Key points

• These two companies may be undervalued when comparing P/E ratios with competitors
• Antofagasta has a compound annual EPS growth rate of 13.4%
• Tullow Oil’s year-end net debt fell to $2.1bn, from $2.4bn the previous year

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With recent market volatility, I’m on the hunt for the best shares to buy now. In doing so, I’m looking at the deeper financial state of companies instead of recent price movement. These two firms, engaged in copper mining and oil respectively, have strong underlying results and may be cheap. Should I add them to my portfolio? Let’s take a closer look.

One of the best shares to buy now: Antofagasta

A copper mining business operating in Chile, Antofagasta (LSE: ANTO) is strong in many areas. Between the 2017 and 2021 calendar years, earnings per share (EPS) increased from ¢76.1 to ¢142.5. By my calculations, this company has a compound annual EPS growth rate of 13.4%. This is both strong and consistent. Furthermore, revenue has steadily increased over the same period from $4.7bn to $7.4bn. It is worth noting, however, that a resurgence of the Covid-19 pandemic might halt mining operations.

There is also an indication that Antofagasta is undervalued. By using the price-to-earnings (P/E) ratio metric, I see that the company has a forward P/E ratio of 15.58. This is slightly lower than Glencore‘s 16.07, which is a major competitor in the sector. Currently the Antofagasta share price is trading at 1,637p, down 15% in the past year.

A cheap oil stock    

The second business is Tullow Oil (LSE: TLW), an oil exploration and production firm operating across Africa and South America. In a recent trading update for the three months to 31 December 2021, the company reported that underlying operating cash flow was expected to be $700m, ahead of guidance. What’s more, year-end net debt fell to $2.1bn from $2.4bn in 2020.

Going forward, it plans to drill three new wells in its Jubilee field in Ghana and expects the yield to be about three times greater than that of 2021. Furthermore, the firm will commence spudding (the beginning of the drilling process) at the Kanuku JV field in Guyana Q2 2022. While this brings the possibility of further oil discoveries, there is always the risk that the yield will be disappointing.

Tullow Oil has a trailing P/E ratio of just 5.17. This is significantly lower than BP, a leader in the oil market. BP’s trailing P/E ratio is 13.73. This suggests to me that there is massive upside potential for the Tullow Oil share price, that is currently 57.88p, up 23.5% in the past year.  

Both of these companies may be cheap and are supported by strong financial results. By adding them to my portfolio, I think I can achieve long-term growth. I will be buying shares in both firms without delay.

Andrew Woods 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.

Over the past 12 months, the Tesco (LSE: TSCO) share price has returned a healthy 26% for investors. By comparison, the FTSE All-Share Index has risen 9% in the same period.

However, 2022 has seen Tesco shares struggle. And the stock is currently down 5% year to date. Despite this, I think at the current price, Tesco shares could be a great addition to my portfolio. Let’s see why.

Appealing fundamentals

One of the most appealing factors for me is the firm’s strong fundamentals.

In its Q3 and Christmas trading statement released earlier this year, Tesco said overall sales grew 2.6% year on year. And this was 8.2% on a two-year comparison. This growth was in part fuelled by Tesco’s ability to double its online delivery capacity during the pandemic. And as a result, the business said it had the highest total market share in four years. As a potential investor, these are pleasing results to see.

I also think Tesco is considerably undervalued, especially when compared to its competitors. It currently trades at a price-to-earnings (P/E) ratio of a mere 3.3. For context, one of its main rivals, Sainsbury’s, trades at a P/E of 20.6. This is an attractive factor for me. 

What I also like about Tesco is the stability it can provide during volatile periods. The business is not immune to the side effects of issues such as inflation. However, as my fellow Fool Rupert Hargreaves stated, as long as there is a human need to drink and eat, Tesco’s services will be in demand. This places the firm in a strong position.

Additionally, it has market power to negotiate prices with suppliers, meaning it can keep prices low — in turn drawing in more customers. And when these ideas are added together, it shows just how tempting a proposition Tesco shares are. In fact, supermarkets in general are much in demand at present and last year, rival Morrisons was taken over by a US private equity firm for £7bn. 

Tesco shares concerns

Yet I do have a few concerns as this is a competitive sector. And cheaper, more affordable stores such as Aldi have been on the rise lately. There is always the threat these businesses steal market share from Tesco. IGD expects the discount grocery market to be worth £34.4bn by 2026. And this growth will be fuelled by the increasing cost of living.

