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Many UK investors will have heard of Purplebricks (LSE: PURP) and seen its TV ads or signs outside homes for sale. But why did Purplebricks shares lose around a quarter of their value yesterday?

What happened?

The online estate agency has revealed that it expects to make a provision of millions of pounds – potentially up to £9m – because it didn’t properly serve legally required documents to tenants explaining that their deposits had been put into a national protection scheme. Its failure to inform tenants within 30 days means they should be able to claim back up to three times the value of the deposit, up to six years after the event.

The Daily Telegraph reported on the blunder first, leading to a response from the company. The paper said the figure could theoretically be as high as £30m.

Overall, the debacle gives the impression of a company that’s cutting corners and doesn’t have the systems in place to do the basics that are legally required of it. No wonder the shares fell. Investors will be fretting about the immediate cost but also what it says about management’s competence. It also makes me wonder what other skeletons might be in the closet.

Is Purplebricks stock now a good buy?

But does the price fall means Purplebricks shares are cheap enough for me to buy? I don’t think so. This latest mistake was avoidable and follows on from an already poor share price performance. The shares are down more than 70% in the year to date.

A trading update in November warned that despite a strong period for the UK housing market in 2021, buoyed by the stamp duty holiday, the six months to 31 October 2021 were more challenging.

The online agency has more recently said the UK housing market is set to be closer to “normal” in 2022, following a “hectic” last 18 months. New business is slowing down already. 

This isn’t the only issue the firm faces. Hundreds of current and former Purplebricks agents are pursuing legal action against the company. They claim they’re entitled to benefits such as holiday pay, pensions and national insurance contributions. The company has moved from self-employed agents to employing staff directly. Similar moves at companies like Provident Financial have been bad news for shareholders as costs have risen.

Competition in online-only, or hybrid agency models is another issue for management and investors and one that’s no doubt having a negative impact on Purplebricks shares.

On the brighter side perhaps the shares are now poised well for a contrarian gamble? They detianly have fallen a lot. Purplebricks does also have strong brand awareness. 

Better options

I hold shares that are connected to the property market. The first is Property Franchise Group. It manages around 55,000 properties and is also involved in house sales. Between 2015 and 2020 its revenue went from £7.1m to £11m. It’s a high-growth share on an undemanding valuation. I also like — and own shares in — housebuilder Persimmon. It has best-in-class margins and a lot of cash on the balance sheet to pay the dividend and buy more land.

I much prefer to hold Property Franchise Group and Persimmon over Purplebricks shares – though both could fall if the property market slumps. I fully expect the latter’s share price to keep falling.

Andy Ross owns shares in Property Franchise Group and Persimmon. The Motley Fool UK has no position in any of the shares mentioned. 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.

Berkshire Hathaway lists two S&P 500 ETFs in its holdings. SPDR S&P 500 ETF and Vanguard 500 Index Fund ETF. It’s true that they represent a tiny fraction of Warren Buffett’s company’s holdings at around $40m, but nonetheless, I find it interesting. Especially, when the Oracle of Omaha so often mentions the benefits for regular investors in holding such funds. 

I’ve already invested in an equivalent London-listed ETF for my own portfolio, but with 2022 approaching, I’m revisiting this ETF strategy again.

S&P 500 ETFs

The S&P 500 is widely considered the most important index in the US. It contains 500 large companies that are selected by a committee. Firms must have a big enough market cap, at least 10% of their shares outstanding and meet liquidity and profitability requirements.

It includes big-name companies such as Microsoft, Apple and Amazon. In terms of industries, the index includes a variety of sectors such as technology, retailers and banking.

As such an important index and essential barometer of US stock market health, it’s no surprise that there are lots of ETFs available.

The funds I’m interested in for my own portfolio are the ones listed on the London Stock Exchange. These allow me to easily and cheaply buy shares in an S&P 500 ETF using GBP. Most, if not all, of the major investment companies offer such an ETF and there’s just so much choice.

The largest one listed in the UK is iShares Core S&P 500 UCITS ETF at over £40bn. The cheapest one is Invesco S&P 500 UCITS ETF with an ongoing charge of 0.05%.

There’s also the question of dividends. Some of the ETFs pay out dividends, some don’t. Personally, I like the income stream.

For my own portfolio, I’ve previously chosen Vanguard S&P 500 ETF (LSE: VUSA), as this seems to sit in the middle in terms of size ($47m) and costs (0.07%). The Vanguard fund has a current yield of 1.12%.

