Here at the Motley Fool we bang the drum for long-term investing in the stock market. If you’re serious about building enough wealth to achieve financial independence, owning shares really is the way to go, in our view.
If you’re looking to invest your first £2,000, you’ll probably be considering which companies could lay strong foundations for a successful portfolio. Here, I’ll tell you how I’d approach the question, and about two starter stocks I’d be happy to buy today.
Narrowing the field
I’d begin by looking to the FTSE 100 for well-established businesses that have stood the test of time.
I’d also narrow down my focus to more ‘defensive’ industries. That’s to say, industries that are more resilient through the ups and downs of economic cycles. I’d want to build my experience a bit before considering highly cyclical businesses like banks and housebuilders.
And within defensive industries, I’d look to those with long-term ‘structural’ growth drivers. That’s to say, those where the broad backdrop for the future is positive. Again, I’d want to build my experience a bit before considering stocks in industries that may be in long-term structural decline, such as tobacco.
The healthcare and defence industries fit my bill. Ageing populations in the developed world, and rising wealth in developing economies, provide long-term structural drivers for growth in healthcare. Meanwhile, the world’s long history of geopolitical conflict is never likely to end, which means continuing demand for the products and services of the defence industry.
If I were starting out today, I’d split my first £2,000 investment between healthcare company Smith & Nephew (LSE: SN) and defence firm BAE Systems (LSE: BA).
Worth every penny
Smith & Nephew is a global business, with leadership positions in Orthopaedics (45% of revenue), Sports Medicine (31%) and Advanced Wound Management (24%). Recent acquisitions have further strengthened its leadership positions, and can be expected to accelerate growth over time.
As it is, it’s growing nicely in developed markets (a 2.2% increase in Q1 revenue reported today) and particularly strongly in emerging markets (a 15.3% increase). Management now expects revenue growth for 2019 to be in the upper half of its guidance range — which is good — but it’s the long-term prospects for the business that convince me it’s a great core holding for a starter portfolio.
The share price is 1,520p, and for a company with leadership positions in its fields, and structural drivers for industry growth, I think the premium rating of near to 20 times forecast 2019 earnings, with a 2% dividend yield, is worth every penny.
Currently cheap
BAE Systems will be well known to most people. Its big contract wins with the Ministry of Defence and major allies in the western world regularly make the national news. As well as producing heavyweight kit for the defence of air, sea and land, the group’s other activities include cyber security and intelligence.
There’s some uncertainty at the moment about the future of BAE’s trading relationship with Saudi Arabia (18% of its revenues), due to political tensions over the war in Yemen and the killing of dissident journalist Jamal Khashoggi. However, again, it’s the long-term prospects of this world-class business that are the big appeal to me.
The current uncertainty may be part of the reason why you can buy the shares today at 487p — less than 11 times forecast 2019 earnings, with a 4.8% dividend yield.