A shortage of workers has also forced Tesco to raise its wages, in turn increasing its labour costs. This will squeeze its margins.

Why I’m buying

Regardless of these potential issues, I am still bullish on Tesco. Its strong results even during the pandemic show the retailer’s resilience. With its low P/E ratio, I also think the stock presents real value. Couple that with the potential stability it can provide during turbulent times and I think Tesco shares would be a great addition to my portfolio. As such, I would buy today.

Charlie Keough has no position in any of the shares mentioned. The Motley Fool UK has recommended Sainsbury (J) and Tesco. 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.

Key points

• Cineworld is currently appealing a £722m damages judgement by the Ontario Superior Court
• Box office revenue has almost returned to pre-pandemic levels
• With a lower forward P/E ratio than a major competitor, the firm may be undervalued 

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As the world begins to reopen after the Covid-19 pandemic, more people are starting to return to the cinema. While restrictions were in place, the Cineworld (LSE: CINE) share price suffered massively. With steadily increasing box office revenue, however, could this be the time for me to add to my existing position? Are there any threats on the horizon with which the company has to contend? I have a spare £500 and I want to know whether I should buy more shares. Let’s take a closer look.

Ongoing litigation and the Cineworld share price

In December 2021, the Ontario Superior Court ordered Cineworld to pay over £700m in damages to Canadian peer Cineplex. This was due to the withdrawal of Cineworld from a takeover deal for Cineplex. Unsurprisingly, the Cineworld share price collapsed, falling around 50% in one day. At the time of writing, it is 34.28p, up over 25% from the 52-week low.

The firm responded to the judgement by launching an appeal. In January 2022, however, things took an even more complicated turn. Cineplex opted to cross-appeal the appeal! As a Cineworld shareholder, I see this as positive news, because the cross-appeal suggests that Cineplex believes the damages could be considered too high. The issue could take months or even years to conclude and I will be watching very closely.

Strong recent results for this cheap stock

In a trading update for the six months to 31 December 2021, the firm announced that group box office revenue for December 2021 was 88% compared to the same period in 2019. This was an increase from 50% in July 2021. Furthermore, revenue for the US operations was 91% of 2019 levels in December 2021.

Although results are not quite back to pre-pandemic levels, they are not far away. It is worth noting, however, that any new pandemic variant may negatively impact the Cineworld share price. With a number of films scheduled for release in 2022, like The Batman, Mission: Imp0ssible 7, and Minions: The Rise of Gru, I think the company will have a much better year.

What’s more, the firm may be cheap at current levels. It has a forward price-to-earnings (P/E) ratio of 2.07. This compares to Cineplex’s higher ratio of 33.44. The company’s lower P/E may be an indication that it is undervalued and this is attractive to me.

I have held Cineworld shares for a few months and recent price movement has been difficult to watch. Nonetheless, box office revenue is going in the right direction. While I will not be spending my spare £500 on more shares in the company for now, I will not rule out a further purchase in the future.   

Andrew Woods owns shares in Cineworld. 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 current geopolitical situation is truly dreadful at a human level. For investors, it illustrates how difficult it is to look for income stocks in the FTSE 100. Many companies, which look attractive from an income perspective initially, are not great passive income investments.

Corporations that appear to offer higher dividend yields than the rest of the market might come with more risk than their lower-yielding peers.

As such, when I am looking for passive income stocks to add to my portfolio, I search across the whole market. I do not exclude companies just because they do not offer market-beating dividend yields. 

And there is one company I am more interested in than any other blue-chip stock as a passive income investment today. 

FTSE 100 income stock

Severn Trent (LSE: SVT) is one of the UK’s largest and last remaining publicly-traded water providers. 

The provision of water and wastewater services is one of the most defensive markets around. Humans will always need to consume water, and cities will always need wastewater services. This essentially gives these businesses a captive market. 

The market is also highly regulated. This has benefits and drawbacks. On the one hand, regulators tightly control how much profit these water companies are allowed to make from consumers. That means they cannot just hike prices if they want to make more money.

On the other hand, the controlled nature of the market means new entrants cannot just start up overnight. A lot of capital and investment is required in order to take a new position in the market.

Even then there are no guarantees regulators will approve a new company’s pricing position. 

Passive income investment 

These are the reasons why I think this FTSE 100 firm is an excellent passive income investment today. Even though the stock only supports a dividend yield of 3.6% at the time of writing, this dividend payout is protected by the company’s competitive position in the market and its defensive nature.

