in June last year. This reliable dividend growth stock was suddenly under pressure on all fronts.
Share slippage
The cost of living crisis has hit sales, activist investors have called for structural reforms, and even the board’s social responsibility stance has been controversial. To summarize, I bought it because it was a mess. Stock prices were much lower than during the company’s glorious growth years, and dividends were higher.
I didn’t expect it to come back any time soon, and I didn’t get it either. Instead, the stock price fell 10% within days. They then remained there until a few weeks ago when they started showing signs of life. I immediately bought another tranche.
Unilever’s share price is up 11.65% from last month, boosted by strong first-quarter results in April. Still down 2.3% in 12 months, we think there’s still an opportunity here.
Its current price-to-earnings ratio (P/E) of 19.6x is much higher than the FTSE 100 average of 12.4x, but is cheap for Unilever, which traded at around 25x during the boom. If interest rates are lowered and consumers feel better, sales should increase.
Unilever still has to rebuild and shoppers are still suffering, but there’s no need to rush. Now that I bought the stock at a decent price, I want to hold onto it for a long time.
spirit giant diageo (LSE: DGE) is another blockbuster FTSE 100 stock that has fallen from grace. The company’s collapse was triggered by a shocking profit warning in November as sales in Latin America plummeted as drinkers switched to cheaper brands. I bought it when I calmed down.
Another FTSE 100 flop
I learned the hard way that buying a company after it’s profitable is risky. They often come in twos or threes. Diageo is not out of the woods yet, that’s for sure. As if to remind you, Siti recently said something like this happened: “There is no convincing case.” Own the stock now.
Still, there is a glimmer of hope. The stock price rose 3.98% from last month. I’m glad I didn’t buy it a year ago. Diageo has since fallen 21.99%. The board needs to work hard to turn around performance in Latin America. The company must hope its premium brand strategy pays off, rather than driving out cash-strapped drinkers.
But I believe Diageo will recover once the cost of living crisis eases. It trades at a trailing P/E of 17.35x, which is cheap by previous standards. However, the yield after that is only 2.82%.
I think the stock market will rediscover its charm, but that will have to wait. That’s fine with me. I invest over years, not months. I think both Unilever and Diageo would make me richer if I had time.
The post I’m betting these two former stock market darlings will soon make investors rich again appeared first on Motley Fool UK.
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Harvey Jones holds positions at Diageo Plc and Unilever Plc. The Motley Fool recommends Diageo Plc and Unilever Plc. The views expressed on the companies mentioned in this article are those of the writer and may differ from official recommendations we make on subscription services such as Share Advisor, Hidden Winners, or Pro. At The Motley Fool, we believe that considering diverse insights makes us better investors.
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