Why I feel the stock market crash could be an opportunity to buy FTSE 100-member Diageo

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The recent fall in the FTSE 100 may appear to be a disappointing event for many investors. It’s likely to have caused paper losses, as well as a degree of worry. However, it may also present buying opportunities, with a number of high-quality shares now trading on lower valuations than they were a few months ago.

One such company is alcoholic beverages business Diageo(LSE: DGE). Its share price has declined by 7% in the last three months, which suggests it may now offer better value for money. Alongside another stock, which reported robust performance on Friday, it could be worth buying for the long term.

Robust performance

The company in question is specialist social care provider CareTech(LSE: CTH). It released a full-year trading update that showed it has performed in line with expectations. Net capacity in residential and supported living increased from 2,534 places a year ago, to 2,622 places. Occupancy levels have remained at 93%, while staff turnover has remained below the industry average, at 22%. The company’s care ratings have risen during the year, while annual fee negotiations with local authorities have also led to positive outcomes.

Looking ahead, the recent acquisition of Cambrian could act as a catalyst on the company’s performance. It seems to be a highly-complementary business which could help to support CareTech’s strategic goals.

With the company trading on a price-to-earnings (P/E) ratio of around 11, it could offer good value for money at the present time. Given its near-50% rise in dividends per share in the last five years, it could also have income growth potential – especially since its dividend yield of 2.7% is due to be covered 3.5 times by profit in the current year.

Growth potential

The growth prospects of Diageo continue to be relatively robust. Certainly, fears surrounding the wider global growth outlook are a concern for the business. Rising US interest rates and the prospect of further tariffs could lead to further share price weakness in the near term. However, with the company enjoying a high degree of customer loyalty, and alcoholic beverages having relatively stable demand in a variety of economic conditions, the long-term outlook for the business seems to be positive.

Diageo is focusing on improving its efficiency, and this is expected to contribute to a rise in earnings of 7% in the current financial year. Although it has a P/E ratio of around 21, the company’s rating could move higher over the coming years. Its mix of growth potential from emerging markets, and its established position in more mature markets, could provide an enticing risk/reward ratio over the long run.

As such, and while further share price falls cannot be ruled out, the investment potential of the stock seems to be high. It appears to have defensive growth prospects that could help it to outperform the FTSE 100 over the long run.

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Peter Stephens owns shares of 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.

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