But it isn’t all gloomy skies. The Office of National Statistics found that the UK economy grew by 0.2% in the second quarter of 2022, dispelling fears of a recession. 

I think quality FTSE 100 shares are still the best option for my growth portfolio. Looking at the charts, top UK shares have been rather elastic, rising strongly after recent crashes. While there is no guarantee that this will happen again, investing during mini crashes has historically been a great way to buy/add growth stocks. This is why I think it is the perfect time to invest in two FTSE 100 shares from my watchlist. 

Pandemic superstars 

Croda International (LSE:CRDA) and Ashtead Group (LSE:AHT) are two companies that I have been tracking closely since the pandemic. Between March 2020 and November 2021, these two FTSE 100 shares went up 152% and 342% respectively.

But since then, market corrections have put these top performers in bargain territory.

Industrial equipment rental firm Ashtead is down 34% since its all-time high and is currently trading at 4,000p, at a price-to-earnings (P/E) ratio of 14.6 times.

Across the financial year (FY) 2022, a period when most businesses struggled with inflation, Ashtead’s revenue jumped nearly 20% to £7.96bn, while net income grew of 36% to £1.25bn. In fact, Ashtead’s revenue has increased every year since 2018.

The company has a strong presence in the US, UK, and Canada, trading under the name Sunbelt Rentals. Its industry was recently boosted by US President Joe Biden’s public works stimulus bill. As a result, rental revenue from the US jumped 29% in the first quarter of FY2023. 

Similarly, chemical giant Croda has fallen 38% since its all-time high in November 2021. It is currently trading at 6,370p at a P/E ratio of 12.5 times. 

In FY2021 (ended 31 December 2021), Croda’s revenue jumped 35.9% to £1.89bn with net income growth of 59% to £320.8m. The company has also seen significant growth across the first half (H1) of 2022. Sales rose 21% compared to the same period in 2021. 

The British manufacturer is currently transitioning into a life sciences business, with a focus on cosmetics and pharmaceuticals. The board expects this to streamline the business with stronger margins and higher returns. 

Concerns and verdict

Both businesses have a global presence and the falling pound could affect profits moving forward. Given the volatility in global markets, this could cause these FTSE 100 shares to fall further. 

Also, a recession in the US could halt development projects, causing Ashtead’s sales to drop. Croda is still seeing proceeds from its Covid test kit chemicals, which is expected to slow down completely moving forward.

Despite these concerns, I think both businesses are well placed to navigate choppy waters. These businesses have demonstrated significant growth in recent times and have established strong markets and steady sales. Given the balance sheets, these FTSE 100 shares look dirt-cheap to me at current levels.

Are any of these worth investing in at today’s prices? To find out, I look to Warren Buffett’s advice.

Buffett’s approach

At the 2000 Berkshire Hathaway Annual Shareholder meeting, Buffett said the following about growth stocks:

Let’s just take a company that has marvellous prospects, is paying you nothing now, and you buy it at a valuation of about $500bn. Now if you feel that 10% is the appropriate rate of return – and you can pick the figure – that means that if it pays you nothing this year, but starts paying next year, it has to be able to pay you $55bn in perpetuity each year. But if it’s not going to pay until the third year, then it has to pay you $60.5bn in perpetuity to justify the present price.

According to Buffett, whether a stock is a good investment or not comes down to the cash it will produce. And the longer it takes for the company to produce the cash, the more it has to produce to justify its current share price.

With interest rates forecast to reach 4%, I think it’s reasonable to require a 7% return to justify the risk of investing in stocks. So let’s see how Croda, Diploma, and Rightmove shape up using Warren Buffett’s approach.

Valuing growth stocks

Croda shares have fallen by 33% since the beginning of the year. As a result, the company now has a market cap of £9.2bn.

At these prices, a 7% annual return implies £644m in cash each year starting immediately. Croda’s annual free cash flow is currently around £145m.

Diploma has a market cap of just under £3bn. The company’s share price is now around 30% lower than it was since the start of the year.

