Some investors may think the 98% one-year rise in Rolls-Royce’s (LSE: RR) share price is reason to avoid the stock.

Others may believe they should jump on the bandwagon to avoid missing out on further gains.

As a former senior investment bank trader and longtime private investor, I know neither view is conducive to making consistent investment gains.

I am only concerned whether the share has value left in it. If there is and it suits my portfolio objectives, then I will buy it.

Determining the fair value of the stock

To assess the value remaining in any share I begin by comparing its key valuations to its competitors.

Rolls-Royce currently trades at a price-to-earnings (P/E) ratio of 22.2. This is in the middle of its peer group, which comprises Northrup Grumman at 16.5, BAE Systems at 19.1, RTX at 35.8, and TransDigm at 45.6.

Nonetheless, it is undervalued against this group’s average P/E of 29.2.

The same is true of its 2.9 price-to-sales ratio compared to a 3.6 competitor average.

To get to the bottom of its valuation, I ran a discounted cash flow (DCF) analysis. This shows where any stock should be priced, based on future cash flow forecasts for a firm.

Using other analysts’ figures and my own, the DCF shows Rolls-Royce is 32% undervalued at £6.34.

So, the fair value of the shares is technically £9.32, although market forces may push them lower or higher.

Does the business look strong?

I think the principal risk to Rolls-Royce is that its production capabilities cannot keep pace with demand for its products.

Any significant slippage in the reliability of its deliveries could incur heavy costs to remedy and could damage its reputation.

Recent months have certainly seen a flood of new orders. The most recent of these was the 24 January £9bn contract award for the UK’s nuclear submarine fleet.

On 6 February, the UK promised to free more sites for nuclear energy developments across England and Wales. This is part of its push to expand the use of Small Modular Reactors (SMRs) to decarbonise the power network.

Rolls-Royce is one of four bidders for contracts that are likely to be worth billions of pounds. Two firms will ultimately be chosen to implement the SMR projects.

Industry forecasts are for the global SMR market to reach $72.4bn by 2033 and $295bn by 2043.

How have its recent results been?

Rolls-Royce’s H1 2024 results saw revenue jump 18% year on year to £8.182bn. Underlying operating profit soared 74% to £1.149bn, and operating margin increased to 14% from 9.7%.

Free cash flow (FCF) rocketed 225% to £1.158bn and return on capital increased to 13.8% from 9%.

Given these stellar figures, the firm upgraded its guidance for full-year 2024 to £2.1bn-£2.3bn underlying profit, from £1.7bn-£2bn. It raised its FCF guidance to £2.1bn-£2.2bn from £1.7bn-£1.9bn.

Will I buy the stock?

I already have shares in BAE Systems. Any additional holdings in the sector would negatively the risk/reward balance of my overall portfolio.

However, if I did not have this holding then I would buy Rolls-Royce stock as quickly as possible. As it stands, I feel it is worth investors considering.

I believe it will reach its strong growth forecasts, which should push the share price higher over time.

The FTSE 100 index has had some strong individual performers over the last five years. From Rolls-Royce to InterContinental Hotels Group, quite a few stocks have delivered gains of more than 100%.

Interested to know which Footsie stock performed the best over this period? Read on and I’ll tell you.

The winner is…

It may come as a surprise but the best performer (in terms of share price appreciation) in the FTSE 100 over the last half decade has been private equity and infrastructure company 3i Group (LSE: III). Over the period, its share price has climbed a whopping 249%.

That’s an impressive return. It’s better than four of the ‘Magnificent 7’ have generated!

It’s worth noting that this stock has also paid dividends. Five years ago the yield was about 3% but since then the dividend payout has risen substantially.

Overall, anyone who has been invested in this company over the five-year period has absolutely cleaned up. If an investor had put £5k into 3i five years ago, that capital would now be worth over £18k.

There were signs it could soar

In hindsight, there were some indicators that this stock could potentially deliver brilliant returns. One was insider buying activity.

Back in September 2021, I highlighted the fact that Peter Wirtz and Pieter de Jong – both Co-Heads of Private Equity at the time – had just bought £950k and £1.3m worth of stock respectively. These were big director buys and they signalled that management was confident about the business.

At the time I wrote: “Both of these insiders are expert investors. The fact that they’ve spent millions on stock suggests they’re quite confident the share price is set to rise.”

Another clue was dividend growth. Over the last five years, the company has aggressively raised its payout, and higher dividends can really push a company’s share price higher.

