UK markets closed
  • NIKKEI 225

    -150.29 (-0.51%)

    -201.69 (-0.70%)

    -0.43 (-0.60%)

    -44.00 (-2.37%)
  • DOW

    -265.66 (-0.77%)

    -1,132.58 (-3.94%)
  • CMC Crypto 200

    -35.34 (-3.56%)
  • ^IXIC

    -33.17 (-0.24%)
  • ^FTAS

    +5.27 (+0.13%)

2 stocks I’d buy over Rolls-Royce

  • Oops!
    Something went wrong.
    Please try again later.
  • Oops!
    Something went wrong.
    Please try again later.
  • Oops!
    Something went wrong.
    Please try again later.
·3-min read
Plane on runway
  • Oops!
    Something went wrong.
    Please try again later.
  • Oops!
    Something went wrong.
    Please try again later.
  • Oops!
    Something went wrong.
    Please try again later.

Back in November, I highlighted a stock I’d buy over Rolls-Royce, even though the engineer is one of the most popular shares in the UK at present. That was dotDigital, an under-the-radar UK technology company that provides digital marketing solutions. That call worked out pretty well. Since that article, DOTD shares have risen about 45%. Over the same timeframe, Rolls-Royce shares have fallen about 4%.

Here, I’m going to discuss two more stocks I’d buy over Rolls-Royce. These may not deliver the same kind of short-term outperformance dotDigital did. However, in the long run, I expect them to outperform RR shares.

This UK company is growing much faster than Rolls-Royce

One UK stock I’d buy today is ASOS (LSE: ASC). It’s a leading online fashion retailer that offers a market-leading app and mobile/desktop experience in over 200 markets. In its last financial year (ended 31 August 2020), it generated sales of £3.2bn.

ASOS has grown at a tremendous pace in recent years (five-year revenue growth of 185%) and, looking ahead, I expect the company to keep growing. Currently, City analysts expect the group to generate top-line growth of 22% this financial year and 18% next year.

This growth is likely to be driven by the continuing shift to online shopping, increased smartphone penetration, advances in payments technologies, as well as new technologies such as augmented reality (which can be used to create ‘virtual’ changing rooms).

But there are risks to the investment case here, of course. One is the threat of competition. ASOS faces intense rivalry from a number of other retailers including Boohoo and Next. With the stock currently trading on a forward-looking price-to-earnings ratio of less than 30 however, I think the long-term risk/reward proposition here is attractive.

This growth stock is also hard to ignore

Another stock I’d buy over Rolls-Royce today is Amazon (NASDAQ: AMZN), which is listed in the US. It’s the largest e-commerce company in the world. It’s also a leader in cloud computing with its Amazon Web Services (AWS) division.

Amazon is continuing to grow at an unbelievable rate. Its first-quarter results, for example, showed 44% growth in the e-commerce division, along with 32% growth in its cloud division.

Looking ahead, I think Amazon has a long-growth runway ahead. I’m particularly excited about growth in the company’s cloud division. The global cloud computing industry is projected to grow at about 18% per year between now and 2025. This should provide huge tailwinds for Amazon.

It’s worth noting that since Amazon posted its Q1 results, a number of brokers have lifted their price targets for the stock and many of these targets are much higher than the current share price. One broker went as high as $5,500 – 70% higher than the current price.

So Amazon is an expensive stock. Currently, it sports a forward-looking P/E ratio of just under 60 and that means there’s some valuation risk here. If growth stalls, the stock could take a hit.

I just think that in five years’ time though, this company is likely to be much bigger than it is today. That’s why I’d buy its stock over Rolls-Royce shares.

The post 2 stocks I’d buy over Rolls-Royce appeared first on The Motley Fool UK.

More reading

Edward Sheldon owns shares in ASOS, Boohoo, dotDigital, and Amazon. John Mackey, CEO of Whole Foods Market, an Amazon subsidiary, is a member of The Motley Fool’s board of directors. The Motley Fool UK owns shares of and has recommended Amazon. The Motley Fool UK owns shares of Next. The Motley Fool UK has recommended ASOS, boohoo group, and dotDigital Group and recommends the following options: long January 2022 $1920 calls on Amazon and short January 2022 $1940 calls on Amazon. Views expressed on the companies mentioned in this article are those of the writer and therefore may differ from the official recommendations we make in our subscription services such as Share Advisor, Hidden Winners and Pro. Here at The Motley Fool we believe that considering a diverse range of insights makes us better investors.

Motley Fool UK 2021