It’s no secret that over the last two years, the S&P 500 has performed well. This is reflected in the returns of the Vanguard ETF. At the time of writing, the share price is up over 30% for the year with a similar return over a 12-month period. The five-year performance is even better with a return of around 100%.

Should I still invest?

Despite the fantastic returns, looking ahead to next year, there are no guarantees of how the ETF will perform. Questions about inflation, government policy and potential Covid lockdowns are all on the horizon.

One downside of buying the ETF is that I limit my returns to those of the index. I could be wrong, but it’s possible that an uncertain market creates opportunities. By picking individual stocks I might be able to outperform it.

Also, this fund and the index itself only include US companies. Yes, many of these companies have revenue streams from outside the States, but the percentage has been falling over time.

However, on balance, going into 2022 I’m still comfortable including an S&P 500 ETF in my holdings as part of a diversified portfolio.

Niki Jerath owns shares in Vanguard S&P 500 ETF. Teresa Kersten, an employee of LinkedIn, a Microsoft subsidiary, is a member of The Motley Fool’s board of directors. 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 has recommended Amazon, Apple, and Microsoft. 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.

In recent months, the UK retail grocery sector has been ripe with acquisitions. Two of the ‘big 4’ supermarkets – Asda and Morrisons – have been bought by private equity (PE) firms. This has largely been spurred by the sector’s resilience during the pandemic.

The interest in Morrisons led to its share price rocketing. It was purchased by CD&R for just under £10bn, including debt. This equated to a 287p per share offer, over 60% higher than the pre-acquisition announcement price.

M&S (LSE: MKS) has proved itself as one of the hottest FTSE 100 stocks this year, delivering over 80% year-to-date returns. In mid-August, on the Morrisons news, the M&S share price jumped over 25% as investors saw it as another potential target. If this did occur, I think we could see the share price of the FTSE 100 stock explode.

Acquisition case for M&S

In my opinion, there are three key factors that highlight M&S as an attractive investment opportunity for a private equity firm.

The first is strong cash flows. The PE model rests on using large amounts of debt to fund an acquisition (called a leveraged buyout). The aim is to pay down this debt using the cash flows produced from the acquired company, building the PE firm’s equity stake in the company. The company can later be sold and the difference in starting and ending equity value is the return on investment. In order for this model to work, the company needs strong, stable cash flows. M&S has just that, delivering £296m cash in 2021.

Them there’s its large property value. One thing that’s particularly attractive about M&S and many retail grocery firms is the large amounts of property they hold. For example, at present, M&S has an estimated £1.8bn worth of property. This is attractive for PE firms because this property can be sold to help fund transaction costs.

The low-interest-rate environment is a broader factor that makes PE investment very attractive. This makes raising capital and sustaining debts very cheap. This is critical for PE firms as their whole acquisition model relies on using large amounts of debt.

Potential risks

Although the above factors highlight the attractiveness of M&S shares, there are still risks that must be considered if I were to consider a purchase. One such risk is the fact that although current interest rates are very low, many investors are expecting them to rise very soon to combat rising inflation. If this is the case, then it will make it harder to raise capital and PE investment will be less attractive.

M&S has already increased its online delivery presence through its 50% stake in Ocado. The pandemic has vastly accelerated the shift to online grocery shopping. While this is encouraging, it also means that M&S will have to compete with a much wider range of grocery delivery firms moving forward. It will have to successfully navigate this competitive landscape if it wants to carry on delivering good results. 

I think M&S is one of the most attractive FTSE 100 stocks for a PE acquisition that could drive a steep share price rise. But acquisition talk aside, I think M&S’s strong results and online presence could make it a great investment opportunity for my portfolio as an independent company. Those features that make it attractive to PE firms, make it attractive to me too!

Dylan Hood has no position in any of the shares mentioned. The Motley Fool UK has no position in any of the shares mentioned. 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.

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Dividend stocks are a great way for me to generate passive income. I also have the option of reinvesting my dividends to buy more shares, which should mean I get an even bigger passive income next year.

What’s most important, though, is buying shares that pay out dependable dividends. This is because dividends are never guaranteed. Companies have to remain profitable before they consider paying dividends to shareholders like myself.

With this in mind, here are two companies I’m considering for my income portfolio that have paid consistent dividends over the years.

A dividend stock to count on

The first company is BAE Systems (LSE: BA), a provider of military equipment and security systems for governments across the world. The UK’s Ministry of Defence and the US Department of Defense are both major customers of BAE Systems. Revenue can typically be quite stable as these governments have to maintain and upgrade their security capabilities each year.

City analysts are expecting the dividend yield to be 4.5% in 2022. This isn’t huge like some other FTSE 100 stocks. But I still view this as a respectable dividend for my portfolio.