Year	2020	2021	2022	2023	2024
Dividend per share (p)	35	38.5	46.5	53	61

Worth buying today?

Is the stock worth considering for a portfolio today? I believe so, despite the fact it has soared over the last five years.

Private equity remains a hot area of financial services today. Across the world, high-net-worth investors are scrambling to allocate capital to alternative investments and firms like 3i are benefitting.

Meanwhile, the company has plenty of momentum. One key driver here is Action – the European discount store chain that 3i owns around 80% of. In 2024, Action’s net sales and operating earnings before interest, tax, depreciation and amortisation (EBITDA) were up 22% and 29% year on year, respectively.

The rest of the company’s portfolio appears to be performing well too. In late January, management said: “We continue to see some significant growth within our other leading consumer and private label portfolio companies, more than offsetting weaker trading at a small number of companies which continue to face specific market challenges.”

Finally, the valuation remains low. Currently, the price-to-earnings (P/E) ratio here is only 7.3. That’s significantly lower than the earnings multiples on some other private equity businesses. Given the low valuation, I wouldn’t be surprised to see a takeover bid come in.

It’s worth pointing out that economic and financial market turbulence presents a risk here. If financial markets were to freeze up for some reason, 3i’s business could be impacted negatively.

All things considered though, I think this Footsie stock looks attractive today and is worth considering.

Dividends paid by shares are the best way I have found to date of generating passive income. This is money made with minimal effort on my part. All I need to do is pick the right shares and then occasionally monitor how they are doing.

That said, the rewards from such investments can be spectacular over time. They can provide a much better standard of living than would otherwise be enjoyed. And they can allow for a comfortable early retirement too.

A prime passive income stock?

Commodities giant Rio Tinto (LSE: RIO) has been in my core passive income portfolio for some years.

Its yield has varied over that period as this moves in opposite directions to a firm’s share price. Currently, it is giving an annual return of 6.7%. This is based on 2023’s 435 cents dividend – fixed at 341p – and the present £50.88 share price.

So, investors considering a £10,000 holding in the firm would make £670 in first-year dividends. Over 10 years on the same average yield this would rise to £6,700. And after 30 years on the same basis, this would increase to £20,100.

However, if the dividends were reinvested back into the stock – ‘dividend compounding’ — the passive income would be much higher.

Doing this on the same average 6.7% yield would generate £9,506 in dividends after 10 years, not £6,700. And after 30 years on the same basis, it would rise to £64,217 rather than £20,100.

With the £10,000 initial stake added in, the value of the Rio Tinto holding by then would be £74,217. This would pay an annual passive income of £4,973.

Making more from just £5 daily?

I think a common misconception is that a lot of start-up capital is required to generate life-changing passive income. This is not true.

Just saving the price of a cup of fancy coffee — £5 a day (£150 a month) – and investing it in Rio Tinto could make £7,824 in dividends after 10 years. This is based on the same average 6.7% yield (which is not guaranteed, of course) and dividend compounding as before.

And over 30 years on the same basis, this would increase to £120,450. Adding in the £150 a month deposits over the period and the total holding would be worth £174,600.

This would pay £11,698 a year in passive income by that point.

Is the core business healthy?

Rio Tinto’s H1 2024 results saw profit after tax jump 14% year on year to $5.808bn (£4.66bn). Underlying earnings rose 3% to $12.093bn and net cash generated from operating activities increased 1% to $7.956bn.

I think a principal risk to future earnings is renewed economic weakness in the world’s largest commodities importer, China.

However, December saw Rio Tinto underline its new strategy of investing for a stronger, more diversified and growing portfolio.

It targets major production increases in copper, iron ore, and lithium in the coming years. I think each of these should see strong demand from ongoing industrialisation and urbanisation.

And they are also likely to strongly benefit from the boom in energy transition projects in emerging and developing markets, in my view.

Consequently, if I did not already own the shares I would buy them today for their strong yield and growth prospects. I think they are worth investors considering.

Shell’s (LSE: SHEL) share price has dropped 9% from its 13 May 12-month traded high of £26.86.

For much of that period it has tracked the oil price lower. But since December it has gained ground while the oil price has continued to lose it.

I think the key reason for this has been potential new liquefied natural gas (LNG) deals in the offing.

Since Russian energy exports were sanctioned after its Ukraine invasion, LNG has become the world’s emergency energy source. Unlike oil and gas moved through pipelines, LNG can be sourced quickly and moved to anywhere in the world fast.