The regulated nature of the market means the corporation can project its cash flows out over the next five to 10 years with a high level of certainty. This means management can try and set the dividend at a sustainable level without having to worry about future dividend cuts. 

That is not to say the dividend is 100% secure. There are always going to be risks the company will have to deal with. For example, rising interest rates could increase the cost of its debt, which could force management to reduce the payout and free up more cash to pay to creditors. 

Despite this, I would acquire Severn Trent for my portfolio, considering its income credentials. As a passive income investment, I think the group has some of the best qualities in the FTSE 100. I think it is highly likely the company will still be paying a dividend to investors 10 years from now. 

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.

Shell (LSE: SHEL) shares have rallied significantly over the past couple of days. As the oil price has pushed to a multi-year high, investors have bought into the company as it is set to benefit significantly from higher hydrocarbon prices.

Over the past 12 months, the stock has produced a total return of 44%. Over the past three months, it has returned 26%. By comparison, the FTSE 100 has produced a total return of just 16% over the past year.

Earnings growth

Investors have been buying into the stock as City analysts have rushed to upgrade their forecasts for growth over the next two years. A year ago, analysts were expecting the company to report earnings of $1.95 per share for the 2022 financial year. Current forecasts suggest the corporation will earn $3.60 per share. That is an increase of nearly 85%. 

Of course, these figures are only estimates. As such, they are subject to change. If the price of oil continues to rise, the company’s earnings per share could increase even further. On the other hand, if governments decide to levy a windfall tax on oil producers, or if oil prices suddenly collapse, then the firm could undershoot this projection.

Still, I think the outlook for Shell shares has improved dramatically over the past year or so. However, it looks to me as if the market is not yet reflecting this potential.

Indeed, at the time of writing, the stock is trading at a forward price-to-earnings (P/E) multiple of 8.2. That seems to significantly undervalue Shell’s growth potential over the next five and 10 years. 

I am not expecting the company to trade at the sort of growth of multiple some technology stocks have been able to achieve, but over the past five years, the stock has traded in at an average P/E of around 12. This implies the business is undervalued by approximately 46%. 

Putting a price target on Shell shares

Due to the uncertainties of operating in the oil and gas sectors, this is not a guaranteed price target. There are plenty of risks the company could encounter over the next few years, including sanctions and high operating costs. 

Nevertheless, with a year of windfall profits, the corporation should be able to accelerate its transition away from hydrocarbons towards renewable energy.

This could guarantee its future potential in a world that is moving away from hydrocarbon energy sources towards green energy. On top of this potential, the stock also offers a prospective dividend yield of 3.6%.

I would not rule out further cash returns if the group continues to generate substantial profits. Management is already using the company’s windfall to repurchase shares. Further buybacks and even special dividends seem likely if the favourable backdrop continues. 

As such, I think Shell shares are a glaring ‘buy’, considering the company’s potential over the next few years. That is why I would snap up the stock for my portfolio today. 

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 ITV (LSE:ITV) share price took quite a tumble this morning after management released full-year results for 2021. As a consequence of today’s 15% decline, the 12-month performance now stands at a disappointing -21% return. But was the earnings report really as bad as the drop in the stock suggests? Or is this actually a buying opportunity in disguise? Let’s explore.

Delivering double-digit growth

Despite what the tumbling ITV share price would suggest, the report actually looked quite encouraging. At least, that’s the impression I got.

Total revenue grew by 24%, reaching a new all-time high of £3.4bn, just surpassing pre-pandemic levels by around £100m. What’s more, the growth doesn’t appear to be concentrated in any one area. Meaning that the business as a whole is performing admirably.

Its content studio achieved a 28% boost in revenue. Meanwhile, advertising income surged at record-breaking levels as total streaming time continued its upward trajectory by 22%, reaching 1,048 million hours. Subsequently, its Media & Entertainment division saw a 21% jump in the top line.

All this growth directly translated into an operating profit of £519m. That’s 46% higher than a year ago and just slightly below pre-pandemic levels by approximately £16m. To me, this looks like the adverse effects of the pandemic are no longer having a significant impact on operations. And as a result, ITV is now the largest ad-funded streaming platform in the whole of Europe.

But with revenues and profits growing by double-digit rates, a simple question remains. Why did the ITV share price plummet on what seems to be strong results?

