With high inflation rates, and the increase in interest rates around the world, growth stocks have struggled throughout 2022. But in the past Warren Buffett has advised that investors should “be fearful when others are greedy, and greedy when others are fearful”. I think this quote applies nicely to growth stocks now, especially those with solid fundamentals and quality. The e-commerce and digital entertainment company, Sea Limited (NYSE: SE), is one of my personal favourites.

The recent results

The company’s recent 2021 results were a bit of a mixed bag. In many ways, the excellent growth of the business continued. For example, total Q4 revenue was $3.2bn, which was a year-on-year increase of 105%. This also enabled full-year revenue to reach $10bn, a 127% year-on-year increase. This represents outstanding growth, which is far ahead of the majority of other growth stocks.

Nonetheless, there were also some slightly worrying signs that growth may be slowing. For example, the e-commerce segment, called Shopee, saw revenue growth of ‘only’ around 90%, far less than previous quarters. The digital entertainment sector is also likely to see a slowdown for a couple of reasons. Firstly, there has been a recent moderation in online activities and fluctuations in engagement. Secondly, the company’s flagship app, Free Fire, has been banned in India. This is due to security concerns revolving around the company’s links to China.

Due to its investment in the e-commerce segment, the company is also seeing widening losses. For example, in 2021, adjusted EBITDA was a loss of $593m. There are also no signs of the group reaching profitability any time soon, despite the fact that the digital entertainment sector is consistently reporting positive EBITDA. This is because free cash flow is being invested into the e-commerce segment, which is expanding around the world. While this is helping drive the excellent revenue growth, such large losses still pose a major risk.

Why would I still buy this growth stock?

Despite the risks, I still feel that Sea Ltd is a no-brainer buy. For instance, after its recent dip, it trades on a price-to-sales ratio of under 7. For a growth stock, especially one seeing rates of growth like this, it feels incredibly cheap. This is why I think it would fit the bill as a Warren Buffett-type stock.

Further, I think worries about the digital entertainment sector have been overdone. And after Tencent, which is a major Chinese company, got rid of its Class B voting shares (that gave it special rights), Sea Ltd’s links to China are far more limited than it may have seemed. Therefore, I believe that the ban in India may be overturned. This would have a positive impact on the Sea Ltd share price.

Finally, I am excited by Shopee. The e-commerce segment has been growing at rapid rates and has already expanded in Southeast Asia, Europe and most recently, Latin America. In many of these markets, e-commerce has still not fulfilled its potential, meaning that there’s significant scope for sales to rise. Therefore, I’ll continue to buy Sea Ltd shares while there’s fear in the market.

Stuart Blair owns shares in Sea Limited. The Motley Fool UK has recommended Sea Limited. 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 think quite a few attractive investment opportunities are emerging in the FTSE 100. As equity markets remain unstable, I am looking to take advantage of this volatility. And with that in mind, here are my top blue-chip shares to buy right now with £3k.

FTSE 100 global champion

I am looking to buy stocks for my portfolio that have a global competitive advantage. This is an edge that competitors around the world may not be able to replicate.

There are many examples of competitive advantages. Size and scale are two of the most important. A unique product or service could be another sign of a strong competitive advantage. 

Building materials group CRH (LSE: CRH) exhibits several of these qualities. Manufacturing and distributing building products is one of those industries which investors often overlook. However, it fulfils an essential role in the global economy. Starting up a quarry or facility to convert raw materials into building products is not easy. It requires a lot of money and experience to develop these facilities.

It also requires permission from local authorities, which can be hard to maintain. Local authorities need to trust the company is responsible enough to develop a facility that will not harm the environment or the local population.

An edge in the market 

This is where CRH has an edge. The FTSE 100 company is one of the largest building materials companies in the world. It has the financial resources and the connections to develop these facilities effectively without getting bogged down in excessive regulation or having to ask shareholders for additional cash.

The company’s size means local authorities can rest safe in the knowledge that there will be room to achieve some sort of compensation if something goes wrong. 

Still, while the corporation does have an edge in the market, it is not immune to the risks involved. One of the most significant risks the company could have to deal with is environmental concerns. The construction industry is one of the biggest polluters in the world. Dealing with the costs of this pollution could significantly impact the organisation’s profit and profit margins.

Nevertheless, building activity around the world is booming, and the company is capitalising on this growth. According to its latest results release, sales increased 12% in 2021 and earnings before interest, tax, depreciation and amortisation (EBITDA) increased 16%.

