Two FTSE 100 start stocks I’d buy with £2,000 today

New investors seeking outsized potential returns should consider these FTSE 100 (INDEXFTSE: UKX) growth stars.

| 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.

It’s natural for new investors looking to dip their toes into the market for the first time to go with large-cap stocks that are mostly household names, offer greater perceived stability than smaller companies and are generally mature businesses with big dividend payouts. But the index also offers a surprising number of stocks with stellar growth potential, two of which in particular have caught my eye. 

Its biggest test yet 

The first is industrial holding company Melrose (LSE: MRO). The company has been in the news of late because of its successful acquisition of automotive and aerospace giant GKN in a cash and stock deal worth some £8.1bn.

The deal, which is by far Melrose’s largest, isn’t without risks, but given the company’s long history of successfully buying, improving and selling on industrial firms for substantial returns, I’m willing to give management the benefit of the doubt. On top of this, GKN is a great target for a cost-cutter such as Melrose.

GKN has leading positions in several key markets but has for years struggled to achieve simple internal targets such as operating margins in excess of 10%. This is where Melrose shines, which is clear in its latest annual results that saw it achieve a 52% rise in operating profits at its recently acquired Nortek business, with operating margins rising significantly to 15.2%.  

Given the sensitive nature of GKN’s relationships with aerospace customers, management will need to tread carefully in its usual cost-cutting exercises. However, Melrose is far from an 1980s-style asset stripper and invests substantial amounts in parts of its acquired businesses that have the potential for long-term returns.

This bodes well for the company’s ability to deliver long-term returns from the GKN aerospace business while selling off the automotive and metallurgy businesses that it sees less of a future for. With substantial scope to increase returns at that leading aerospace business, I reckon Melrose’s long, long history of delivering market-walloping returns for shareholders can continue for a long time coming.

Even more financial progress on tap?

Another great business that I think could deliver outsized returns in the coming years is luxury fashion house Burberry (LSE: BRBY). The company has been very successful in recent years in turning around its image and cementing its brand as truly upmarket, which has driven strong sales growth in luxury-loving China and helped boost margins.

With a new management team in place that appears more responsive to investors’ desire for improved financial performance, I reckon this strong competitive position could be turned into even more impressive sales and margin improvements in the years ahead. This would continue recent trends as operating margins have risen considerably in recent years and were up from 12.5% to 14.6% year-on-year in the half to September.

And as the Chinese anti-corruption drive appears to be winding down, there’s good reason to expect previously-wary wealthy Chinese to return to Burberry in droves. This is already starting to play out as in the quarter to December the group recorded a 2% uptick in same-store sales, driven by mid-single-digit growth in the Asia Pacific region.

With a cash-heavy balance sheet, a strong new CEO and creative chief refocusing on the brand’s strengths, and great competitive position, I reckon Burberry could be a fantastic long-term holding for new and experienced investors alike.

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.

Ian Pierce has no position in any of the shares mentioned. The Motley Fool UK owns shares of Melrose. The Motley Fool UK has recommended Burberry. 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

Person holding magnifying glass over important document, reading the small print
Investing Articles

Just released: our top 3 small-cap stocks to consider buying in October [PREMIUM PICKS]

Small-cap shares tend to be more volatile than larger companies, so we suggest investors should look to build up a…

Read more »

Investing Articles

How I’d use an empty Stocks and Shares ISA to aim for a £1,000 monthly passive income

Here's how using a Stocks and Shares ISA really could help those of us who plan to invest for an…

Read more »

Investing Articles

This FTSE stock is up 20% and set for its best day ever! Time to buy?

This Fool takes a look at the half-year results from Burberry (LON:BRBY) to see if the struggling FTSE stock might…

Read more »

Investing Articles

This latest FTSE 100 dip could be an unmissable opportunity to pick up cut-price stocks

The FTSE 100 has pulled back with the government’s policy choices creating some negative sentiment. But this gives us a…

Read more »

A young woman sitting on a couch looking at a book in a quiet library space.
Investing Articles

As the WH Smith share price falls 4% on annual results, is it still worth considering?

WH Smith took a hit after this morning’s results left shareholders unimpressed. With the share price down 4%, Mark Hartley…

Read more »

Investing Articles

The Aviva share price just jumped 4.5% but still yields 7.02%! Time to buy?

A positive set of results has put fresh life into the Aviva share price. Harvey Jones says it offers bags…

Read more »

Investing Articles

Can a €500m buyback kickstart the Vodafone share price?

The Vodafone share price has been a loser for investors in recent years, and the dividend has been cut. We…

Read more »

Frustrated young white male looking disconsolate while sat on his sofa holding a beer
Growth Shares

3 mistakes I now avoid when choosing which growth stocks to buy

Jon Smith runs through some of the lessons he's learnt the hard way over the years about what to look…

Read more »