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

This FTSE 100 business has been struggling for the past five years, explains this Fool who’d rather buy a peer in the index.

| 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.

Whenever I consider adding investments to my portfolio, one of the first things I do is look at each company’s track record of creating wealth for shareholders.

While a business’s past performance never guarantees future success, I believe it provides some indication of how well it’s run. For example, some FTSE 100 companies such as Sainsbury’s (LSE: SBRY) have struggled to retain market share and expand profitability in the past. This can signify that the group has failed to identify with its customers. 

In its defence, the company has faced a hostile operating environment over the past decade. The rise of the German discounters, Aldi and Lidl, has disrupted the UK grocery market. This has made it harder for companies like Sainsbury’s to retain customers. 

Branching out 

To get around these problems, management has tried to branch out. The group acquired the parent of retailer Argos several years ago. The FTSE 100 business has also slashed prices to compete with competitors.

Unfortunately, none of these efforts seem to have worked. Group operating profit has fallen from £707m for the company’s 2016 financial year, to £679m for fiscal 2020. Sainsbury’s also recently announced it would be cutting 3,500 jobs and closing 420 Argos stores

Based on Sainsbury’s poor track record of growth, I plan to avoid this FTSE 100 business for the time being. Personally, I feel the company has just made too many mistakes.

But that doesn’t mean the company will never return to growth. Indeed, the group’s latest set of results revealed a 7.1% increase in total retail sales, excluding fuel, for the 28 weeks to 19 September 2020. Free cash flow hit £943m, allowing the organisation to reduce net debt by £912m and pay a special dividend to shareholders of 7.3p.

These numbers are incredibly encouraging, and may be the green shoots of a turnaround. If the group can build on this performance over the next two or three years, the business may be able to reverse the mistakes it’s made in the past.

FTSE 100 growth 

A FTSE 100 firm with a better growth track record is distribution group DCC (LSE: DCC). Over the past five years, through a combination of acquisitions and organic growth, this business’s net income has grown at a compound annual rate of just under 9%. 

I think this trend is set to continue. Profit margins in the distribution industry are razor-thin. That makes it difficult for smaller companies to compete with larger entities. With revenues of nearly £15bn, DCC has the profit margins and scale other organisations lack. Since 2015, its operating profit margin has grown from 1.7% to around 3%. 

That being said, scale doesn’t guarantee success. The FTSE 100 firm has built up a lot of debt in its drive for growth. Net debt was more than double net income at the end of its 2020 financial year. That’s concerning. I’m not too fond of organisations that have to borrow a lot of money and this could cause the company problems further down the road. 

Still, for the time being, I think DCC has the scale required to succeed. While the company’s success is by no means guaranteed, I think it’s growth over the past few years shows management’s strategy seems to be working.

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

With a P/E ratio of 9, is the Aviva share price a bargain?

Christopher Ruane looks at the Aviva share price and considers some strengths and weaknesses of the FTSE 100 insurance business.

Read more »

Surprised Black girl holding teddy bear toy on Christmas
US Stock

Is it too late to buy growth stock Shopify after its 25% pop?

Up more than 40% this year, Shopify is on fire at the moment. Here, Edward Sheldon explains how he’d play…

Read more »

Investing Articles

Investors should consider buying this energy AIM stock, up 50% in the past year

AIM stock Afentra has seen a stellar price rise in 12 months to November. I believe there may be room…

Read more »

Investing Articles

2 ISA shares to consider for a large passive income!

Looking for dividend shares to buy in a Stocks and Shares ISA or Lifetime ISA? Royston Wild reveals two of…

Read more »

Young mixed-race woman jumping for joy in a park with confetti falling around her
Investing Articles

A Bitcoin investment that can be held inside a Stocks and Shares ISA or SIPP

UK investors can’t buy Bitcoin ETFs for their investment accounts or SIPPs due to FCA regulation. This stock could be…

Read more »

Entrepreneur on the phone.
Investing Articles

As the Vodafone share price slides 6% on lacklustre H1 results, what does the future hold?

After posting moderate results this morning, Vodafone saw its share price sink further, erasing this year's gains. Our writer looks…

Read more »

Young woman working at modern office. Technical price graph and indicator, red and green candlestick chart and stock trading computer screen background.
Investing For Beginners

If I’d invested £5k in a FTSE tracker fund after the pandemic crash, here’s what I’d have now

Jon Smith explains the extent of his potential gains if he'd invested in a FTSE tracker fund during the Covid…

Read more »

Investing Articles

2 top shares I’ve bought for my Stocks and Shares ISA in November

This writer reveals a pair of fast-growing businesses that he's recently added to his Stocks and Shares ISA for the…

Read more »