Bolt-on acquisitions 

To help complement growth, the company is looking for additional acquisitions. Last year, it invested $1.5bn on 20 bolt-on acquisitions to help expand its presence in additional markets. The group is planning further acquisitions and capital spending to increase its footprint in certain markets. 

A key area of growth for the company is America. Here, management is excited by the recently announced $1.2bn infrastructure package, which could have a significant impact on the demand for construction materials across the region.

The number of housing starts has also recently hit a multi-year high, further reinforcing the company’s opinion that the demand for building materials will increase substantially across the US in 2022 and beyond. 

Based on these qualities and the outlook for the company, I think this is one of the best shares to buy right now. I would not hesitate to add the FTSE 100 stock to my portfolio with an investment of £3,000. 

FTSE 100 

Alongside CRH, I would also buy its blue-chip peer Ashtead (LSE: AHT). I think this is a really interesting company. It owns capital equipment, which it rents out to organisations like builders and other industrial companies.

This business model is incredibly profitable. It requires a lot of capital investment upfront, but once an enterprise has acquired the equipment, it can rent it out repeatedly and earn a high return on its initial investment.

Indeed, the company has reported a return on invested capital in excess of 50% in the past. This generates plenty of additional funding for the business to reinvest back into new growth initiatives and buy smaller peers.

During the six months to the end of October 2021, the company invested $1.2bn in the business and spent a further $428m on acquisitions. It is also benefiting from the construction industry boom taking place in multiple markets around the world.

Global growth

While the company’s biggest market is North America, it also has a strong presence in Europe. Rental revenue increased 18% year-on-year in the six months to the end of October. Operating profit increased 22% and adjusted earnings rose 29%. 

With profits surging, I think the group could report faster growth in the years ahead as it reinvests its capital back into growth initiatives and targets new markets.

That said, this company is very sensitive to the economic environment. One of the biggest challenges it will have to overcome is the uncertain economic outlook.

If spending falls in the construction industry, demand for its products and services could also decline. This would also certainly have a significant impact on profitability as a company is not making any money if its equipment is sitting its yards unused. 

Buy-and-forget holding 

Even after taking this potential challenge into account, I think the outlook for the business is incredibly exciting. As such, I would not hesitate to buy the stock for my portfolio today.

As the FTSE 100 company capitalises on the improving economic backdrop, I think it will be able to grow and invest more, further accelerating its growth rate over the next five to 10 years.

Even though the current geopolitical and economic environment could prove to be a significant headwind for the business, as a buy-and-hold investment for the next decade, I think this is one of the best shares to buy now with £3k.

Rupert Hargreaves 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 FTSE 100 index was subdued yesterday. It closed below 7,300. But this particular stock is up by more than 10%, making it the biggest index gainer so far as it continues to rise in early trading today. Often when individual stocks start flying in contradiction to the broader markets, something quite newsworthy is going on with them — robust financial results, for instance. 

What happened to the LSE’s share price?

This is exactly what happened for the London Stock Exchange Group (LSE: LSEG), which rallied yesterday. But first, some context. The FTSE 100 stock has had a pretty bad past year. Its price is down by some 25%, even after the latest bump-up. After making gains during the pandemic, when investing activity was heightened, the stock came crashing down following its acquisition of the data and analytics provider Refinitiv. The ambitious buyout probably made investors nervous.

Robust results for 2021

Its full-year 2021 results, however, seem to have led to a boost of confidence in the stock. Its revenue increased by 6% from the year before and pre-tax profits almost doubled. It also increased its dividend for the year. The group, with a 1.4% dividend yield, does not really qualify as a notable income stock on the face of it. But over the years, its dividends can mount up, even though that does not appear to be the case at first glance. It is also confident about its future performance. Its CEO, David Schwimmer said that the company has “good momentum for 2022”, which sounds encouraging.

Valuation red flag for the FTSE 100 stock

However, there are undeniable red flags for the FTSE 100 stock too. First, its price-to-earnings (P/E) ratio is at a super-high 70 times. Frankly, this is unheard of even among some really high-performing companies that I have covered in the recent past. And I find it particularly bizarre right now, when its debt is still somewhat high, in my view. 

To be fair, it has managed to reduce it to sub-two times as a proportion of earnings before interest, taxes, depreciation and amortisation (EBITDA). But it can still be seen as being at an uncomfortable level considering that much of it happened after the Refinitiv acquisition last year. 

