With the earnings outlook for most companies being murky at best, identifying bargains in the FTSE 100 isn’t easy. Simply buying the biggest ‘losers’ in the hope they’ll recover the most feels decidedly dangerous.
A far better move in my book is to focus on those companies with decent growth prospects, brands, and/or a large addressable market. These are the stocks that stand a better chance of rebounding in time. And if you’ve got many years of investing ahead of you, where better to stash them than in a tax-efficient Stocks and Shares ISA?
Here are three examples from the top tier that catch my eye as potentially great buys for the eventual recovery.
An ageing world
Smith & Nephew (LSE: SN) specialises in making medical devices. More specifically, it produces hip and knee implants, products to help with fractures and bone deformities and instruments to repair and remove soft tissue. With populations ageing, I think this makes it an ideal candidate for a long-term ISA hold.
In addition to its growth potential, Smith & Nephew also has a presence in more than 100 countries around the world. This makes it very geographically diversified and, consequently, a safer pick than more domestically-focused FTSE 100 companies. Its balance sheet also looks pretty solid to me.
Like most, shares in Smith & Nephew have rebounded strongly since mid-March. Whether this positive momentum can be sustained remains to be seen. As a racier alternative to more income-focused healthcare stocks, however, I think it takes some beating.
Growth play
Corrugated packaging firm DS Smith‘s (LSE: SMDS) share price wasn’t exactly in sparkling form before the coronavirus crisis. That said, I think this could prove another great buy for the future.
Smith’s packaging solutions are used to move food and personal care items to supermarket shelves or deliver goods to customers’ homes. Coronavirus hasn’t stopped this, suggesting that earnings should stay fairly stable. Factor-in the ongoing explosive growth of e-commerce and holders of the stock should be sitting pretty for many years to come.
Like Smith & Nephew, DS Smith has a wide geographical spread. It operates in 37 countries around the world. It’s also a nice play on the sustainability trend. The business is looking to manufacture 100% reusable or recyclable packaging by 2025.
Firms operating in dull industries rarely hit the headlines. They do, however, have a habit of generating great returns over time. I think this could prove to be the case here.
FTSE 100 stalwart
And finally, Diageo (LSE: DGE). Pubs and restaurants may still be closed but this hasn’t turned us into a nation of teetotallers. Indeed, supermarket sales of alcohol jumped last month as people were forced back into their homes for their own safety.
Will this be sufficient to offset the damage caused to revenues by the lockdowns for firms like Diageo? It’s unlikely. Nevertheless, the fact that demand hasn’t dried up means it’s likely to be in a better place post-coronavirus compared to index peers making hardly any money.
Markets could be set for a further leg downwards but I wouldn’t dissuade anyone from building a stake as things are. Diageo’s share price remains roughly 25% lower than the highs hit in August last year. That feels an attractive entry point for the owner of established brands such as Guinness, Smirnoff and Captain Morgan.