The firm’s LNG expansion programme

Shell already has the largest LNG portfolio in the world. It has major projects in 10 countries and access to about 38m tonnes of its own LNG capacity from 11 liquefaction plants.

Towards the end of 2024 it committed to expand this business, based on forecasts for a 50%+ increase in demand by 2040.

This month saw Egypt make $3bn of deals to buy 60 cargoes of LNG in 2025 with Shell and TotalEnergies. Analysts expect more such deals to come from the North African state.

On 12 February, Norway permitted Shell to begin production from the huge Ormen Lange gas field’s third phase. It has 77 billion cubic metres of recoverable gas reserves remaining, with expected daily output of 70 million cubic metres.

Plans to boost oil output too

I think oil prices will be subject to several bearish forces in the near term. Demand from the world’s major net oil importer China looks uncertain along with its economic recovery from Covid.

And US President Donald Trump is overseeing a drive to push the country’s oil production higher. However, he also promised to ease the approvals process for new oil projects for international oil companies, such as Shell.

This means the firm can make more money even at lower prices by drilling more.

To this effect, 9 January saw it begin oil production at its Gulf of Mexico ‘Whale’ facility. This has estimated recoverable reserves of 480m barrels of oil equivalent (boe). Forecast peak production is 100,000 boe per day (boe/d).

And CEO Sawan met with Iraq’s prime minister in the same month to highlight Shell’s readiness to increase its investments in the country. Along with Saudi Arabia and Iran, Iraq has the cheapest oil in the world to produce at just $1-$2 per barrel.

Where could the share price go from here?

A risk here is gas and oil prices holding in sustained bearish trends over the long term.

That said, analysts forecast that Shell’s earnings will increase 7.4% a year to the end of 2027. And it is this growth that ultimately powers a firm’s share price (and dividend) higher.

In Shell’s case, a discounted cash flow analysis using other analysts’ figures and my own shows the stock is 37% undervalued.

Based on its current price of £26.86, this means the fair value of the shares is £42.63. Although market vagaries could push them lower or higher, the stock looks a bargain to me.

Given this and the strong earnings growth forecast, I will add to my Shell holding very soon.

I’ve never owned Tesla (NASDAQ: TSLA) stock. I’ve also missed several opportunities to buy before its share price surged.

This electric car group’s stock is notoriously volatile, making entry points particularly difficult. Then again, sharp price moves can deliver opportunities to buy after slumps.

For example, this stock slumped to a 52-week low of $138.80 on 22 April 2024. Back then, I urged my wife to buy into Elon Musk’s electric dream, arguing that this latest price collapse was overdone. But my better half strongly dislikes Musk and his antics, so she declined to buy at around $140.

Tesla shares soar

What a missed opportunity. By 18 December 2024, this stock had skyrocketed a 52-week high of $488.54. This was an incredible rise of 249% from my suggested buy price.

Therefore, had we invested, say, £100,000 at $140, we could have sold at the peak for £348,957 — a gain of nearly a quarter of a million pounds. (This calculation assumes a constant pound-dollar conversion rate and no dealing charges.)

Today, I asked my wife to comment on this decision. She replied, “I won’t own anything linked to that [expletive deleted]!“

Losing charge?

Since this pre-Christmas peak, Tesla stock has tumbled. On Friday, 14 February, the shares closed at $355.84, valuing the group at $1.14trn. That’s as much as the combined market valuation of the next 10 biggest carmakers. Wow.

Thus, the share price has dived by 27.2% since 18 December. Hence, £10,000 invested in Tesla stock back then is now worth just £7,284 today, for a loss of £2,716. That’s more than a quarter of the initial investment gone during this latest share-price turbulence.

This stock ain’t cheap

Even after recent slides, Tesla shares have leapt by 88.6% in 12 months, roughly four times the S&P 500‘s comparable gain of 22.3%. What’s more, this stock has trounced the wider market over five years, soaring by 492.4%. No wonder Tesla fans are such vocal supporters of this stock and Elon Musk, their self-proclaimed Technoking.

Would I buy into this business at current price levels? My answer would be a hard no, largely because this stock trades on a stratospheric multiple of 174.7 times trailing earnings. To me, this stock appears priced for perfection, Musk or no Musk.

Nevertheless, it’s clear that — despite his personal and political stunts — Elon has created massive wealth for shareholders. Indeed, I know several Tesla millionaires, including one who has 100% of his personal wealth tied up in this stock. That’s an extremely risky gamble for most, but his past returns have been hugely life-changing.