What I’d do

Both its valuation and its debt levels are enough to diminish confidence in the stock. If its earnings had risen enough to moderate its P/E, that would have been preferable. There is a an interesting point to be made here though. The company’s adjusted numbers paint a different picture. Earnings are much higher on this measure, which considerably reduces the P/E to around 25 times. And they also reduces the debt ratio. So which earnings figure should I consider? I have tried to dig deep, but it requires more work, since this is the first set of numbers post-Refinitiv acquisition.  

With this in mind, I am taking a step back from my earlier belief in the stock. While I have little doubt that it can still be a rewarding stock to hold in the long-term. I think for now, there could be a better opportunity for me to buy it if the share price dips further and its valuations are more aligned to the FTSE 100. 

Manika Premsingh 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.

These are uncertain days, even for the best UK shares. Yesterday, for instance, the FTSE 100 index closed at sub-7,300 levels and it is even lower in early trading today. In this environment, two falling stocks in particular have caught my attention. The first is FTSE 100 hygiene and pest control services provider Rentokil Initial (LSE: RTO) and the other is the food delivery biggie Just Eat Takeaway (LSE: JET). 

Rentokil Initial’s strong results

Both stocks fell after they released results. So I need to try to figure out whether they indeed deserved the hammering they just took or if it just happens to be a temporary market overreaction that could balance itself out over time. First, let us look at Rentokil Initial. Frankly, there was little to dislike in its results, I feel. Its revenues were up by 5.5% in 2021 compared to the year before, its pre-tax profit was up a huge 41.5% and its dividends rose too. It also has a positive outlook for 2022. 

Among the best UK shares or not?

It is pricey, though. Considering the latest earnings numbers, its price-to-earnings ratio is 35 times, compared to around 16 times for the FTSE 100 overall. From what I can see, there seems to be a rotation away from UK shares that performed quite well during the pandemic. It has been going on for a while, and it continues even now. The company’s share price has already ‘corrected’ quite a bit over the past year, offering almost no gains to investors. I still think that it is a buy for the long term, but also that if its price can dip more, it would be a better idea to buy it then. If I had not already bought it, I would watch it for now and buy on the dip. 

Just Eat Takeaway’s increasing revenues

Next, Just Eat Takeaway saw a brutal drop in its share price of almost 13% yesterday after releasing its 2021 results. On the face of it, the numbers here also looked good. Revenue was up by 33% from the year before. And while it is still loss-making, according to CEO Jitse Groen, it is “now rapidly progressing towards profitability”.

Why is its share price falling?

Yet the company’s share price has been tumbling fast. Over the past year, it has lost over half its value. But it was falling even before that, since the stock market rally started as the first vaccines were developed. And that is quite a while. Also, investors are probably questioning whether its acquisition of US-based Grubhub can really reap dividends. North America is its slowest-growing market right now, though to be fair, it is also the biggest. 

What I’d do

I have long liked Just Eat Takeaway. Much like Rentokil Initial, I do not think it a falling knife. Quite the contrary. I expect its share price to start rising as soon as the first profits start trickling in. And from the looks of it, that could be soon. But until such time, its share price could drop more. I would be happy to buy it but at lower levels than today. In the meantime, I am focusing on these FTSE 100 shares. 

Manika Premsingh owns Evraz, Polymetal International and Rentokil Initial. The Motley Fool UK has recommended Just Eat Takeaway.com N.V. 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.

As a committed value investor, Boohoo (LSE: BOO) represents my first and, to date, only foray into growth stocks. Since buying the stock a few months ago, I have seen the value of my investment plunge, which is never a great feeling for any investor. My dilemma is whether its crashing share price represent a good opportunity to double down or a falling knife with still a long way to drop?

A broken business model?

Boohoo’s innovative value-driven business model has certainly taken the fashion world by storm. Its approach of manufacturing small quantities of a wide range of clothes and scaling production for those that sell well, has been a hit. With fashion constantly changing, the company has profited handsomely from image-conscious teenagers and millennials. The company’s ‘test and repeat’ model has also enabled it to minimise financial losses on products that, for whatever reason, don’t sell.

But then problems emerged. It began with the findings of a report commissioned by the company that concluded Boohoo knew of poor working practices in its supply chain long before the scandal hit the headlines. This was followed by the class action lawsuit in the US accusing it of misleading promotions in California.

Pressure continued to mount on the firm when it issued a profit warning in December citing rising supply chain inflation, high returns and air freight restrictions leading to 10-day delivery times to the US, a key growth region.

