When stock markets are crashing and many investors are panicking, it’s wise to keep a cool head. Few are wiser than octogenarian billionaire Warren Buffett. Back in 2001 he said:
To refer to a personal taste of mine, I’m going to buy hamburgers the rest of my life. When hamburgers go down in price, we sing the ‘Hallelujah Chorus’ in the Buffett household. When hamburgers go up in price, we weep. For most people, it’s the same with everything in life they will be buying – except stocks. When stocks go down and you can get more for your money, people don’t like them anymore.
Of course, when stocks – and hamburgers, if you’re partial to them – go down, it’s exactly the time to snap them up. With this in mind, I think FTSE 100 stocks Diageo (LSE: DGE) and Unilever (LSE: ULVR) are terrific buys right now.
Double-digit discounts
Diageo and Unilever are the kind of quality businesses beloved by Buffett. Indeed, his Berkshire Hathaway investment group owned one of the predecessor companies of Diageo back in the 1990s. More recently, he had a tilt at Unilever, via Berkshire- and 3G Capital-backed Kraft Heinz.
Right now, investors can pick up Diageo and Unilever shares at what I reckon are very nice discounts. Diageo’s shares ended yesterday at 2,934p. This is a discount of 10% to their all-time high of 3,265p which were posted last year. Similarly, Unilever’s shares closed at 4,387p, which is a near-18% discount to their high of 5,324p, also posted last year.
Near-term outlook
Now, it’s certainly true Diageo and Unilever face near-term headwinds, as a result of the coronavirus. Unilever – which said in its results on 30 January “the impact of the coronavirus outbreak is unknown at this time” – has yet to provide an update. However, Diageo released a statement yesterday addressing the expected affect on its business.
As things stand, the drinks giant anticipates a hit of less than 5% to sales and operating profit for its financial year ending 30 June. However, this is based only on the impact from Greater China, other Asian countries affected by the outbreak, and travel retail. It also assumes consumption in these areas largely returns to normal by 30 June. Clearly, if the outbreak becomes a pandemic, the impact would be greater than Diageo’s currently modelling.
Long-term prospects
Whether the near-term impact on Diageo’s business is mild or severe, I’m confident about the longer term. I’m sure more and more people will be enjoying the company’s well-loved brands – such as Johnnie Walker whisky, Smirnoff vodka and Guinness stout – for generations to come. The same goes for Unilever’s trusted food, personal and home care brands like Hellmann’s, Pond’s, and Domestos.
Diageo trades at a 12-month forward price-to-earnings (P/E) ratio of 20.9, with a prospective dividend yield of 2.6%. For Unilever the numbers are 18.9 and 3.4%. These valuations are cheap by their respective historical standards. While we may see some downgrades to analysts’ near-term earnings forecasts, I believe the long-term growth prospects of the businesses make their current discount share prices highly attractive.
