As the FTSE 100 draws ever closer to a new all-time high, I’m considering three promising stocks to buy. All three have received a buy rating from major broker UBS in the past month or so, and I think they all have long-term growth potential.
The stock that just won’t stop
Rolls-Royce Holdings (LSE:RR.) shares are up almost 200% in the past year and show no signs of slowing down. They’ve climbed a further 6% since I last wrote about them just over a week ago. Based on future cash flows, analysts estimate the shares to be undervalued by at least 50%.
However, the company’s liabilities outweigh its assets, leaving it with a £3.6bn shortfall. This is a significant risk that potential shareholders would need to take into consideration. Also, Rolls-Royce has suspended dividend payments until its financial situation improves.
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Why do I think it’s a good buy?
The Royal Navy aims to deploy a fleet of new Dreadnought Class nuclear submarines by 2030, which could keep the company in demand for years to come. Rolls-Royce supplies the Nuclear Steam Raising Plants (NSRP) and other parts used to power the subs.
They’re the best-performing shares in my portfolio currently and if I had the money, I’d buy more today.
The bank that bounced back
Popular high street bank NatWest Group (LSE:NWG) had a tough time during 2023. The share price fell 41% from a high of 308p in January to 182p in October. It has since recovered to 262p and I think it looks poised to keep climbing. Its price-to-earnings (P/E) ratio has reduced from 8.1 last March to 5.4 today, indicating the shares may be undervalued.
However, its recent Q4 earnings report revealed a 12% year on year decline in pre-tax operating profit (although that’s better than some analysts expected). And like much of the UK banking sector, NatWest is at risk of loan defaults if the economy falls into a recession.
Why do I think it’s a good buy?
The main benefit of NatWest Group is the 7% dividend yield. With a 35% payout ratio, it’s well-covered by earnings and has recently begun paying out consistently. For this reason, I’ve added it to my list for the next buying round.
Defending the nation
With a share price of £13.53, BAE Systems (LSE:BA.) is up 37% in the past year. Much of the growth could be attributed to increased government defence spending prompted by the ongoing conflict in Ukraine. Sadly, negotiations have thus far failed to secure a peaceful resolution.
Naturally, if a peace deal is reached, the share price could fall as defence budgets are cut. I’m happy with the returns my shares have delivered so far and I plan to keep holding them, but an end to the war would be a preferable outcome. Furthermore, despite no direct involvement, BAE has been criticised for supplying parts for fighter jets involved in the Palestinian conflict.
Why do I think it’s a good buy?
Its profits extend beyond just current conflicts. The UK is on a mission to improve its defence capabilities, with PM Rishi Sunak recently pledging a £200m investment and declaring it a “national endeavour”. As one of the largest defence and aerospace contractors in Europe, I think BAE could benefit from this initiative for years to come.
