Why Greene King is in my 'buy zone' but Diageo isn't
If there's one important lesson I've learnt in nearly 20 years of investing, it's that patience can make a huge difference to long-term returns. Warren Buffett once stated that "it's better to buy a wonderful company at a fair price than a fair company at a wonderful price." However with patience, it's often possible to buy the wonderful company at a wonderful price, enjoying the best of both worlds.
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With that in mind, here's a look at two stocks trading at contrasting valuations. One is simply too expensive for me right now, while the other is in my 'buy zone'.
Diageo
To my mind, Diageo(LSE: DGE) really is the kind of 'wonderful' company that Warren Buffett is referring to. Consumers buy Diageo's products throughout the good times and the bad, and the company has an outstanding record of generating shareholder wealth.
While Diageo has struggled to generate revenue growth in the last few years, I believe its significant emerging markets exposure will be a key driver of shareholder returns over the long term, making it an ideal core portfolio holding.
I have Diageo in my portfolio at present, and I will look to add to my position in the future. However right now, the price is too high for me. Diageo currently trades on a P/E ratio of 25.1, falling to 21.4 for FY2017, and the recent upwards move in the share price has pushed the company's yield down to 2.6%.
While I acknowledge that Diageo often trades at a premium to the market, these metrics just look a tad expensive to me. I'd prefer to buy the stock under the 2,000p mark, when the yield is at least 3%. Will that be possible this year? In my opinion, it's highly likely. I believe it's only a matter of time until we see some market turbulence, and that should bring buying opportunities. As such, I'll be leaving Diageo on my watchlist for now and waiting patiently for an attractive top-up point.
Greene King
By contrast, shares in Greene King(LSE: GNK) now trade at a level which I believe offers cracking value for those willing to look beyond short-term uncertainty. Investors have dumped the stock recently on the back of Brexit worries and increased cost pressures across the entire hospitality industry. However with the share price now hovering around the 700p mark, I reckon Greene King is a solid long-term buy.
There are several things I like about the pub operator. It's a simple company to understand, and with over 3,000 pubs, restaurants and hotels across the country, is well-placed to capitalise on the nation's love of a drink. Furthermore, Greene King is nothing short of a dividend powerhouse, growing its dividend by a compound annual growth rate (CAGR) of 10% since 1980.
Obviously Brexit adds an element of risk to the investment case in the short term. And management has stated that the company is "alert to a potentially tougher trading environment ahead."
However with the stock's P/E ratio falling to a low 9.8, I'm happy to declare it's now officially in my 'buy zone'. The share price fall has pushed the stock's yield up to a high 4.6%, so a healthy, well-covered dividend is on offer, at a very attractive valuation.
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Edward Sheldon owns shares in Diageo. The Motley Fool UK has recommended Diageo. We Fools don't all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors.
