History shows that periods of market volatility can be great times to invest. Well, we’ve certainly hit a rough patch recently! With this in mind, I’m eyeing up this duo for my Stocks and Shares ISA in August.
1. Diageo
First up is Diageo (LSE: DGE). To be fair, the spirits giant had been struggling for a while before this market sell-off. The FTSE 100 stock is down nearly 40% in two years!
As a shareholder, this hasn’t been fun to watch.
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The problem is weak demand from cash-strapped drinkers, some of whom have been trading down from Diageo’s premium brands. In its recent annual results, it said sales in its Latin America and Caribbean region dropped 21% year on year, slightly worse than expected. Organic operating profit fell 4.8%.
Meanwhile, management has stated that this year is likely to be challenging too, meaning there’s a risk that sales and profits could fall further.
Why on earth am I interested then? Well, I suspect all this pessimism might now be reflected in the share price. The stock is trading at around 16.6 times forecast earnings, which looks pretty cheap to me. It’s been well into the 20s in years gone by.
Plus, the dividend yield is now 3.4%. That’s higher than usual, while the firm still generates plenty of cash.
Finally, there’s weakness across the spirits sector. Rival Pernod Ricard’s share price is down 38% over the last year while Rémy Cointreau’s has slumped 52%. So this isn’t a Diageo-specific issue.
Long term, I expect resilience and growth from its incredible stable of brands. And with falling interest rates supporting a recovery in consumer budgets, I think the stock looks attractive at 2,369p.
2. Visa
Next up is Visa (NYSE: V), which is another stock I already hold. It’s done much better than Diageo, rising 6% over the past year. However, it’s now dipped nearly 12% from a record high reached in March.
There are a few things I like here. First, Visa provides electronic payment solutions worldwide via its branded credit and debit cards. But it doesn’t take on credit risk, it simply processes the payments.
In its last financial year that ended in September, the firm executed 757m transactions per day on average! That drove net income of $17.3bn on revenue of $32.7bn, an increase of 11%.
That translates into a net profit margin of 53%. So the company is incredibly profitable.
Also, the stock is trading on a forward price-to-earnings (P/E ratio) of 24 versus a five-year historical average of 33.
A possible US recession would be problematic, as that could hurt consumer spending and transaction volumes. Increased regulation of the payments space is another risk to consider.
Then again, US recessions typically last less than a year, which means Visa spends more time benefitting from economic growth than suffering from contraction.
In October, CEO Ryan McInerney said: “There is tremendous opportunity ahead and I am as optimistic as ever about Visa’s role in the future of payments.”
I have to agree given that the world is moving away from cash and towards digital payments. With Visa near a five-year low on a P/E basis, I’m considering buying more shares.
