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I am looking to make some investments in September. And while I think there are a number of good investment opportunities out there right now, I’ve identified two strong buy stocks for my portfolio this month.
The stocks in question are. Diploma (LSE:DPLM) and Professional (LSE:EXPN) I don’t own Diploma shares yet, but I do own Expert. This is why I want to add one to my portfolio and increase my investment in the other.
Economic recession
It looks to me like the UK is headed for failure. Energy prices are rising, inflation is high, and the Bank of England’s best attempts to stem the tide seem ineffective.
As a result, I expect things to get worse before they get better and want to be cautious about my current investment. To me this means two things.
First, it involves paying more attention than usual to high-quality businesses when looking to buy stocks. In an unfavorable macroeconomic environment, I don’t want to take unnecessary risks.
Second, it involves being conservative, especially in valuing stocks. This means being realistic about what basic businesses will produce in the future and how much I’m prepared to pay.
Quality
At first glance, it’s hard to see how Diploma and Experian fit the bill. Both stocks seem to have good growth prospects built-in.
Diploma currently trades at a price-to-earnings (P/E) ratio of around 41. Experian looks a little more reasonable with 24-time earnings, but it still looks risky.
But beneath the surface there is much more. Both companies have exceptional cash-to-cash ratios and I think this makes them attractive stocks at current prices.
Diploma converts more than 92.5% of operating income into free cash flow. Expert is better – over 94% of operating income becomes free cash flow.
This is amazing. For context, both of these numbers are more impressive than Alphabet (84%), Apple (89%) and Meta forums (91%)
According to Warren Buffett, what makes a business worthwhile is cash. I also think that both Diploma and Experian generate enough cash to offset the risk in their respective P/E ratios.
Prices
If interest rates are expected to reach 4% next year, I want an expected return of 7% per year on a stock investment.
Diploma needs to grow its earnings per share by about 15 percent annually to achieve this. This seems like a lot, but the company has many opportunities in front and I think the management team can use them wisely.
In Experian’s case, the business should grow at an average of 12% annually for the next decade. As it has grown close to 15% over the past 10 years, I believe this is achievable.
I think that’s why both Diploma and Experian are strong buy stocks for me right now. I would love to add both stocks to my portfolio at today’s prices.