To justify an investment at these prices Diploma needs to generate £210m in free cash annually. Over the last 12 months, Diploma produced £107m in free cash.

Lastly, Rightmove shares trade at a price implying a market cap of just under £5bn. That’s following a 25% decline in the company’s share price since January.

A 7% annual return implies free cash generation of £350bn annually. Last year, Rightmove’s free cash flow came in at £191m.

2 growth stocks I’d buy today

I think that Croda shares look expensive at current prices. Diploma and Rightmove, on the other hand, look attractive to me.

A 7% average return implies 30% annual growth in free cash flow for Croda. That seems like a lot to me and I’m not prepared to invest on that basis. 

For Diploma and Rightmove, the equation looks much more favourable. Free cash flow growth of 10%-15% annually would see each company generate a return of over 7% on average.

In my view, this kind of growth might well be realistic. As a result, I’d be happy buying either Diploma or Rightmove shares at today’s prices for my portfolio.

I have identified two such FTSE 100 shares that are currently in the bottom half of the index when ranked by the 30-day average trading volume. And I think these companies look like they are ready to explode when the next bull run hits. 

Overlooked superstars

Spirax Sarco (LSE:SPX) and Croda International (LSE:CRDA) were big pandemic winners. Between March 2020 and December 2021, these two shares gained over 110%. In fact, Croda International was a top FTSE 100 performer across 2021, jumping 57% in a year. 

But since this bull run, both shares have fallen significantly. Croda bottomed out at 4,490p in June 2022 after hitting all-time highs in December 2021. Spirax-Sarco too fell over 46% during the same period, bottoming out at 9,130p. 

This caused investor interest to dampen. Thirty-day trading volume for Spirax-Sarco and Croda is currently at 168,000 and 434,000, respectively. For comparison, Lloyds shares recorded 205.33m trades during the same period. 

But I think the tides are changing. Since the June low, both companies have rebounded by over 22%, showing me that if the market is healthy, these shares could grow very fast. 

Finances

Croda International is a speciality chemical company operating in Britain for over a century. It focuses on chemicals used in beauty and personal care products. The firm also has a huge agriculture wing that focuses on chemicals required for crop growth. 

The recently released first-half (H1) 2022 results showed that sales jumped by 21% compared to H1 2021. Similarly, profit before tax went up 26% to £636.5m including proceeds from recent sales. 

The company recently redoubled its growth efforts in the fragrance industry, which is witnessing strong growth in emerging markets. It has a projected valuation of $58.8bn by 2022 which would bring compounded annual growth to 5.6%. 

The second company on my list, Spirax-Sarco, is an engineering firm with a focus on steam management systems. This share gained a lot during the recent green energy push across Europe. And this has gathered more steam this year, making the market ripe for Spirax-Sarco, which creates efficient energy systems for industries. 

In 2021, the company recorded a revenue of £1.3bn, up 17% from 2020. Total profits were £340.3m with an impressive margin of 25.3%. A strong positive is that insiders purchased Spirax shares worth over £462,000 last year and sold nothing.

While these are strong signs for both companies, I think there are some concerns to address. Both boards have noted fluctuating commodity prices as a major cause of concern for the coming months. Also, Croda has been spending a significant amount on R&D, which could backfire if there is a market crash. 

And it is unlikely that these companies will recreate the runs they had in 2020. But given the strong fundamentals and large market share, I think I would make an investment in both companies in 2022 provided the rebound continues. 

Speciality chemicals

Croda creates and sells specialist chemicals that many industries and businesses use in everyday products used by consumers. Some of Crodas chemicals are included in foods, cosmetic creams and lotions, and plastic products as well as dietary supplements.

So what’s been happening with the Croda share price? Well, as I write, the shares are trading for 7,606p. At this time last year, the shares were trading for 6,582p, which is a 10% increase over a 12-month period. In 2022 to date, however, the shares are down over 20%, from 10,120p to current levels.

I believe Croda has suffered, like many other FTSE 100 stocks, due to soaring inflation, rising costs of raw materials, and the events in Ukraine which pulled the stock markets back. The stock market correction saw Croda shares hit 6,736p on 8 March. Croda shares have rallied 12% to current levels since that day.

