Portfolio manager Terry Smith is the man they call ‘Britain’s Warren Buffett’. It’s not hard to see why. Smith’s global equity fund, Fundsmith, has delivered amazing returns since its launch in late 2010, making many investors very wealthy. £50k invested in Fundsmith when it launched would now be worth about £250k.
What I find interesting about Smith is that he actually has a very simple investment strategy. Like Warren Buffett, he simply buys high-quality companies and holds them for the long term. It’s nothing that the average investor can’t do. With that in mind, today I’m going to look at two FTSE 100 shares that are in the Fundsmith portfolio. I see both as ‘buys’ right now.
A high-quality Fundsmith stock
One Fundsmith-owned FTSE 100 share that I believe looks attractive right now is alcoholic beverages champion Diageo (LSE: DGE). It’s the owner of a number of popular brands including Johnnie Walker and Tanqueray.
Before Covid-19, Diageo was the FTSE 100 stock that everyone wanted to own. A highly reliable performer with an outstanding dividend growth track record and an attractive growth story, it was a core holding for many investors.
However, attitudes towards the stock have changed significantly as a result of the coronavirus. With sales taking a hit due to global lockdowns, many investors have dumped Diageo. Year to date, DGE is down nearly 20%.
If you’re a long-term investor, I think this share price weakness is a great buying opportunity. I don’t expect Diageo shares to bounce back immediately. In the short term, the company faces challenges due to Covid-19. However, at some stage in the not-too-distant future, sales should pick up. And when that happens, Diageo’s share price should bounce back. In the meantime, a yield of approximately 2.7% means you are paid to wait for a turnaround.
City analysts expect Diageo to generate earnings per share of 129p next year. That puts the stock on a forward-looking P/E ratio of about 20. I think that’s good value. I’d buy this FTSE 100 share today.
A FTSE 100 ‘coronavirus stock’
Another FTSE 100 share held in Fundsmith I’d buy today is Dettol owner Reckitt Benckiser (LSE: RB). It’s had a good run recently due to higher demand for its cleaning products. However, I think it has the potential to climb higher.
One reason I like Reckitt Benckiser is that the company has recently launched a new professional services business to capitalise on the demand for hygiene services. Through this business, the FTSE 100 firm will partner with companies such as hotel operators and airlines to research and develop new disinfecting plans for busy areas such as hotel lobbies and airports.
I think this new business has considerable growth potential. Already, Reckitt has signed long-term agreements with the likes of Delta Airlines and Hilton Hotels to help keep their customers safe. The business is yet to contribute to overall group sales, however CEO Laxman Narasimhan says the unit will ramp up in the second half of 2020.
Reckitt Benckiser shares are a little expensive. Currently, they trade on a forward-looking P/E ratio of about 23. I don’t see that valuation as a deal-breaker though. The company is well placed for growth right now, and analysts are lifting their price targets. At least three brokers now have price targets of 9,000p or higher.
I’d buy this Fundsmith-owned FTSE 100 share today.