Summing up

Don’t get me wrong: having enjoyed trips in a number of Tesla models, I think its products are excellent. Also, the business is committed to spending huge sums on artificial intelligence, robotics, and self-driving vehicles. I’m sure more exciting times lie ahead for Tesla and its stockholders.

Alas, almost nothing — other than another spectacular share-price slide — could convince me to board this particular bandwagon. My long-held aversion to buying highly overpriced shares prevents me from joining in the fun. I’d much rather sleep easier at night with a broad, widely diversified portfolio, than bet the farm on any one company or CEO.

In short, given Tesla’s sky-high valuation and erratic leader, I will look elsewhere for my next big winner!

At the end of last week, I sold part of an investment in my Stocks and Shares ISA. I’m not allowed to say what it is yet for disclosure reasons, but I’m looking to redeploy the proceeds.

The big question is which stock (or stocks) should I buy? I’m in a position to make something a meaningful part of my portfolio, but I’m finding it hard to decide between a few options.

Admiral

From the FTSE 100, I like Admiral (LSE:ADM) very much. It operates in an industry that isn’t discretionary – people need car insurance – and consistently outperforms its competitors.

On top of this, its policy of reinsuring most of its risk means the company is able to return a lot of cash to shareholders via dividends. This is another attractive feature of the business.

One thing to keep an eye on with Admiral is inflation. Used cars and repairs becoming more expensive is the kind of thing that can cut into margins, despite its strong competitive position.

The stock got to my price target – which is £25 – earlier this year, but I wasn’t in a position to buy then. So I’m now wondering whether I need to be patient with this one. 

Macfarlane

Another stock I’ve got my eye on is Macfarlane (LSE:MACF). With a market-cap of £172m, this is a much smaller business, but it’s one that I think has a lot of attractive features.

The company specialises in packaging products. Obviously, this is an industry with a lot of bigger competitors and this is something of a risk, especially for basic things like boxes.

Importantly though, not all packaging is like this. With healthcare products, there are certain technical requirements to meet and particular standards, creating a barrier to entry. 

The stock is actually trading well below my estimate of its intrinsic value at the moment. So it’s definitely one that I’m considering for my ISA. 

Polaris

Over in the US, I’ve got an eye on Polaris (NYSE:PII) shares. The company is one of the world’s top manufacturers of recreational vehicles (RVs), such as snowmobiles, boats, and motorcycles. 

The stock is down quite a bit recently, which is largely due to US interest rates. With a lot of the firm’s sales financed through borrowing, the possibility of rates remaining high is a risk.  

This, however, is a risk across the industry. And I think it’s one that Polaris – by virtue of the strength of its brands and its distribution network is better placed to deal with than its rivals.

As a result, I expect the company to cope with a difficult trading environment better than most. And with the stock at an unusually low price, this could be my opportunity.

Opportunities

Warren Buffett and the team at Berkshire Hathaway might be backing away from shares at the moment. But I’m not looking to build a cash position of my own. 

I’m in the unusual position of having cash available and seeing a range of opportunities, both in the UK and the US. I’m still figuring out what to do, but I’m expecting to act soon.

What’s the best kind of ISA to go for, a risky Stocks and Shares ISA or a safe Cash ISA?

I don’t want a Cash ISA because the long-term returns are so poor. But they can be a boon for people who want the guaranteed safety they offer. Not everyone’s happy with stock market risk.

Whatever we go for, what difference would a few percent make anyway? Over just one year, maybe not a lot. But over the long term, it could add up to quite a bit. And it’s all down to the magic of compounding.

Compound returns

Hargreaves Lansdown senior investment analyst Joseph Hill tells us: “We asked people what they’d end up with if they invested £10,000 for a year, and their investments grew at 8%, compounded daily. Just 28% of people got the answer right. The most common answer was £10,800 – which is 8% growth without compounding.“

What’s the correct answer? It’s £10,832, and the key is the bit about compounding daily. If the annual 8% is spread out with a tiny proportion paid every day, the first day’s income then earns its own return for the next 364 days. Then the next day’s income compounds for 363 days, and so on.

Now, £32 might not be a huge difference. But let’s try a real world example and see the difference that compounding can make over the long term.

Steady dividend stock

I’m going to pick British American Tobacco (LSE: BATS) as the example. It’s on a forecast dividend yield of 7.8%, and it has a long track record of steady payments. Suppose someone invests the same one-off £10,000, which is half an ISA allowance, into this stock and leaves it there for 10 years.

I’ll assume the share price and the dividend don’t change over the whole period. That’s unlikely, but it’s good enough for comparison purposes.