For and against buying Croda shares

FOR: Croda released full-year results for the period ending 31 December 2021 at the end of last month. The results exceeded analyst forecasts. Sales increased by 35% compared to 2020. This led to a surge in profit of over 40% compared to last year. Croda also has a positive track record of trading too. I can see revenue and gross profit have increased year on year for the past three years. I do understand that past performance is not a guarantee of the future, however.

AGAINST: At current levels, Croda shares look a bit pricey to me. The FTSE 100 price-to-earnings (P/E) ratio average is 15. Croda shares are currently on a P/E ratio of just over 32. The shares are already down in 2022 overall but they are still priced at a premium. Could I get more bang for my buck elsewhere in other stocks? After all, quality or not, I don’t want to overpay.

FOR: Croda shares pay a dividend that would boost my passive income stream through dividend payments. In the most recent set of results, Croda confirmed a dividend of 9.9p per share for 2021. The current dividend yield is just below 2%, which is lower than the FTSE 100 average of 3%-4%, however.

AGAINST: Current macroeconomic headwinds could impact future results and investment viability for Croda, in my opinion. The most recent set of results have not been affected as many of these issues have only intensified since the turn of the year. These issues include soaring inflation, rising cost of raw materials and the supply chain crisis. All these issues can take a bite out of profit margins and affect shareholder returns and sentiment.

A FTSE 100 on my watch list for now

I like Croda as a business and believe there is some long-term potential for some lucrative returns. I have two main issues right now, however. Firstly, macroeconomic headwinds are putting me off. Secondly, the shares look a bit expensive for my liking.

On this basis, I’m keeping Croda on my watch list. If the shares fall further and results continue upwards, I will revisit my position.

2 FTSE 100 stocks I like

There are a number of stocks in the index that can help me inch towards the objective of financial freedom. Like two that I intend to discuss here. The first of these is Bunzl (LSE: BNZL) and the second is Croda International (LSE: CRDA). If I had bought them 10 years ago, they would have more than tripled my money by now. 

Perhaps that is why they are highly coveted by investors. This is evident from the fact that they are priced at a premium, as seen from their market valuations. Bunzl has a price-to-earnings (P/E) ratio of 22 times. And that for Croda International is 30 times.The FTSE 100 P/E is 15 times right now as per Bloomberg numbers, which gives some perspective on the matter.

Healthy results

Still, I think it is entirely possible that these stocks could continue to reward investors over the long term. This is obvious after looking at their recent results. Consider Bunzl first, which is a global distributor of products from food packaging to personal protective equipment. Its adjusted numbers, which indicate the health of the underlying business, have been impacted because of ongoing Covid-19-related trends in 2021. But on a statutory basis, its earnings are improved from last year. And with economic recovery underway, I reckon it can continue to strengthen further. 

Croda International, which provides speciality chemicals to industries like personal care and life sciences, has seen a big jump in both revenue and earnings from 2021 compared to the year prior. In this case, the growth is also mirrored in adjusted numbers. This goes a long way in explaining why it is trading at a premium right now. Management is also optimistic about 2022. 

What I’d do

I am convinced for these reasons that the share prices for both can rise. In fact, I have long liked them. The question on my mind is when I should buy them. In the case of Croda International, a significant price correction has happened so far this year. I can wait and watch for the next few weeks to see if that will continue and if it does, it would be a good idea to buy it when its valuation is closer to the FTSE 100 P/E. In the case of Bunzl, I could wait for another earnings release just to be double sure that this is a good time to buy it, which I think will happen down the line in 2022. 

With this in mind, here are three top-tier titans I’ve got my eye on. 

Croda International

Shares in chemicals firm Croda International (LSE: CRDA) are down almost 30% year-to-date. That’s an awfully big drop for such a great company. While I’m not sure I’d buy just yet, I do get the sense that opportunity is knocking increasingly loudly. 

