Putting together a portfolio of stocks for the first time can be a daunting experience. That’s because there are thousands of companies to potentially invest in.
If I was putting together a portfolio from scratch today, I’d start by selecting some rock-solid businesses to be the foundation of my portfolio. With that in mind, here are two stocks I’d go for.
This stock offers growth and resilience
One company I’d definitely invest in if I was starting out today is Microsoft (NASDAQ: MSFT). Listed in the US, it’s one of the world’s largest technology companies.
The reason I’d pick MSFT as a foundation stock is that the company is diversified in nature and has many growth drivers. One is the cloud computing market. This industry is expected to grow by nearly 20% over the next decade, which should benefit Microsoft as it’s currently the second-largest player in the industry.
Another growth driver is the expansion of the video gaming market. This industry is expected to grow by around 10% per year over the next decade. Microsoft is also a major player here due to the fact it owns Xbox and recently acquired Call of Duty publisher Activision Blizzard.
Microsoft is not just a growth play however. This company also has ‘defensive’ attributes. Not only does it have a strong balance sheet and high profit margins, but it also has many customers ‘locked in’. Businesses, for example, aren’t suddenly going to stop using Office if there’s a recession.
The downside to Microsoft is it’s not a cheap stock. Investors know this is a wonderful company, and it’s priced accordingly. Currently, the forward-looking P/E ratio is about 32, which adds a bit of risk.
A second risk I face as a UK investor is foreign exchange risk. If I was to buy shares today and the pound strengthened against the dollar, my investment would be worth less.
I’m comfortable with these risks however. I think this is a great stock to own for the long term.
The perfect core holding
Another stock I’d select if I was starting a portfolio from scratch today is Diageo (LSE: DGE). It’s a multinational alcoholic beverages company that owns a number of premium brands including Johnnie Walker and Tanqueray.
The reason I’d choose Diageo as a foundational stock is that the company looks well-positioned to benefit from a number of powerful trends in the years ahead. One such trend is ‘premiumisation’ – where consumers are willing to pay more for premium products. This is a major trend globally.
Rising levels of wealth is also a trend that could benefit Diageo. By 2030, millions more consumers in developing countries will be able to afford its products.
Like Microsoft, Diageo offers a nice mix of growth and defence. People tend to drink alcohol no matter what the economy is doing. This means the company is relatively recession proof.
One risk here though, is Covid-19 setbacks. If we see further lockdowns, Diageo’s sales from restaurants, pubs and bars are likely to take a hit. It’s worth noting that the stock’s valuation doesn’t leave much room for error. Right now, the P/E ratio is a relatively high 26.
I’m happy to pay a premium valuation however. To my mind, this stock is the perfect core holding.