However, it’s the consistency of dividends here that I’m drawn to. In fact, BAE Systems has paid a dividend every year going back to at least 1992. This covers the dotcom bubble, the financial crisis, and most recently the pandemic. This is an impressive run of dividend payments.

Another dividend stock

The next company is Rathbone Brothers (LSE: RAT), an investment and wealth management business.

Jumping straight to the dividend forecast and this is a decent 4.1% for next year. Again, it’s not huge like some UK stocks, but I still consider this high enough for my income portfolio.

Rathbones Brothers has been able to pay a regular dividend over the years too. In a similar way to BAE, the company has paid one every year since at least 1992. This track record means there’s a good chance it’ll pay a dividend again in 2022.

Risks to consider

It’s important that I review a company’s history of dividend payments before I invest. However, this doesn’t guarantee that a dividend will be paid in the future. If either BAE Systems or Rathbones Brothers struggles in the year ahead and profitability falls, there’s a good chance the dividend will be cut, or worse, stopped altogether.

Rathbones Brothers generates fees on its assets under management, so a stock market crash could really impact the company’s profits. If this does happen, I expect the dividend to be reduced.

As for BAE Systems, it has to keep developing its technologies to keep up with global demand for security. There’s always a risk of losing a key government contract to a competitor, which would significantly impact its profits.

On balance though, I’m looking to buy these dividend stocks for my portfolio.

Dan Appleby owns shares of BAE Systems. The Motley Fool UK has recommended Rathbone Brothers. 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.

2021 has been a good year for oil and gas generally. Oil is up by over 50% this year, as is natural gas. The share prices of natural resource exploration companies are largely reliant on the value of these commodities, so it’s no surprise that they’ve had a stellar year.

In fact, at the time of writing, iShares Oil & Gas Exploration & Production UCITS ETF (LSE:SPOG) is the best-performing ETF of the year.

The ETF

I’ve always been a fan of ETFs (exchange traded funds). These are funds that track an index or sector and can be bought and sold like a share through most online brokers. They allow me to invest in multiple companies in a single fund and are usually low-cost.

This particular ETF aims to track the S&P Commodity Producers Oil & Gas Exploration & Production Index.

This index measures the performance of some of the largest publicly traded firms involved in oil and gas extraction and development from around the world. The companies must also meet liquidity and market capitalisation requirements to be included.

Quite simply, this fund has had a phenomenal year. Year to date the fund has increased by over 70% and over 12 months the performance is similar.

Looking into some of the holdings reveals some heavyweight natural resources companies. The two biggest holdings are ConocoPhillips and EOG Resources. The former is Alaska’s largest crude oil exploration and production company. The latter is a Fortune 500 company headquartered in Texas. Both firms are in the oil discovery and processing business with operations in the US, Middle East, Europe, and Asia.

Canadian Natural Resources, is the third-largest holding in the fund. It’s one of the biggest independent crude oil and natural gas producers in the world.

Should I invest?

The increase in the share price of this fund is ultimately because of the rise in the value of oil and gas. As the world has come out of lockdowns, soaring demand combined with surging business activity has rapidly increased energy prices.

However, the 2022 price outlook for these commodities is far from certain. On one hand, the International Energy Agency projects oil demand to recover to pre-pandemic levels in 2022. However, according to an S&P report, the price of oil should stabilise in 2022. On balance, I think that the price of oil and gas in 2022 will be largely determined by Covid variants and possible lockdown restrictions. A surge in the new Omicron variant, identified by the World Health Organisation as potentially very high-risk, has already seen the price of oil fall.

For this reason, despite this being the best-performing ETF of the year so far, I’m happy to wait and see what happens to energy prices in 2022 before adding it to my own portfolio.

Niki Jerath has no position in any of the shares mentioned. The Motley Fool UK has no position in any of the shares mentioned. 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.

I’ve been looking at a FinTech penny stock for my portfolio. Not only is the FinTech sector growing at a rapid pace, but penny stocks can sometimes offer outsized returns.

The company I’ve been analysing is Equals (LSE: EQLS). It offers a range of products, including international payments, bank accounts and credit facilities, plus multi-currency cards and travel cash. The company pivoted its strategy three years ago to focus on its business-to-business (B2B) solutions. Today, Equals derives the majority of its revenue from its international payments operation.  

Let’s take a look to see if I should buy this penny stock in my portfolio.