For the uninitiated, Croda has been around for almost a century. It produces ingredients for manufacturers in the home care, beauty, personal care, and fragrance market. It also operates in the Life Sciences space (providing solutions to protect crops, for example). I can’t see either of these markets ceasing to exist, even if Croda has struggled to grow profits recently. 

On the downside, the shares still look highly valued at 28 times forecast earnings. That’s a bit higher than the company’s five-year average P/E. With investors showing a penchant for (possibly-lower-quality) stocks on cheaper valuations right now, I wouldn’t be surprised if there was more selling pressure ahead.

It’s a bit expensive for me at present, so it stays on my watchlist for now. 

Next

FTSE 100 clothing firm Next (LSE: NXT) is another company whose share price has been struggling. A 15% drop in 2022 so far leaves the stock sitting at a 52-week low and changing hands for just 12 times earnings. That’s a low valuation for a firm that has built a reputation for consistently great returns on capital and fat margins.

Then again, it’s worth considering the wider context. With higher prices pushing many in the UK to watch their non-essential spending, I wonder if things could get worse before they get better. Next month’s Q4 numbers will be pivotal in determining how much the business is suffering. Recent activity suggests investors are already bracing themselves for a few nasties.

Under the stewardship of Simon Wolfson, there’s no doubt in my mind that Next is one of the better companies in the FTSE 100. I’m also convinced it can and will bounce back from this sticky patch. 

Even so, I’m inclined to hold off buying for now. 

Auto Trader

A final FTSE 100 growth stock I’m keeping tabs on is Auto Trader (LSE: AUTO).

A beneficiary of the global shortage in semiconductors and, subsequently, new vehicles, buyers have been flocking to its site even more than usual. Indeed, the clamour for used motors sent the share price rocketing last November.

Unfortunately, the very same stock is down 14% year-to-date. Some profit-taking is understandable. Like Next, however, I wonder if demand could soften as inflation places huge pressure on discretionary incomes. That’s even if supply chain issues are resolved.

Having said this, a P/E of 25 is cheaper than digital peers such as Rightmove and considering its dominance of the industry in which it operates. As such, I’d be prepared to buy Auto Trader hand over fist if things get worse over the next few months. Just like this top investment trust.

The FTSE 100’s winners and losers over one month

In the past month, the FTSE 100 has gained 0.1%. As you’d expect, some Footsie shares have performed much better than others. Over one month, 33 of 100 Footsie shares have gained in value. These gains range from 19.9% to 0.1%, with the average rise being 2.7%.

At the other end of the scale lie 67 FTSE 100 stocks that have lost value over one month. These losses range from 0.1% to 26.9%. The average decline across all 67 losers is 9.1%. But 23 FTSE 100 shares have dipped by double-digit percentages in the past 30 days.

Top of the FTSE 100 flops

For the record, these are the FTSE 100’s three biggest fallers in the past month. Each of these slumping stocks has lost more than a fifth of its value in 30 days:

As you can see, losses at these Footsie flops range from over 21% at Croda International to almost 27% at Fresnillo. The average decline across all three slumpers is 23.5%. Yikes.

For me, one of these flops is too cheap

I don’t own shares in Fresnillo (LSE: FRES), but this FTSE 100 stock is now firmly on my radar. After steep falls since September 2020, Fresnillo’s share price has more than halved. And these kind of hefty declines often plunge unloved or unwanted stocks into Mr Market’s bargain basement. But does this de-rating really reflect the underlying performance of the business? Or have the shares been overlooked?

Fresnillo has been London-listed since 2008. However, the group is based in Mexico City and also quoted on the Mexican Stock Exchange. Fresnillo’s claim to fame is being the world’s largest producer of primary silver (silver from ore), as well as Mexico’s second-largest gold miner. In fact, its oldest mine has been in operation for nearly five centuries. Today, Fresnillo manages seven operating mines, three development projects, and six exploration prospects. In 2020, this FTSE 100 firm produced 53.1m ounces of silver and nearly 770,000 ounces of gold. Wow.

