Meta (NASDAQ: FB) stock has suffered considerably over the past month, crashing nearly 40% to $200. This means that the company’s market cap has fallen back to around $500bn. Such a large fall has been caused by disappointing growth prospects. Even so, this dip has left Meta looking very cheap to me on a valuation basis. Therefore, can the Facebook owner outperform the S&P 500 over the next few years?

What caused the large decline?

There is no doubt that the recent Q4 trading update from the company was a disaster. In fact, for the first time in its history, daily active users dropped slightly to 1.929bn. This was partly due to the rise of TikTok, which has been attracting many younger users. This also led to disappointing forward guidance, whereby Q1 revenues are only expected to increase 7% year-on-year.

There are also issues due to operating changes by Apple, which allows iPhone users to tell app makers not to track them around the internet. This was introduced in June 2020, and it has been revealed that it will likely cost Meta around $10bn in revenues this year. These are big numbers, and due to the recent issues with the company, its impact seems particularly profound right now. As such, there is a risk that Meta stock will continue to fall due to the weaker growth prospects.

Is Meta stock now too cheap?

The recent dip may have made it an ideal time to buy though. For example, the stock currently trades at a price-to-earnings ratio of around 15. This is similar to the valuation of many utilities’ companies, which are seeing far slower, or even negative growth. Further, the company has a very large share buyback programme, which was under way even before its disastrous results in February. These repurchases were completed at prices of around $300, demonstrating that the company believed the stock was too cheap at these levels. Therefore, I believe that the stock buyback programme will continue at a fast pace throughout 2022, and this should have a positive effect on the Meta share price.

There is also a hope that Meta will play a major role in the metaverse in the future. Indeed, it’s currently investing a lot of money into development in this area, with the hope that future profits can grow at extraordinary rates. Of course, there are several risks with the tactic, especially as the metaverse may not be as big as the company hopes. Even so, it’s still promising to see a new dimension to the company.

Can the company outperform the S&P 500?

It’s clear that Meta stock is trading at historically low valuations. In comparison to other S&P 500 stocks, it also seems ridiculously cheap. For example, Apple trades at a P/E ratio of around 30, Amazon at over 50 and Nike at over 30. Meta’s growth prospects are not too dissimilar to these companies. Further, McDonald’s,which is seeing slower growth than Meta, has a P/E ratio of 25. This makes me think that Meta is far too cheap right now and will hopefully be able to outperform the S&P 500. I may add some Meta shares to my portfolio.

John Mackey, CEO of Whole Foods Market, an Amazon subsidiary, is a member of The Motley Fool’s board of directors. Randi Zuckerberg, a former director of market development and spokeswoman for Facebook and sister to Meta Platforms CEO Mark Zuckerberg, is a member of The Motley Fool’s board of directors. Stuart Blair owns shares in Apple. The Motley Fool UK has recommended Amazon, Apple, and Nike. 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.

Was this article helpful?

YesNo

Warren Buffett has famously said that investing isn’t about intellect (thankfully for me!), it’s about temperament. I for one am not going to argue with the Sage of Omaha, as he is known. Even more so as the Berkshire Hathaway share price overtakes the growth-focused Ark Innovation ETF. Warren Buffett has weathered many really serious market crashes. These include Black Monday in 1987, the dotcom bubble bursting in 2000, and the 2008 financial crisis (as well as some earlier ones few of us would remember). That’s why his advice is worth listening to and his example worth following. 

For investors, a stock market crash can mean losing a lot of money. But for long-term investors, it also means the chance to position oneself to potentially make a lot of money too. In every crisis, there’s an opportunity as they say. 

Warren Buffett on a falling market

Because in a stock market crash nearly everything goes down indiscriminately as investors panic, it can create an opportunity to pick up high-quality companies at a cheaper price. As Warren Buffett has said: “Whether we’re talking about socks or stocks, I like buying quality merchandise when it is marked down.” This is exactly the situation when there’s a stock market crash.

Another famous Buffett-ism is: “We simply attempt to be fearful when others are greedy and to be greedy only when others are fearful.” This again encapsulates the idea that a stock market crash is an opportunity for savvy investors, rather than something to fear. Given that crashes are inevitable, and it’s possible there will be another in 2022, it’s worth being prepared for one.

The Buffett takeaways

So what does Buffett teach us? For long-term investors a crash is ideal. It’s not necessary to time a stock buy perfectly. It’s enough just to get a hopefully great, well researched company at a lower value than it would have been pre-crash.

I treat a stock market crash as an opportunity, especially if there’s cash available to buy shares at a better valuation. Berkshire Hathaway holds a lot of cash, presumably for this reason. As long-term investors, Buffett and his team want to buy shares at an attractive valuation. They don’t need to seize every opportunity that presents itself. He waits until he has a margin of safety and the odds of success are in his favour before pouncing.

3 things I’ll focus on if the stock market crashes

With everything that has been said, there are three things I’ll focus on if the stock market crashes. First up is trying to stay calm and not selling anything. Then I’ll focus on researching new shares and assessing if there are any emerging opportunities to invest in a great company. And finally, when I believe the dust is starting to settle, I’ll invest my cash in high-quality businesses that I know I want to own

That’s my plan. Pure and simple. As Buffett has pointed out, it’s not about intellect or being super-sophisticated. Instead, consistent success is about temperament. It’s also about seeing a crash as an opportunity to buy great companies that can provide growth and income.

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.

Was this article helpful?