The bull case

I’m excited by the growth potential of the FinTech sector. It’s an area that’s expected to grow by over 23% on a compound annual rate between 2021 to 2026. Indeed, Equals is confident of challenging incumbents in the financial services sector. Its ambition is to become the leading payments company of choice for small and medium-sized enterprises, which I view as a huge potential growth avenue for Equals.

The company is also performing well right now. In a trading update released on 8 December, Equals said it has significantly exceeded full-year expectations for both revenue and adjusted EBITDA (earnings before interest, tax, depreciation and amortisation). This is exactly what I want to hear as a potential investor. A significant international payments transaction for a large corporate client played an important role in the outperformance. This shows to me that the company’s strategy is working well.

The bear case

Although the share price has had a strong run in 2021, and is up a huge 128% as I write, it remains under the all-time high it reached in 2018 of 150p. In fact, the share price crashed by an eye-watering 85% from this high when it reached a low during the Covid sell-off in spring 2020. This kind of volatility is always something to keep in mind when investing in a penny stock.

Equals has been loss-making in its last two financial years. Investing in companies that don’t make a profit is always riskier as any downturn in trading may lead to significant financial distress.

Finally, the FinTech sector is highly competitive. That’s generally the case when a disruptive sector is growing at pace as it attracts new and ambitious companies to the market. I wrote about Wise recently, which operates in this sector. There’s a risk that Equals may have to reduce its prices to remain competitive in its main international payments business in order to remain competitive.

Is this penny stock a buy?

Taking everything into account, I do like the investment case here. The general growth in the FinTech sector acts as a tailwind for Equals. The pivot towards its B2B solutions has proved successful so far too. The valuation isn’t particularly demanding either as the price-to-earnings ratio for next year is currently 19.

I’m strongly considering this penny stock for my portfolio.

Dan Appleby has no position in any of the shares mentioned. The Motley Fool UK has no position in any of the shares mentioned. 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.

The Rolls-Royce (LSE: RR) share price is shaking wildly as the Covid-19 crisis ramps up. Fears over its recovery as travel restrictions return have ratcheted up several notches. Now the FTSE 100 engineer is trading at near-three-month lows of 120p.

A case could be made that Rolls-Royce’s share price could now be too cheap for me to miss. City brokers think earnings at Rolls will soar 307% in 2022 as the aviation industry rebounds.

This leaves the business trading on a forward price-to-earnings (PEG) ratio of 0.1. A reminder that a reading below 1 suggests a UK share could be undervalued by the market.

On the right path…

To recap, Rolls-Royce’s share price took a hammering in 2020 as profits slid and debt levels soared. Coronavirus-related travel curbs reduced flying hours of its engines and decimated demand for its maintenance services. Concerns that orders of its hardware could slump if airlines go to the wall also spooked investors into selling their holdings.

A steady recovery in flying hours, along with a solid start to company restructuring, helped the Rolls-Royce share price recover some ground in 2021. Financials this month showed large engine flying hours back at 50% of 2019 levels, up from 43% as of June. It announced too that it had achieved £1bn worth of cost savings so far and chalked up £2bn worth of disposals.

Critically, this restructuring — along with the steady recovery in civil aviation and solid performances in its Defence and Power Systems Division — meant Rolls-Royce returned to positive free cash flow in the third quarter, it said. Now it expects full-year cash outflows to be better than the £2bn previously predicted.

…but for how long?

This is important news, given the colossal amount of debt the group has on its books (more than £4.9bn worth of as June). It has perhaps proved that the company has what it takes to manage its debt-buckled balance sheet.

I wasn’t prepared to buy Rolls-Royce shares following the result however. Past performance is no guarantee of future success. The dangers to the company remain immense as the Omicron variant spreads. Indeed, the Rolls-Royce share price fell again despite the release of that positive trading statement.

As I said, the Rolls-Royce share price is cheap. But this reflects the uncertain outlook for the aviation industry and, by extension, aerospace engineers like this. The UK Business Travel Association recently described the reintroduction of mandatory Covid-19 tests for those entering Britain as a “hammer blow”. Countries across  the world are reimposing, or tightening, their restrictions too, creating a global problem for the travel sector.

Why I worry for Rolls-Royce’s share price

Last month, ratings agency Fitch slashed its global passenger forecasts for 2021 and 2022, due to Omicron. It also reiterated its expectation that the airline industry won’t return to pre-pandemic levels until 2024.

It’s possible the sector will perform better than predicted if increasing rates of vaccination play out. But this isn’t a risk I’m prepared to take with Rolls-Royce, given its enormous debts. I’d rather buy other blue-chip shares today.

Royston Wild has no position in any of the shares mentioned. The Motley Fool UK has no position in any of the shares mentioned. 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.