With a rotation pending, are these the best stocks to buy in August?

When searching for the best stocks to buy in August, it’s important to note that the FTSE 100 is currently trading about 10% above its 200-day moving average — a level that typically signals strong bullish momentum. While this uptrend can present exciting opportunities, it also means the market is somewhat extended and could be entering overbought territory — in other words, stocks are trading too high.

Furthermore, global equities are trading at valuations that are quite rich compared to their long-term averages, especially in developed markets like the US. This combination of high prices and stretched momentum suggests that investors should approach new investments with care. It’s important to be selective and have risk management front of mind when identifying which stocks to buy in the current environment.

AstraZeneca

A sector rotation away from high-valuation technology stocks toward undervalued areas like pharmaceuticals in 2025 could benefit AstraZeneca (LSE:AZN). The stock has driven the FTSE 100 forward over the past decade but has underperformed over the past 12 months.

Recent market trends show money shifting out of technology and into healthcare, as investors seek defensive growth and reliable cash flows in a volatile environment.

AstraZeneca is trading at a forward price-to-earnings of 16 times and with a price-to-earnings-to-growth (PEG) ratio of 1.3. That’s far below the market average. What’s more, it offers a 2.2% dividend yield, which is actually above average again for this sector globally.

The company’s strong pipeline, diversified global footprint, strong cash generation, and above-sector dividend yield enhance its long-term appeal. However, there are risks, including the impact of US trade policy, still unknown, and the US administration’s long-term perspective on vaccines and immune therapies.

Personally, I believe there’s signs that health secretary Robert F Kennedy may be softening his position on vaccines. And from a distance at least, it appears that AstraZeneca may be among the better prepared pharma stocks to deal with US tariffs. That’s simply because of the geographies where it produces.

Melrose Industries

Melrose Industries (LSE:MRO) is a favourite of mine. The stock trades around 15 times forward earnings, which I believe is vastly undervalued for a company with such an impressive economic moat and a sole-supplier position for 70% of its sales.

And while I appreciate the company’s transition may have clouded the outlook, the business is forecasting an impressive 20% annualised earnings per share growth through to 2029. That suggests an adjusted PEG ratio of 0.75.

That figure is a massive discount to peers like Rolls-Royce and GE, which both trade close to 2.5. This signals that the stock could be hugely overlooked. And in a rotating stock market, I’d rather hold stock is the more cheaply valued opportunity.

There is a caveat and that’s Melrose’s debt. While it is manageable, indebted companies typically perform worse in economic downturns. Firms with high net debt ratios have lower financial flexibility, making them more vulnerable to adverse market conditions. This is worth thinking about if economic conditions deteriorate.

The bottom line

There’s no guarantee these companies will stop underperforming and start outperforming. However, I believe there’s some evidence that the market will rotate towards stocks with ower valuations. That’s why I believe these stocks deserve consideration in August. I own both and may decide to buy more.

The post With a rotation pending, are these the best stocks to buy in August? appeared first on The Motley Fool UK.

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James Fox has positions in AstraZeneca Plc, Melrose Industries Plc and Rolls-Royce Plc. The Motley Fool UK has recommended AstraZeneca Plc, Melrose Industries Plc, and Rolls-Royce Plc. 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.