I’d buy Fresnillo today

As you’d probably guess, Fresnillo’s financial fortunes are strongly tied to the prices of silver and gold. As I write, gold trades at around $1,803.60 an ounce, down 1.1% over one year. Likewise, silver is priced at $22.51 an ounce, diving 17.6% in the past 12 months. Of course, these price declines have depressed Fresnillo’s cash flow, profits, and earnings. From its 52-week high of 1,193.5p on 1 February 2021, this FTSE 100 stock plunged to a low of 612.6p on Monday, 31 January.

As I write, Fresnillo shares trade at 626p, valuing the business at £4.6bn. This stock trades on a modest price-to-earnings ratio of 10.2 and a solid earnings yield of 9.8%. The dividend yield of 3.8% a year is slightly below the FTSE 100’s 4%. To me, these fundamentals seems too cheap, so I’d buy Fresnillo stock today. But I’d fully expect this Footsie share to ride the roller-coaster of volatility in 2022-23!

Before I continue, I should note that I think this company is a British champion. Over the past few decades, the group has helped develop a range of new technologies and specialist equipment, earning it a reputation as one of the country’s best businesses. 

However, as the stock has surged and profits have stagnated, the stock has become less appealing.  Unfortunately, it does not look as if this will change anytime soon. 

FTSE 100 company challenges

In some respects, I am attracted to Croda’s business model. It is a champion of the unexciting, manufacturing specialist goods such as lipids, a key component of vaccines. It has also tried to branch out into electric vehicle batteries, although management has now announced that it will be exiting this business. 

Croda made a strategic misstep with batteries. The company discovered it could not compete with larger competitors, which can manufacture more for less. 

The business has also recently decided to sell off its industrial division. When complete, the group will have transitioned to a pure-play chemicals company focused on consumer care and life sciences. These are defensive businesses where demand is expanding. 

If this is the case, then why would I avoid the business? I am worried about the FTSE 100 company’s valuation and growth potential.

Expensive business 

Over the past three years, Croda’s net profit has hardly budged. Nevertheless, its stock has moved steadily higher. As a result, the shares are currently trading at a forward price-to-earnings (P/E) multiple of 45. 

This premium multiple suggests the market is expecting a lot from the enterprise. But there is no guarantee it will be able to meet these lofty expectations.

Croda needs to stay on its toes to remain competitive. That means investing in new technologies and fast-growing industries. This strategy comes with its own risks. There the investments that may not work out and could lead to write-offs. 

Of course, I could be wrong. The company has a history of innovation and changing with the times. There is no guarantee it will fall behind. The market may continue to pay a high multiple for the shares if the enterprise can stay ahead of the competition. 

Still, with risks in the global economy growing, I am planning to avoid richly-valued businesses. If the business disappoints, the shares could slump back to the sector average multiple. This is around 20-25. If this scenario materialises, shares in the business could drop significantly from current levels. 

Considering this risk, I think there are plenty of other FTSE 100 companies I would rather own in my portfolio. 

Steady long-term growth

2021 was not a flash in the pan for Croda. The company, which was first listed in 1964, has been gaining market momentum for a while now. Five-year returns stand at a whopping 148%, and Croda consistently ranked in the top 10 FTSE 100 performers over this period.

The company carried forward strong momentum from 2020. The decision to acquire the drug delivery systems researcher Avanti Polar Lipids played a crucial role in the development and manufacture of the Pfizer and BioNTech Covid-19 vaccine. This US$225m purchase injected life into Croda’s life sciences and healthcare divisions. And this has shaped how the company is transitioning today.

The revenue from the healthcare division boosted sales by 39% in the first half (H1) of 2021 (ended 30 June). The report showed a pre-tax profit of £229.5m driven by £934m in sales during the six-month period. The life sciences (LS) division grew 60% after the US$100m Covid lipid systems sales.

Although revenue from Covid vaccine sales is expected to wane, the board is already focusing on broader mRNA vaccine applications, which are expected to grow exponentially in the coming years.

Shareholders also received a boost after the chemical manufacturer raised the interim dividend by 10% to 43.5p. The company has steadily increased its shareholder returns for nearly 30 years, which has raised its reputation among investors.