If they take out their dividend cash and keep it in a sack, they’d end up with an extra £780 per year. That would be a total of £7,800 after 10 years, the same as if it was paid all at the end, like in the Hargreaves Lansdown example. It’s 7.8% multiplied by the 10 years.

Years of compounding

But if, instead of just letting the dividends pile up, they reinvest the cash in more British American shares each year? Well, the pot could more than double to £21,000 from those compounded dividends alone. And £21,000 is a lot nicer than the £7,800 we’d expect if we didn’t reinvest the cash. It’s the difference that compounding can make.

I’ve no idea where the British American dividend or share price might go in the next 10 years. And I’d never put all my money into it. I’d be kept awake at night worrying about what might happen to the tobacco industry in the next decade. Diversification is essential.

But this snapshot example shows why we shouldn’t underestimate the power of compounding. And how the longer it goes on, the greater the difference it can make.

I regularly invest my savings into shares on the stock market to build a passive income stream. The long-term goal is to retire early and live off the dividend income from a portfolio of stocks.

But how easy is that goal and how much would someone need to invest to achieve it? Let’s crunch the numbers and find out.

How much?

Each individual has different expenses based on their location, lifestyle and dependants. Those accustomed to a high-flying lifestyle would naturally need more money than those happy with the basics, so it’s best to work with averages.

The average annual salary for full-time British workers is around £35,000. However, due to inflation, this won’t amount to much by the time retirement rolls around. A better figure to aim for is at least £50,000 a year for sufficient income.

Estimating time scales

To bring in £50k would require a £714k portfolio of dividend stocks yielding 7% a year. That’s quite a lot so it’ll need to be built up over time. How long that takes depends on how much is contributed every month. Fortunately, reinvesting dividends and compounding the returns can speed things up.

With an initial investment of £10,000 and contributions of £500 each month, it would take around 28 years. That assumes the portfolio achieves the 8% historical average return for UK stocks. But £500 is a lot to save every month. If it were only £300, it would take around 33 years. For younger investors, this would still be more than enough time before retirement.

Investing for passive income with dividends requires some careful balancing of stocks. To avoid losses from industry-specific risks, it pays to invest in a diverse range of stocks (retail, energy, finance, etc).

Dividends and diversity

Some popular UK dividend stocks to consider include Vodafone, Legal & General and British American Tobacco, all with yields upward of 7%. However, a lesser-known stock I like the look of currently is TP ICAP (LSE: ICAP). This FTSE 250 financial services company has offices around the world, trading assets and providing intermediary services between global businesses. 

For several years before the pandemic forced a cut, it was paying 15p per share. Now it’s finally recovered to this level and looks set to keep delivering solid dividend value to shareholders. The yield has dropped from 7.3% to 5.7% over the past year, while the share price has risen 45.8% in the same period. 

But the share price is quite volatile which is a risk to consider. During the pandemic, it fell from 404p to an all-time low near 100p. Now with the economy strengthening, it’s recovered 143%. These fluctuations reveal its sensitivity to global markets and exemplify why diversification’s so important. 

If high inflation returns it could lead to a drop in trading volume and more losses for the company.

TP ICAP’s just one of many dividend shares to consider for a passive income portfolio. When combined with a range of high-yielding dividend stocks, the portfolio could achieve a 7% average yield.

A couple of months ago, I took the plunge and bought BP (LSE: BP.) shares. Since then, I’ve enjoyed a solid 12% gain.

Others will be even happier, with the FTSE 100 stock rallying almost 25% in the past three months. But zoom out and the picture is less straightforward. The BP share price is naturally volatile. Like all oil producers, it’s at the mercy of a force it can’t control – energy prices.

The stock’s down 2% over the past year and 16% over two. As pressure builds across almost every front, it’s now on a knife edge. I buy shares with the intention of holding for years, and decades, ideally. But how bumpy is this ride going to be?

Short answer? Very.

I can see five risks that could drive BP in any direction from here.

1. Falling oil prices

Donald Trump’s pushing for a peace deal in Ukraine while ramping up domestic energy production. Both could boost supply and drive oil and gas prices down. As green tech gets scaled up, renewable prices could fall sharply, adding to the squeeze.

2. The green transition

BP’s flip-flopped on its green energy commitments, frustrating both sides of the debate. The company initially pledged to cut oil and gas output by 40% by 2030 but later scaled that back to 25%. Now there’s talk of going full-on for fossils again. The board’s blowing about in the wind.