It is this last issue that has caused most concern for me. The company believes the problems are primarily related to the pandemic and therefore “transitory in nature”. I am not so sure. Its entire value proposition, popularised in the words ‘fast fashion’, is based on price. With inflation beginning to really take hold in the economy, it is likely that discretionary spending could fall.

Long-term potential

Yet while short-to-medium-term headwinds will stunt Boohoo’s growth, I maintain that the prospects for the company on a longer-term horizon remain favourable. As its US distribution centre comes online in 2023, that should help improve sales in that fast-growing market. However, that may take some time to materialise, as there will be a clear need to invest in marketing to make up lost ground.

I am also pretty excited about its growth potential from the brands it acquired out of administration last year. The standout purchase was Debenhams. Here, it wants to transform a leading fashion and beauty retailer into a digital department store and marketplace through a new capital-light and low-risk operating model. The company has already began working on the digital platform that will support this acquisition. If it can execute on its strategy here, then I see huge potential for future growth.

Buy, sell or hold?

The short-term fate of Boohoo will very much depend on its trading update next week. If returns remain stubbornly high or it has failed to meet its revised sales growth targets from December, then I expect the share price to fall significantly. Either way, given the uncertainty in the pace of economic recovery together with rising inflation, I expect the share price to remain under pressure for some time. Therefore, for now, I am in no rush to buy more but I will not sell either. I am holding.

Andrew Mackie own shares in Boohoo. The Motley Fool UK has recommended boohoo group. 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.

Scottish Mortgage Investment Trust (LSE: SMT) made headlines with its 2020 rally. Despite the tough market conditions because of the coronavirus outbreak, the FTSE 100 trust saw a meteoric 107% rise.

However, since then, the share price slowed down, with SMT rising just under 5% in 2021. And in fact, this year has seen the Scottish Mortgage share price drop dramatically – it’s down 25% in 2022. 

But will the stock recover? And should I be buying some shares today? Let’s take a look.

Why has the SMT share price fallen?

So, let’s start by looking at why the SMT share price has dropped. One reason is due to the uncertain global economic outlook, in part because of rising inflation. An example is the UK. The opening up of the economy post-Covid saw fast growth coupled with massive global supply issues. And, as such, the Bank of England expects inflation to reach around 6% by spring 2022. To combat inflation, central banks raise interest rates. And, in times like these, people can receive higher returns on their savings and therefore are less likely to invest. And growth stocks tend to be hit the hardest. Given SMT’s top holdings include NIO, Nvidia, and Illumina, it is clear to see why the fund’s price has dropped.

On top of this, SMT has been impacted by the recent tech sell-off. With its tech-heavy weighting, the global tumble we have seen in the price of these stocks has negatively reflected onto the Scottish Mortgage share price. Further pressures, such as Chinese regulators, have also fuelled the fall.

Long-term growth

However, management makes no secret of the trust’s aim is to look for long-term growth opportunities. Therefore, volatile periods like now should be of no concern to investors.

Instead, as a more valuable measure, it would be smarter to look at returns over a longer time frame. As my colleague Roland Head highlighted, the trust has delivered 650% returns over the past 10 years. This is an achievement that very few investment funds have managed.

Within this period, the trust has also experienced large falls, for example, a 50% drop after the dotcom crash of 2000. What this shows for me is that I should not be deterred from the fall in the share price. And it may actually present an opportunity for me to buy some cheap stock.

Further, investing in it provides me with access to a variety of assets all under one investment. This allows me to diversify my portfolio. What makes this more appealing is the cheap ongoing charges of 0.34%.

Anderson departure

That said, fund manager James Anderson is set to hand over the reins next month. Given the impressive rise of the stock under his control, investors may be disappointed that he’s leaving.

However, co-manager Tom Slater is set to stay, and most of the management team’s members are staying on. As such, I think Scottish Mortgage is still in safe hands.

Will it recover?

Its track record certainly suggests that the trust will recover. And I like the diversification it brings to my portfolio. I think Scottish Mortgage will recover over the long term. However, the current stock market volatility will particularly affect tech stocks. And given its heavy tech weighting, I think we could see the share price drop even further. As such, I won’t be buying any shares just now.

Charlie Keough 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.

Today, I’m searching for the best cheap stocks to buy for my portfolio. Here are two I think could help me make terrific returns. Both look set to deliver rapid earnings growth for at least the next couple of years.

A top counter-cyclical share to buy today

I believe Begbies Traynor Group (LSE: BEG) shares look too cheap for me to miss. The insolvency and administration practitioner trades on a forward price-to-earnings growth (PEG) ratio of 0.5 for this financial year (to April). This is comfortably inside the benchmark of 1 and below that suggests a stock is undervalued.