Restructuring phase

The business has slowly been restructuring to move away from the industrial chemical sector. This is not an unexpected move, given that the LS and consumer care sectors brought in 90% of Croda’s total revenue in 2020.

In December, Croda struck a deal to sell its performance technologies and industrial chemicals operations to American commodities group Cargill for a whopping $1bn (£778m).

In a recent press release, chief executive Steve Foots said, “Today’s announcement completes our transition into a pure-play consumer and life sciences company. We will focus our capital and resources on delivering sustainable solutions and scaling our consumer, health and crop care technologies, leading to consistent sales growth and an even stronger profit margin“.

But many analysts feel the deal is undervalued. And I agree with the assessment, given Croda’s global reach in the industrial chemical sector. Investors are backing out and taking profits after this move. This has caused the Croda share price to fall nearly 19% from 10,120p on 31 December to 8,228p earlier today. Even after the recent downtrend, the company is trading at a price-to-earnings ratio of 45.5 times, making it overvalued.

Croda is entering a crucial phase of restructuring. But it does not take away from the stellar year the company had in 2021. The company has made many strategic investments in the last 24 months in the personal care space. And I think the 53% jump in share price in 2021 is a result of years of positive financial performance. I am looking forward to the full-year results, which should give me a lot of clarity on the chemical giant‘s future plans. 

Croda International

Consumer Care and Life Sciences company Croda International (LSE: CRDA) has gained 51% in value in the year to Christmas Eve. That makes the stellar 12% rise in the FTSE 100 look almost pedestrian. Much of this momentum has been due to the company managing to exceed analyst expectations on profit over the year. The question is, can this continue?

I’m certainly optimistic. Having now agreed to sell the majority of its Performance Technologies and Industrial Chemicals businesses, Croda intends to move into “faster growth areas” such as healthcare and become a leader in the cropcare market. These moves, according to CEO Steve Foots, will see the company generate “consistent sales growth and an even stronger profit margin”.

The only problem is that Croda now trades on a punchy valuation of 39 times forecast FY22 earnings. As such, I’d be very surprised if the company manages to replicate 2021’s gains.

Nevertheless, this remains a great stock, in my opinion. If I were looking to build a FTSE 100-focused portfolio for the long term, CRDA would easily make the shortlist. One to buy on dips perhaps?

Glencore

Next up is mining and commodities trader Glencore (LSE: GLEN). Its shares have climbed 52% in 2021, so far. Again, this is evidence that picking your own stocks has at least the potential to vastly outperform the market. It also shows that winners can come from multiple, very different sectors.

Glencore’s streak can be attributed to the growing demand for commodities like copper and, more recently, oil. In fact, the company’s interest in the former could continue to be very lucrative in the years ahead as the adoption of electric vehicles and renewable energy gathers pace.

Of course, one issue with Glencore is that its fortunes are, to some extent, beyond its control. Commodity prices can quickly reverse and this leaves me skeptical that the stock will repeat this year’s performance in 2022.

Then again, it might be argued that the potential income on offer more than makes up for this. A 6.8% yield for FY22 is currently forecast. Shares also trade at just 7 times earnings. 

Ashtead

A final FTSE 100 stock that’s done the business for holders in 2021 has been equipment hire business Ashtead (LSE: AHT). Its value has climbed a stonking 72% year to date as rental revenues have soared to record levels.

Naturally, such a run of form could lead to some profit-taking in 2022. The seemingly never-ending pandemic could also cause a slowdown in trading if projects end up being delayed due to safety concerns. However, a forward P/E (price-to-earnings) ratio of 25 doesn’t feel excessive, given the consistently high margins Ashtead achieves.

The outlook is bullish too. With the construction industry in rude health following a post-lockdown rise in demand (not to mention Joe Biden’s infrastructure bill), I don’t doubt the good times can continue for the £27bn-cap.

Another 72% next year? Probably not. However, this is another stock worth keeping in the bottom drawer, in my opinion.