Uncertainty is on the rise

Despite the encouraging performance, it seems investors have some concerns about management’s spending plans. The company announced £1.23bn of content investments will be made in 2022. And that number is planned to increase to £1.35bn in 2023. The goal is to create popular high-quality shows to continue growing total viewing hours as the group aims for its 2026 revenue target of £750m.

That certainly sounds like a sound strategy on the surface. But it’s worth remembering that original content production is fraught with risk. A lot of capital can be invested in a show that turns out to be a dud. And with other streaming giants like Netflix and Disney+ continuing to expand their international reach, there are understandable fears that ITV may struggle to compete.

The bottom line

The risk of looming competition and aggressive content spending is something I’ve highlighted before. And while it remains a prominent threat, management has demonstrated a level of fidelity when it comes to content capital allocation. That’s why, personally, I feel this is a risk worth taking. And with the ITV share price tanking on solid earnings, this looks to me like a buying opportunity for my portfolio.

Zaven Boyrazian has no position in any of the shares mentioned. The Motley Fool UK has recommended ITV. 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 am looking for equities to add to my Stocks and Shares ISA, and I am focusing on opportunities in the FTSE 250. With that in mind, here are three mid-cap UK stocks I would buy for my portfolio today, considering their growth and income potential over the next few years. 

Stocks and Shares ISA buys 

The first company on my list is the FTSE 250 threads manufacturer Coats (LSE: COA). Over the past couple of years, this firm has transformed from a turnaround situation into a growth opportunity. It is the world’s leading industrial thread manufacturer, one of those businesses that hardly gets the pulse racing.

But the company forms an integral part of the global clothing supply chain, and it has been benefiting from rising demand for its services.

According to its latest results release, reported revenues increased 29% in its 2021 financial year. Operating profit jumped 75% off the back of these figures allowing the company to reduce overall debts with additional cash flow. Going forward, management plans to invest its windfall profits in further growth opportunities.

Optimisation

It is looking to “optimise” its manufacturing footprint and workforce. These initiatives are expected to lower overall costs even as the group invests in new products. It launched 21 new products last year. These products contributed $37m in incremental revenue. 

Despite the company’s strengths, there is no denying it will face some challenges. These include wage pressures and supply chain issues, both of which could hit profit margins in the near term. Further, like almost every other business, Coats will have to deal with competition in its primary market. 

Still, despite these risks and challenges, I think the FTSE 250 corporation could make a great addition to my Stocks and Shares ISA. With management planning to bring out new products over the next few years and optimise the company’s manufacturing footprint further, I think it has a bright future. 

Supply and demand

The UK’s private healthcare market is growing rapidly, thanks to a rising number of consumers who are willing to pay for treatment. The growing NHS backlog is pushing wealthy customers to find other options, generating additional business for private healthcare providers such as Spire Healthcare (LSE: SPI). 

This business is rising to the challenge. It reported revenue growth of 20% for 2021 and is investing in new facilities to help meet the growing demand for its services.

Indeed, last year the company invested £77m in new facilities and equipment. This was a 52% increase on the level of investment reported for 2020. The new facilities included replacement CT and MRI scanners. It is equivalent to around 7% of the group’s revenue and 10% of the adjusted operating profit. 

Spire has also been helping the NHS deal with its extensive treatment backlog. It has agreed to provide the public healthcare service with facilities to help treat cancer. Since the start of the pandemic, 356,000 NHS patients have been treated in the company’s facilities.

Need in the market

While some people might disagree with public funding going to private healthcare providers, it is clear that Spire is fulfilling a need in the market. The NHS clearly cannot deal with the growing patient backlog alone. Leaning on other providers in the sector makes a lot of sense. 

For its part, Spire is planning to continue to invest in its operations over the next year. It plans to expand its healthcare offering into new markets, including standalone diagnostic/minor treatment clinics and diabetes long-term condition management. 

Unfortunately, the firm’s growth cannot be taken for granted. This is becoming an increasingly competitive market, and the costs of doing business are growing. Rising costs could impact the company’s growth and spending plans over the next two years. If costs rise significantly, the company might have to put some of its growth plans on ice. This could impact patient care. 

Even after considering this fact, I would be happy to add the FTSE 250 healthcare provider to my Stocks and Shares ISA. As the demand for private healthcare in the UK continues to expand, I think the business can capitalise on this market growth over the next five to 10 years. 

Stocks and Shares ISA opportunity

I have always been impressed by the way Wizz Air (LSE: WIZZ) has grown and developed over the past couple of years. Sadly, the company’s growth plans have had to take a backseat, due to the situation in Eastern Europe. The outfit has a lot of exposure to the region and is the only EU airline with bases and aircraft in Ukraine. 

