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I’m always on the hunt for a top UK share to add to my ISA or SIPP. Typically, I target FTSE 100 companies that have taken a bit of a beating. I’m instinctively drawn to companies that have fallen from favour. The aim is simple: pick them up cheaper, lock in a higher yield, then wait patiently for recovery.
It doesn’t always work though. Sometimes momentum stocks keep racing ahead while battered shares take further beatings. But overall, it’s served me well. So where are today’s opportunities?
Despite the FTSE 100 hovering above 10,000, there are plenty of laggards. Right now, most sit in the data and analytics sector, where investors fear artificial intelligence could rip up traditional business models.
Panic grips this FTSE 100 sector
Accounting software specialist Sage is down almost 40% over a year. Credit agency Experian has fallen 35%. Pearson, RELX and London Stock Exchange Group have taken a massive pounding too. Until recently, they were market darlings trading on price-to-earnings (P/E) ratios above 30. Now they’re treated as if extinction looms.
I suspect the market may be overreacting. AI is powerful, but flawed. It relies on trusted data sources, many of which these firms provide. These companies are also embedding AI into their own platforms, which could improve customer offerings and productivity. Yet once fear has gripped investors, it can be hard to shake. Every new AI product launch could unsettle markets all over again. I think the threat has been overdone, but the shadow will take time to lift. They exactly the type of stocks I’d love to buy, but right now I’m gripped by fear too.
I’ve learned some hard lessons by investing in ailing drinks giant Diageo (LSE: DGE). It’s endured a brutal spell, with the shares almost halving over the last three years. A drop that was initially triggered by weakness in Latin America and the Caribbean turned out to be something broader. Sales slowed across Western markets and China. US tariff worries and shifting drinking habits added to its woes.
Diageo is showing signs of life
I kept averaging down and the shares kept sliding. Then in January I went bigger, committing more capital. Since then, there have been tentative signs of improvement. The share price is still down 17% over one year, but it’s jumped nearly 10% in the past month. Of course, that could be a false dawn. Yet new chief executive Dave Lewis has a clear mandate to take drastic action. His track record at Tesco suggests he’s not afraid of tough calls. Diageo needs them.
There are longer-term concerns. Weight-loss drugs could curb alcohol consumption. Gen Z seems to be drinking less. But social drinking has been part of human life for centuries. When disposable incomes recover, I suspect our thirst will return.
The shares trade on a price-to-earnings ratio of 15.3. The trailing yield has climbed to 4.35%, although Lewis could trim shareholder payouts as part of his reset. But I think Diageo is starting to see light at the end of the tunnel, whereas those once mighty data stocks may have only just entered it.
