Why I think the Diageo share price could crush the FTSE 100 this year

Screen of price moves

While the FTSE 100’s future may be difficult to accurately predict at the present time, there are a number of stocks that could generate impressive returns. Among them is beverages business Diageo (LSE: DGE). It appears to offer a relatively defensive business model that may be able to deliver high earnings growth over the long run.

Of course, it’s not the only stock which could generate impressive returns in the long run. Reporting on Thursday was a cheap FTSE 250 company that may be able to post high profit growth and improving investment returns.

Improving prospects

The company in question is urban regeneration specialist and house-builder Countryside Properties(LSE: CSP). Its performance in the fiscal first quarter has been in line with expectations. It’s recorded a rise in total completions of 28%, increasing to 1,094 homes. Total forward order book increased by 78% to £946m, while its adjusted operating margin was in line with expectations.

Encouragingly, the company’s net debt of £12m is better than expected. It believes its mixed tenure delivery model could help it to meet the demand for homes across all bases and is on track to meet its medium-term guidance.

In the current year, Countryside Properties is expected to post a rise in earnings of 20%. This puts it on a price-to-earnings growth (PEG) ratio of around 0.5, which suggests it offers good value for money. With a dividend yield of 4% that’s covered 3.3 times by profit, it may also offer income investing potential. While its operating outlook may be uncertain, the stock could perform well as a result of its low valuation and growth potential.

Long-term opportunity

Diageo’s share price may also have a bright future. The company is adapting its strategy to keep pace with changing consumer tastes. The introduction of products with more natural ingredients has proved popular, and  product innovation may be able to boost its financial prospects yet further. Alongside this, rising wages in its key markets may mean that the popularity of premium drinks increases. This may provide scope for higher prices and growing margins over the long run.

Diageo’s business model has proven to be relatively robust and resilient in previous years. It has a strong track record of delivering growth during uncertain periods for the world economy. Since various risks may currently be facing the FTSE 100, it may therefore be able to offer lower correlation to the macroeconomic outlook than is the case for many of its index peers.

Of course, there are cheaper shares available – especially following the index’s fall in recent months. A price-to-earnings (P/E) ratio of around 21 suggests that there’s little, if any, margin of safety on offer. But with ambitious growth plans, a wide range of premium beverages, and a track record of resilient performance, it could prove to be a popular stock among investors.

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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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