The company’s exposure to Eastern Europe has spooked investors. The stock has fallen significantly since the Russia-Ukraine conflict began last week. 

While dealing with the fallout of this war is likely to be a significant challenge for the enterprise over the next few years, its operating model is unlikely to change. This suggests to me that now could be a good time to snap up some shares in this aviation challenger. 

Growth potential

The company’s recovery is far from guaranteed. However, it is clear the demand for low-cost air travel is unlikely to fall significantly over the next decade. If the enterprise can survive the current crisis, it should be able to capitalise on this growth. 

With most of its operations located outside of Ukraine, there is no reason to suggest why the business cannot survive the current situation. It may face some turbulence along the way, but Wizz possesses the qualities required to navigate the current crisis. It could even emerge stronger. That is why I would acquire the FTSE 250 investment for my Stocks and Shares ISA. 

Rupert Hargreaves has no position in any of the shares mentioned. The Motley Fool UK has recommended Coats 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.

Trading updates are always extremely useful when I am deciding whether to buy shares in a company. They give an up-to-date assessment of how the company is performing, as well as offering some forward guidance. Here are two UK firms that released their half-year and full-year trading updates today, showing several positive signs. I think now is the time to buy both companies.

A cyber-security firm

Darktrace (LSE: DARK) has had a mixed start to life as a public company. After soaring to around 1,000p, the UK share has since dropped back to under 400p. But after today’s excellent trading update, and some other recent positive developments, the shares have managed to climb back to over 500p. I think they can continue to soar.

Even as a current shareholder, the trading update exceeded my expectations. In fact, revenues in the six months to 31 December 2021 reached over $192m, over a 50% year-on-year increase. Even more impressive was the fact that the company saw an operating profit of over $8m, mainly due to the pandemic-related suppression of some key costs. This is a change from the consistent losses the company has been seeing. While I don’t believe this is a sign of consistent profitability, especially as the costs are likely to return soon, it’s still a promising sign.

Even more promising is the updated forward guidance. For FY22, the company now expects year-on-year revenue growth of over 45%, updated from previous guidance of 43%. The recent acquisition of Cybersprint should also boost revenues in the longer term.

There are a couple of risks that must be pointed out though. For example, it has a high valuation, with a price-to-sales ratio of around 10. This implies that revenue growth is already expected to be very high. Further, share-based compensation is expected to increase over the next year, potentially leading to share dilution.

Despite these risks, the potential of Darktrace certainly seems too strong to ignore. This is a UK share I’ll continue to add to my portfolio.

A packaging UK share

Mondi (LSE: MNDI) is a FTSE 100 share that has delivered consistent growth over the past few years, while also paying a sustainable, and fairly high, dividend. Its recent results also demonstrated its consistent growth.

For example, in 2021, revenues were able to grow 16% year on year to €7.7bn, while operating profits grew 23% to over €1bn. This gives Mondi a price-to-earnings ratio of just 11. Considering that it’s managing to deliver strong growth, this seems very cheap. It also raised its full-year dividend 8%, reaching 65 cents. This equates to a yield of around 4%, far higher than many other UK shares.

Even so, the current conflict between Russia and Ukraine is a severe problem for Mondi, because it has significant operations in both countries. In fact, Russian revenues equate to around 12% of the group’s total. Loss of these revenues would, therefore, have a significant impact on the Mondi share price. As such — and also for the sake of an end to the suffering — I hope that a ceasefire is not too far away.

Despite this risk, Mondi is not a Russian company and will not be targeted by western sanctions on Russia. It should be able to mitigate the impacts of the conflict through its other operations. This is why it remains a stock I’m happy to have in my portfolio.

Stuart Blair owns shares in Darktrace and Mondi. 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.

Investing in shares to create passive income is a major goal of mine. To achieve a sustainable passive income, I need to understand the stock market and do my research. That should help me unearth good investments that I hope can grow year after year.

So, these are the UK shares I’d buy and hold for at least a decade to create and grow a passive income stream.

Two top UK shares

To choose what I think are the best two companies, I’ve looked for those with high dividend cover, a history of dividend and earnings growth and yields above 3%.

Meeting these criteria were UK shares such as MTi Wireless, Belvoir, Hargreaves Services, Domino’s Pizza, and Intermediate Capital, as well as a number of investment trusts.