Earnings at Begbies Traynor have been growing by solid double digits each year for around half a decade now. This is thanks in large part to the profits-boosting acquisitions it’s been making in recent times.

With the UK economy slowing, and rocketing inflation putting businesses under intensifying pressure, I expect profits to keep growing strongly too as demand for its services should inevitably pick up. This is a view shared by City analysts who reckon full-year profits will grow 23% and 10% this year and next respectively.

Insolvency cases in Britain are rising sharply as Covid-19 furlough schemes have been withdrawn. The numbers look set to grow strongly in the spring and beyond too, as inflationary pressures worsen and the removal of final government financial support programmes this month.

However, Begbies Traynor’s profits could significantly suffer when economic conditions improve. But at current prices, I think it remains a top cheap UK share to buy.

A dirt-cheap stock for the digital revolution

Kape Technologies (LSE: KAPE) might not have the financial clout or the brand recognition of US cyber security giants like Microsoft or McAfee, to name just a couple of its rivals. And it is facing the threat of other major tech players like Google entering the fray too. But at current prices, I still think this smaller player could be worth the risk. Today, Kape trades on a forward PEG ratio of 0.2.

The rapidly-growing cyber security industry moved up another gear during the pandemic as both homeworking and e-commerce took off. It’s a sector that looks set to keep growing rapidly as well, giving Kape the chance to deliver more solid earnings growth, despite that competitive threat. City brokers think the firm’s earnings will surge 57% in 2022 and by an extra 11% in 2023.

It’s perhaps no surprise that forecasters are so bullish given the constant stream of news concerning cyber attacks. In recent days, Toyota was forced to shutter 14 of its factories following an attack on its systems. The British government too announced steps to make internet providers bulk up their security to protect users.

Investment in internet security is set to soar across the globe as cyber warfare from independent hackers and rogue states increases. And I think Kape could be a great cheap share to buy in this environment.

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

The Evraz (LSE: EVR) share price has plunged by around 90% over the past week.

This is one of the fastest collapses of a blue-chip company’s stock price that I can remember.

Only a few weeks ago, the shares were changing hands for around 600p. It was a multi-billion pound company and one of the largest listed corporations in the UK, with a place in the FTSE 100. Now, it looks as if the stock is going to be kicked out of this blue-chip index. 

The collapse in the value of the Evraz share price is a direct result of the Russia-Ukraine conflict. The group itself is not as exposed as some businesses. It has operations in Russia and Ukraine, but it also has a presence in the U.S. and other European nations.

However, international companies have stopped doing business with any organisations that have any exposure to Russia. What’s more, Roman Abramovich is the corporation’s largest individual shareholder. There is growing speculation that this Russian-Israeli businessman will face sanctions from Western governments.

A difficult and messy situation

Quite simply, Evraz is in a complicated and messy situation. But I would not write off the Evraz share price just yet. Its assets outside of Eastern Europe and Russia will still have a value.

Moreover, steel prices have been surging recently, and the company is vertically integrated. So it can supply itself with raw materials if third parties do not want to associate with Russian enterprises. 

Unfortunately, trying to work out how much of the corporation will be left in a year’s time is almost impossible. It depends on what happens next in the global economy and geopolitical environment. If the situation becomes much worse, Evraz could struggle to survive in its current form even with its international assets. On the other hand, if the situation stabilises, the firm might be able to pull itself back from the brink. 

Another option that I think is worth considering is the potential for a spin-off. The company could spin its international assets into a different business. This would allow them to remove any association with the Russian side of the enterprise and operate independently. As independent entities, these assets in the new firm will be able to capitalise on high commodity prices. 

This is the best-case scenario, but once again, it would be difficult for me to place a value on this theoretical new business.

Evraz share price value

I am always on the lookout for companies that have fallen on hard times as, sometimes, these businesses can be great value investments.

The recent performance of the Evraz share price has ignited my interest. However, considering all of the above, it is impossible for me to try and determine how much the company is really worth. Even in the best-case scenario, if it spins off its international assets, I do not think the group will ever be worth as much as it was a few weeks ago (600p). 

As such, I would not buy the stock today. I think there are plenty of other options on the market. 

Rupert Hargreaves 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 best dividend shares I’d buy this month offer an additional kicker. Not only would I get a chunky passive income from the dividends but I reckon the value of the shares could rise too.

