2 top FTSE 100 stocks that are outperforming the market

While the FTSE 100 has lagged other global indexes, these two FTSE 100 stocks have performed excellently. Can their strength continue?

| 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.

The FTSE 100 hasn’t delivered excellent returns over the past few years, falling behind other global indexes like the S&P 500 and the Nasdaq. However, this does not mean that individual FTSE 100 stocks haven’t performed well. Two good examples include Diageo (LSE: DGE) and AstraZeneca (LSE: AZN), both of which have provided steady returns for investors over the years. But can these companies continue to outperform the FTSE 100? 

The drinks giant 

In the past five years, the Diageo share price has risen an astounding 80%. This can be compared to the broader FTSE 100 return of just over 7%. This outperformance has been driven by the company’s record of shrewd acquisitions, which has helped boost profits over the years. As a result of the rising profits, Diageo’s dividend and share buyback programmes have also increased, benefiting shareholders. 

Things are going well at the moment, and Diageo is near its all-time high, sitting at just below 4,000p. This is partly due to recent strong half-year results, with operating profits increasing 22.5% to £2.7bn. Operating margins also increased by 190 basis points, demonstrating that the firm has dealt well with inflationary pressures. There is hope that profits can continue to increase too. 

There are some risks, however. For example, the Russia-Ukraine conflict has meant that the group has paused exports to Russia and the Russian division has suspended manufacturing its beers. Although Diageo’s business in Russia contributes less than 1% of operating profits in the half-year results, this is still not good news.

Further, a price-to-earnings ratio of over 20, which is now larger than ‘growth stocks’ Netflix and Meta, demonstrates that further growth is expected. This means that any slip-up will be heavily punished. 

Despite these risks, I still feel that Diageo can continue to outperform the FTSE 100, albeit to a lesser extent than in the past five years. This is due to its excellent quality. Therefore, I’m not selling the Diageo shares in my portfolio. 

The second-largest FTSE 100 stock

After rising over 130% in the past five years, AstraZeneca (LSE: AZN) has established itself as the second-largest FTSE 100 stock, trailing only Shell. This has been achieved from a history of rising revenues and profits.

Recent developments have also been positive. For example, in the latest full-year trading update, revenues were able to increase 41% year-on-year to over $37bn, and core earnings per share increased from $4.02 to $5.29. Reported EPS was far lower ($0.08), due to the acquisition of Alexion and restructuring charges during the year. As these are short term, this is not overly worrying to me, however.  

Alongside these results, AZN also announced that five of its medicines were “crossing blockbuster thresholds”, showing industry-leading research and development productivity. The drugs Evisheld and Tezspire also received approval, giving hope to the company for 2022. 

There are a few problems, however. Firstly, revenues from its vaccine are starting to diminish. This means that revenue growth is likely to be far slower from now. Secondly, AZN also trades at a price-to-earnings ratio of over 20, meaning that growth is expected. Pharma is a very volatile industry, so I’m not convinced the company can live up to expectations. Therefore, this is a FTSE 100 stock I won’t be buying just yet, due to its expensive valuation. 

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.

Stuart Blair owns shares in Diageo. The Motley Fool UK has recommended Diageo. 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

After it crashed 25%, should I buy this former stock market darling in my Stocks and Shares ISA?

Harvey Jones has a big hole in his Stocks and Shares ISA that he is keen to fill. Should he…

Read more »

happy senior couple using a laptop in their living room to look at their financial budgets
Investing Articles

How’s the dividend forecast looking for Legal & General shares in 2025 and beyond?

As a shareholder, I like to keep track of the potential dividend returns I could make from my Legal &…

Read more »

artificial intelligence investing algorithms
Investing Articles

Could buying this stock with a $7bn market cap be like investing in Nvidia in 2010?

Where might the next Nvidia-type stock be lurking in today's market? Our writer takes a look at one candidate with…

Read more »

Investing Articles

Is GSK a bargain now the share price is near 1,333p?

Biopharma company GSK looks like a decent stock to consider for the long term, so is today's lower share price…

Read more »

Snowing on Jubilee Gardens in London at dusk
Investing Articles

Could December be a great month to buy UK shares?

Christopher Ruane sees some possible reasons to look for shares to buy in December -- but he'll be using the…

Read more »

Young mixed-race couple sat on the beach looking out over the sea
Investing Articles

Sticking to FTSE shares, I’d still aim for a £1,000 monthly passive income like this!

By investing in blue-chip FTSE shares with proven business models, our writer hopes he can build sizeable passive income streams…

Read more »

Growth Shares

BT shares? I think there are much better UK stocks for the long term

Over the long term, many UK stocks have performed much better than BT. Here’s a look at two companies that…

Read more »

British Pennies on a Pound Note
Investing Articles

After a 540% rise, could this penny share keep going?

This penny share has seen mixed fortunes in recent years. Our writer looks ahead to some potentially exciting developments in…

Read more »