But two other shares particularly caught my eye – Rio Tinto (LSE: RIO) and Morgan Sindall (LSE: MGNS). The former has an earnings per share (EPS) compound annual growth rate (CAGR) of 44.7% over the last three years. This is very high, and has helped underpin dividend growth. The dividend yield is already very high at around 10%, but it’s covered by earnings. Earnings cover the dividend by more than 1.5 times. Along with a reasonable price-to-earnings ratio (P/E) of six, Rio Tinto looks like a top buy-and-hold passive income share for me.

But mining is an industry with boom and busts and there’s a risk we’re at the top of a cycle right now. Yet with electric cars needing copper and other metals in increasing amounts, there’s going to be demand for Rio’s output for a long time to come.

The company digs for copper, aluminium, silver, gold, bauxite and diamonds, but it’s best known for iron ore. That makes it reliant on steel production and Chinese construction for further growth. This could be a risk, especially in light of the recent debt problems at Chinese developer Evergrande. 

The stock isn’t without risks and has environmental challenges to face up to. Nonetheless, looking from the point of view of creating passive income, it looks like a top share for me to buy right now and then hold for a decade. I’m very tempted to buy the shares.

Investing for passive income

Shares in construction and infrastructure group, Morgan Sindall, yield around 4% and are on a P/E of 10, indicating they could be quite good value. The three-year EPS CAGR is much less than Rio’s, but is still respectable at 12.3%. Also, the dividend – which has been growing well – is covered more than twice by earnings. All in all, it looks like a very promising passive income investment.

The group is doing well operationally and financially, which bodes well for the future. It recently reported record full-year results with double-digit profit growth being driven by a modest increase in revenues and improved operating margins. It had net cash of £358m as of 31 December 2021, which suggests a balance sheet in good shape. Again, I’m tempted to buy.

Rio Tinto and Morgan Sindall are my top picks to buy and hold for a decade to create a passive income from UK shares.

Andy Ross owns no share 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 Darktrace (LSE:DARK) share price erupted by over 16% this morning after management released its latest half-year report. What was in it that has investors so excited? And is it too late for me to snatch up some shares? Let’s explore.

The rising Darktrace share price

As a reminder, Darktrace is a cybersecurity technology business. The firm provides an AI-driven platform that leverages machine learning to automatically adapt whenever encountering a new threat. 

That certainly sounds like a promising platform. And it’s easy to see why investors are getting excited about Darktrace’s share price potential, especially looking at the latest results. The group has expanded its customer base to 6,531. That’s a 40% jump compared to a year ago, demonstrating a rise in popularity as a cybersecurity solution. And with the vast majority buying two or more products from Darktrace’s tool box, revenue has surged by 52%, reaching $192.6m (£143.9m).

Seeing such vast top-line growth is undoubtedly impressive. However, for technology companies this is somewhat expected. What I find more encouraging is that the company actually moved out of the red and into the black. Net income came in at $5.9m (£4.4m) achieving what most young technology businesses struggle with – finding a path to profitability.

With that in mind, I’m not surprised to see the Darktrace share price surge on this report.

Taking a step back

As encouraging as these figures might be, there remains a long road ahead. The emergence of profitability is a solid signal of progress, in my opinion. But the group still remains dependent on external financing. And it will likely stay that way until cash flows can expand further. That obviously adds an elevated level of risk, especially now that macroeconomic factors are reducing general capital liquidity.

What I’m also keeping an eye on are those customer numbers. While they’re heading in the right direction, some ex-clients have described the technology as “snake oil”. If that assessment is accurate, many of its new clients could be heading for the exit. Churn rates have fallen from 8% to 6.4% over the last 12 months, but I think it’s still too soon to draw any meaningful conclusions.

Having said that, my biggest concern actually lies with the valuation. The AI cybersecurity market is estimated to reach $46.3bn by 2027. By comparison, in 2020, the market size stood around $10.5bn. Needless to say, that’s a lot of growth potential for this business. 

However, with a market capitalisation of £3.2bn, it seems investors are valuing the firm based on future expectations rather than existing fundamentals. In my experience, that’s a recipe for enormous share price volatility – something Darktrace is no stranger to.

The bottom line

These latest results are an encouraging step in the right direction. But, personally, the valuation remains too rich for my tastes. And with other unknown factors surrounding this young business, I think Darktrace and its share price still have plenty to prove. Therefore, I’m keeping the stock on my watchlist for now.

Zaven Boyrazian 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.