My top pick is mining giant Rio Tinto (LSE:RIO). A few months ago, I included it in my ‘top dividend shares with growth potential’ list. Since then, I’m pleased to say that its shares have gained by almost 40%. Now, what’s interesting is that today its dividend yield is still a whopping 9%. Granted it’s not the 11% it was a few months ago, but it’s still one of the greatest dividend yields in the FTSE 100.

After such a strong performance in just a few months, should I still buy these shares? My answer to that question is yes. Rio shares have benefited from a general rise in metal prices. Iron ore accounts for two-thirds of its sales, and it’s up by almost 20% this year.

Rising commodity prices

Commodity prices are currently being pushed higher from the tragic events in Ukraine. My best guess is that they could grind higher over the coming months as Russia is one of the largest iron ore producers in the world. Any further supply constraints could extend prices even more. That said, geopolitical factors can be fast-moving and any sign of resolution could pull metal prices lower in the short term.

But my choice for Rio isn’t only due to rising commodity prices. It’s a high-quality, cash-generative and profitable company. One measure of quality that is frequently mentioned by popular investor Terry Smith is return on capital employed (ROCE). I like companies with a ROCE of over 15%. For Rio, that figure is 33%. Overall I’d say that it could be an excellent long-term holding for me, and one that certainly provides some balance in my relatively tech-heavy Stocks and Shares ISA.

‘Slow n steady’ dividend shares

On the topic of balance, I’d also consider electricity provider SSE (LSE:SSE). Utility companies generally tend to make dull investments in my view. Their share prices rarely perform well in boom times and bull markets. That said, they can offer outperformance and relative safety in times of recession or market corrections. Also, they’re usually reliable dividend payers. For instance, SSE has paid regular dividends for almost three decades. And like many utility shares, it offers an above-average dividend yield. It currently pays 5%. That’s a decent premium to the average FTSE 100 yield of 3.6%.

I’m becoming more cautious regarding the state of the global economy. Geopolitical risks coupled with rising inflation, oil prices, and interest rates are cautionary. For that reason, I’d want to own some dividend shares that could offer me a margin of safety. I reckon SSE shares are one of the ways I could achieve that goal. Like Rio, SSE also demonstrates its quality characteristics with a double-digit return on capital employed and double-digit profit margins. It’s also one of the leading generators of renewable electricity in the UK. Overall, I’d definitely consider buying these shares this month.

Harshil Patel 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 have written several articles saying I would be happy to buy Rolls-Royce (LSE: RR) shares. These were written before the company published its latest set of results. They were also published before the geopolitical situation deteriorated. 

Clearly, a lot has changed over the past week.

However, my opinion of the company has not changed that much. I think the business will have to deal with some significant challenges over the next year. However, it has already pulled through the most devastating pandemic in recent memory. It emerged stronger on the other side from this crisis. I think it has the fight left in it to move through the current situation. 

The outlook for Rolls-Royce shares

Before I continue, I should note I do not think it is going to be an easy passage for the company over the next few years. There is no denying it is facing some significant challenges.

The global aviation industry is still recovering from the pandemic. What’s more, the war in Eastern Europe will almost certainly have an impact on the company’s aviation business. As of yet, it is not possible to tell how much of an impact the situation will have on the organisation’s bottom line. 

Still, following the group’s latest results release, City analysts believe the enterprise will report a profit of nearly £400m in 2022. That is a significant turnaround from 2020’s loss of £3.2bn. Analysts are also projecting further growth in 2023. They are expecting a profit of £630m for the year. 

Based on these projections, the stock is trading at a 2023 forward price-to-earnings (P/E) ratio of 14. By comparison, many of the company’s international peers are trading at multiples of 20 or more. 

As such, based on these numbers, I could argue the stock is significantly undervalued compared to its growth potential over the next few years. 

However, considering all of the challenges the company is currently having to work through, I am not willing to pay over the odds for Rolls-Royce shares. To put it another way, I think the stock deserves an uncertainty discount. 

Buy, sell, or hold? 

After taking all of the above into account, I still think Rolls-Royce shares look attractive as a speculative recovery play over the next few years. 

As such, I would be happy to buy the stock for my portfolio today. And if I already owned it, I would continue to hold to see how its transformation develops. If the firm starts to struggle again, I will review my position. But if profits continue to grow and management hits analysts’ growth forecasts over the next couple of years, I will add to my holding. 

Unfortunately, as there are so many moving parts, I cannot make a concrete prediction about the company’s outlook over the next few years. 

Rupert Hargreaves 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.