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As the FTSE 100 is getting closer to a new all-time high, I'm considering buying three promising stocks. All three have received a buy rating from a major brokerage. USB in the last month and I think they all have long-term growth potential.
The action that just doesn't stop
Rolls-Royce Holdings (LSE:RR.) The stock is up almost 200% last year and shows no signs of slowing down. They are up 6% more since I last wrote about them a little over a week ago. Based on future cash flows, analysts estimate the stock will be undervalued by at least 50%.
However, the company's liabilities exceed its assets, leaving it with a deficit of £3.6bn. This is an important risk that potential shareholders should be aware of. In addition, Rolls-Royce has suspended dividend payments until its financial situation improves.
Why do I think it is a good buy?
The Royal Navy aims to deploy a fleet of new Dreadnought-class nuclear submarines by 2030, which could keep up demand for the company for years to come. Rolls-Royce supplies the nuclear steam generating plants (NSRP) and other parts used to power the submarines.
They are the best performing stock in my portfolio currently and if I had the money, I would buy more today.
The bank that recovered
Main Street People's Bank NatWest Group (LSE:NWG) has fallen on tough times during 2023. The share price fell 41% from a high of 308p in January to 182p in October. It has since recovered to 262p and I think it looks set to continue rising. Its price-to-earnings (P/E) ratio has dropped from 8.1 last March to 5.4 today, indicating the stock may be undervalued.
However, its recent fourth-quarter earnings report revealed a 12% year-over-year decline in pre-tax operating profit (although it's better than some analysts expected). And like much of the UK banking sector, NatWest is at risk of loan defaults if the economy falls into recession.
Why do I think it is a good buy?
The main benefit of NatWest Group is the 7% dividend yield. With a payout ratio of 35%, it is well covered by earnings and has recently started paying steadily. For this reason, I added it to my list for the next round of purchases.
defending the nation
With a share price of £13.53, BAE Systems (LSE:BA.) is up 37% in the past year. Much of the growth could be attributed to increased public defense spending caused by the ongoing conflict in Ukraine. Unfortunately, negotiations have so far failed to achieve a peaceful solution.
Naturally, if a peace deal is reached, the share price could fall as defense budgets are reduced. I am happy with the returns my stocks have generated so far and plan to continue holding them, but an end to the war would be a preferable outcome. Furthermore, despite having no direct involvement, BAE has been criticized for supplying parts for fighter jets involved in the Palestinian conflict.
Why do I think it is a good buy?
Its benefits go beyond current conflicts. The UK is on a mission to improve its defense capabilities, with Prime Minister Rishi Sunak recently pledging a £200m investment and declaring it a “national effort”. As one of Europe's largest aerospace and defense contractors, I believe BAE could benefit from this initiative for years to come.