3. UK energy policy

Windfall taxes on UK production are a punitive 78%. Energy Ed Miliband wants to shutter all UK fossil fuel fields. There’s even talk of BP quitting London for a New York listing. It only adds to the uncertainty.

4. Break-up threats

Investors welcomed news that aggressive hedge fund Elliott is building a stake in BP. But this could go either way. If activist pressure mounts, BP could face a period of uncertainty and strategic upheaval.

5. The balance sheet

BP’s committed to another $1.75bn of share buybacks in Q1, on top of the $7.1bn repurchased last year. With full-year attributable profit plunging from $15.2bn in 2023 to just $381m last year, it’s effectively borrowing money to fund them. Net debt’s crept up a couple of billion to almost $23bn in the last year.

Despite these concerns, BP remains a cash machine, generating more than $27bn in operating cash flow in 2024. While down from $32bn in 2023, this still provides a strong financial base. The dividend remains attractive, with a recent 10% increase to eight cents per share. The trailing yield’s a handsome 5.23%. 

The board continues to streamline operations, with $800m in structural cost reductions achieved last year as part of a broader $2bn savings plan.

After the recent Elliott-fuelled jump, the shares may struggle while all this plays out.The 27 analysts offering one-year share price forecasts for BP have produced a median target of just over 493p. If correct, that’s a modest increase of just 5% from today.

I won’t sell my shares but I’m under no illusions. I’m taking risks here. BP’s on a knife edge. It could go either way.

BAE Systems‘ (LSE:BA.) shares are up 90% over five years. There was some pull back during the pandemic but then the stock surged as Russia invaded Ukraine and as the conflict erupted in the Middle East. As a result, £10,000 invested in February 2020 would now be worth £19,000, plus dividends, which would have equated to around £1,200 during the period.

Clearly, that’s a pretty strong investment.

What’s behind BAE’s resurgence?

The stock’s resurgence reflects structural shifts in global defence priorities amid heightened and tragic geopolitical tensions. The company benefits from long-cycle contracts for advanced platforms like fighter jets, submarines and cyber systems, which provide multi-year revenue visibility — orders surged to £74.1bn in 2024, with a 12%-14% sales growth projection. 

As such, unlike short-term ammunition demand, BAE’s strength lies in complex, multi-decade programmes such as the F-35 Lightning II, where it provides electronic warfare tech, and nuclear submarine projects. Moreover, geopolitical instability, including the Ukraine war and Middle East conflicts, has accelerated NATO defence spending.

Strategic acquisitions like Ball Aerospace expanded capabilities in space technology, aligning with the Pentagon’s focus on next-gen warfare. Exposure to the US market (45% of sales) provides insulation from regional budget fluctuations, while rising global military budgets underpin long-term growth.

Risks of investing today

BAE Systems is certainly benefitting from supportive trends in security systems demand, but it also faces operational risks from cost overruns on long-term contracts, exacerbated by volatile energy prices and supply chain disruptions. Profitability depends on accurate cost forecasting, with margin pressures possible if inflation persists.

Political shifts also pose threats. Potential US defence cuts — notably against non-US or traditional contractors — under new administrations could dampen growth. Moreover, while dividends (yielding 2.6%) appear sustainable, debt from acquisitions may constrain buybacks. Lastly, BAE’s growth narrative relies on sustained conflict-driven spending, which could unravel if geopolitical tensions ease unexpectedly.

The valuation conundrum

The company’s valuation metrics indicate a position of relative strength — it’s certainly not oversold. Its price-to-earnings (P/E) ratio is projected to fall from 19.3 times in 2023 to 15.6 times in 2025, suggesting improving earnings expectations.

The forward P/E of 17.9 is 9.7% below the global industrials sector median, indicating potential undervaluation compared to peers. In addition, BAE’s forward price-to-earnings-to-growth (PEG) ratio of 1.62 is 12.3% below the sector median, implying better value relative to growth prospects.

Notably, BAE now trades in line with US peers, which isn’t typical and may suggest limited room for further multiple expansion. The company’s forward P/E ratio is 25% above its five-year averages, potentially indicating that the stock’s currently trading at a premium to its historical valuation. This could signal that BAE’s stock may have limited potential for appreciation in the near term.

My take

BAE’s a stock I owned and sold too soon. However, I don’t have any desire to get back in. There’s an element of volatility based on geopolitical events that I don’t love, and the valuation doesn’t suggest undervalued conditions. Investors may want to consider other companies for defence exposure.