The FTSE 100 has made a good start to 2019. In almost two months it has risen by 7%. After a tough previous year, this is a refreshing performance from the index, and shows that recent past performance is not a good guide to the future.
Since the start of the year, the Diageo (LSE: DGE) share price has been able to beat the FTSE 100. It has gained 10%, and could generate further outperformance of the wider index. It appears to have a strong growth outlook and a sound strategy. As such, it could be worth buying alongside a company that released results on Tuesday, and which could also generate high long-term returns.
Improving prospects
The stock in question is real estate investment trust (REIT) Derwent London (LSE: DLN). It released full-year results which showed a rise in net property and other income of 12.8% to £185.9m. Its earnings per share moved 20% higher to 113.1p, while its net asset value (NAV) per share gained 1.6% to 3,776p.
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The company reported strong demand for central London office space, with it being able to outperform the wider market through its development activities. Its portfolio value increased by 2.2% to £5.2bn, with it experiencing positive trading conditions despite the continued uncertainty posed by Brexit.
Looking ahead, Derwent London is forecast to post a rise in earnings of 5% in the current year. With its shares trading on a price-to-book (P/B) ratio of 0.9, it appears to offer a wide margin of safety. As such, now could be the right time to buy it after the stock has risen by 15% since the turn of the year.
Improving growth prospects
The growth potential of Diageo appears to be highly impressive. The company’s products are focused on the premium segment, which is forecast to become increasingly affordable across the global economy over the coming years. This may increase demand for the beverages company’s products at a time when it is in the process of becoming increasingly efficient as it follows a rationalisation and cost-cutting programme.
Having risen by 10% this year, the stock now has a price-to-earnings (P/E) ratio of around 24. This is clearly a high valuation, but the dependable growth of the business may help to justify it. Should there be a global economic slowdown, its performance may be hit less hard than some cyclical shares, since it operates in a relatively defensive industry where it has a strong competitive position.
Therefore, further outperformance of the FTSE 100 could be ahead for Diageo. Its economic moat appears to be wide as a result of the range of brands which it owns, while it operates across a wide variety of geographies. Therefore, from a risk/reward perspective, it could have significant appeal versus the rest of the FTSE 100 in the long run. As such, now could be the right time to buy it for the long term.
