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Over the past three years, Rolls-Royce (LSE:RR) shares have mounted the sort of comeback story normally reserved for Hollywood movies. It has certainly benefitted my portfolio, reminding me that FTSE 100 stocks can also sometimes serve up Tesla-type returns.
However, while I’m still bullish long term, the market appears well up to date with the Rolls-Royce story. And with the stock trading at 33 times forward earnings, I reckon there are more attractive opportunities elsewhere in the blue-chip index.
Here are two that I currently prefer over Rolls-Royce.
Diageo
The first is Diageo (LSE:DGE). This is a somewhat strange pick for me because I sold out of the spirits giant back in January. I was fed up with the stock’s slide lower… and lower.
Diageo’s challenges are well-documented, including weak sales in Latin America, under-pressure consumers in the UK and US, and Gen Z drinking less or not at all. GLP-1 weight-loss drugs are a wildcard, while the firm’s debt position has started to look high.
Yet the company’s category-leading brands remain top-tier, stretching from Tanqueray gin to Johnnie Walker whisky and the all-conquering Guinness. And while sales are sluggish, things haven’t dropped off a cliff (organic net sales were flat in Q1 2026).
What Diageo needs badly is a new sense of direction and concrete turnaround strategy. Thankfully, this could come in the form of new CEO Sir Dave Lewis, who starts in January.
While nobody knows what Lewis will do, he has a few options. He could offload underperforming brands, streamline global marketing spend to focus on strong brands, and even pull out of certain markets or categories. Diageo could sell its 34% stake in Moët Hennessy.
Now, I don’t expect a turnaround to materialise overnight. And there’s a risk the dividend will be cut to free up some cash, which would make the current 4.6% yield less attractive for income investors.
But I think there’s the potential to make Diageo a far leaner beast, with a growth strategy centred around its best brands. Were Lewis to get this right, with the stock trading very cheaply today, Diageo may well produce far higher returns than Rolls-Royce over the next few years.
I accept this might not happen, and that Diageo could stay a value trap. Yet at 1,725p, I think the risk/reward proposition looks attractive enough to consider.
BAE
The second stock is BAE Systems (LSE:BA.), which has fallen 20% since late September.
The reason for this appears to be related to the renewed hope for peace in Ukraine. If an actual ceasefire were announced, as we all hope for, it could put further pressure on the share price (some of BAE’s equipment is supplied to Ukraine by Western governments).
However, it doesn’t really change the need for Europe (including Ukraine) to rearm over the next decade. NATO countries have now committed to spend 5% of their GDP on defence annually by 2035, including at least 3.5% for core military spending.
Therefore, the backdrop for earnings growth over the medium and long term is still very strong. And this makes the stock’s forward price-to-earnings ratio of 19.5 look good value, in my opinion.
Interestingly, the share price target among analysts is now 24% above the current level. I think BAE is worth considering after the 20% pullback.
