When looking for attractive stock options, different features can catch my eye. One is a potentially undervalued firm. This might be the case if it has recently hit 52-week lows. Another feature is if any prominent investor has already purchased the stock — for example, legendary investor Warren Buffett. Therefore, when I found a stock that ticket both boxes, I was immediately interested!
Needing a stiff drink
I’m referring to Diageo (LSE:DGE). The global alcohol and soft drinks producer is a large player in the FTSE 100, with a market cap of £64bn. Over the past year, the share price has fallen 20%. Back in late January, the stock traded down to 2,676p, equating to 52-week lows.
Even though the stock has rebounded slightly since then, it still trades under a cloud. One factor at play is the sprawling nature of its operations. The business owns so many different brands that it might not be the most efficient way to operate. Evidence of this can be noted from recent reports that it might be looking to offload some, including Pimm’s, Safari and Pampero.
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Further, the death of Sir Ivan Menezes last summer has weighed the stock down. He was the CEO for a decade until his sudden death. Naturally, someone that was so hands on with the business will be sorely missed. Some investors will also be concerned about the direction for Diageo going forward. This remains a risk.
Buffett is keen
Last May, filings showed that Berkshire Hathaway (Buffett’s company) purchased shares worth $41.3m in Diageo. The stock was actually bought by Gen Re, an insurance company owned by Berkshire Hathaway.
Of course, this investment size is relatively small for Buffett, who has billions of dollars at his disposal to invest. Yet what interest me is that he holds a portfolio of 42 stocks right now. So given the broad universe of stocks he could select, he is specific in what he wants to hold. This shows me that he sees value in Diageo.
Given that he’s a big fan of long-term value investing, Diageo makes sense. The fall in the share price will likely take some time to recover. But I feel that in years to come, the share price should rally.
The company has a very strong hold on the alcohol market. It also has a very diversified revenue stream from all around the world. Given that it operates in the ultra premium down to the affordable price range, it should be sheltered from consumer impact of the cost-of-living crisis.
I’m with you, Warren
The dividend yield of 2.8% is nothing to write home about. However, it does provide some income while an investor waits hopefully waits for the stock to rally.
When I pull everything together, I do like the long-term potential here. That’s why I’m thinking about buying the stock.