YesNo

On 22 November 2021, the tech-dominated Nasdaq Composite index hit a record high of 16,212.23 points. On Friday, it closed at 13,548.06. That’s a loss of 16.4% in under three months. Were the index to fall below 12,969.78 — losing another 4.3% — it would be in a bear market. This is when a stock, index or market falls by 20% from a previous peak. Thus, it’s been a tough three months for tech stocks. But this crash has hit Cathie Wood’s flagship fund, the ARK Innovation ETF (NYSE: ARKK), even harder.

Ark Innovation ETF skyrockets

From 2019 to early 2021, returns from the Ark Innovation ETF were astonishing. They were outstanding because it invested in what Cathie Wood calls “disruptive innovation“. This includes fields such as DNA sequencing and genomics, automation and robotics, green energy, artificial intelligence, and fintech (financial technology). Many of ARKK’s highly speculative stocks soared during the Covid-19 pandemic as investor expectations went sky-high.

In 2019, ARKK gained 34.6%, before skyrocketing by 149.1% in Covid-hit 2020. The stock kept rising, hitting an all-time high of $159.70 on 16 February 2021. From launch on 30 October 2014 to last February’s high, this New York-listed ETF returned an incredible 683.6% (excluding dividends). This would have grown $1,000 into over $7,836 in under six-and-a-half years. This earned Cathie Wood the nickname of ‘The Queen of the Bull Market’. Investors also likened her to legendary mega-billionaire investor Warren Buffett.

ARKK crashes back to earth

Alas, it’s been all downhill for ARKK since February 2021, as the ETF crashed spectacularly over the past year. It ended 2021 at $94.59. But 2022 has been brutal for Cathie Wood, as her prized ETF’s stock kept plunging. At one point on Friday, it hit a 2021-22 low of $63.99. So far, the stock has crashed by almost 60% from its record high. This means it’s back to where it stood in early June 2020, wiping out roughly 20 months of gains.

Would I buy this ‘spec tech’ stock today?

After collapsing by 31.5% in 2022, is ARKK now in Mr Market’s bargain bin? One positive note is that the stock is down a mere 2.3% since 27 January. This was the day Cathie Wood predicted would mark the bottom of 2021-22’s tech crash. However, I saw something eerie and worrying last week. It was a chart that overlaid the Nasdaq’s path from 1996 to 2001 with ARKK’s performance from 2017 to 2022. The correlation was striking. Both lines surged in sync, before plunging together. When market bubbles finally burst, they sometimes deflate in similar fashion — in my experience.

I don’t own ARKK at present, but would I buy this stock after its precipitous decline? As a veteran value investor, I usually steer well clear of speculative tech stocks. Also, as Warren Buffett said on 1 May 2021: “There’s a lot more to picking stocks than figuring out what’s going to be a wonderful industry in the future.” Right now, I’m seriously unconvinced that Cathie Wood can repeat her market-beating performance of 2019-21.

In addition, the US faces strong economic headwinds. These include red-hot inflation, interest-rate rises and higher bond yields in 2022-23. These conditions are hardly conducive to an upward re-rating of ‘spec tech’ stocks. I didn’t buy ARKK before and have yet to change my mind. But, of course, its investments could still pay off and I could be wrong about it — as I was in 2019-20!

Cliffdarcy 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.

It’s been a slow start to the year for the Rolls-Royce (LSE: RR) share price. The stock is sitting around the middle of the pack in the FTSE 100 when ranked on year-to-date returns. This means it’s underperforming the FTSE 100 return so far this year. However, over 12 months, the share price is up a much more impressive 19%.

So is the Rolls-Royce share price going to charge ahead from here? Or is it destined to underperform the FTSE 100? Let’s take a closer look.

The recovery and outlook

Rolls-Royce really suffered during the pandemic as travel restrictions largely put a stop to flying. As such, demand for aircraft engines from the company’s Civil Aerospace division dropped significantly. In fact, in the 12 months to 31 December 2020 (FY20), sales from Civil Aerospace crashed 37% compared to FY19. This was particularly painful for Rolls-Royce as this is by far the company’s biggest business.

Things aren’t looking great for FY21 as it stands either. Revenue for Civil Aerospace is expected to dip again, but by a much smaller 0.9% this time. Having said this, Covid still heavily disrupted travel during 2021. So it’s not too surprising that demand for aircraft engines was still reduced across the year.

If I was to buy the shares today though, I’m more concerned about the company’s future growth. And actually, things are looking up.

For one, Civil Aerospace is expected to grow by an impressive 17.5% in FY22, and make an operating profit for the first time since 2019. Rolls-Royce’s other two big divisions – Defence Aerospace and Power Systems – are expected to grow too. In fact, Defence Aerospace, Rolls-Royce’s military engines business, has been stable throughout the pandemic, unlike Civil Aerospace. To my mind, this adds good diversification to the company’s revenue profile.

City analysts are then expecting significant pre-tax profit growth for FY22 of 97.5%. Also, free cash flow is expected to be positive this year for the first time since before the pandemic.

Where is the Rolls-Royce share price headed?

It does look like Rolls-Royce is turning a corner after a difficult two years. However, it’s important for global air traffic to recover if Civil Aerospace is to grow from here.

According to FitchRatings, the recovery in air traffic will continue this year, but slower than initially expected. It quotes lower business travel, and a slow uptake in international flying, that are both still impacting the industry. This remains a key risk to Rolls-Royce in the year ahead.

The valuation doesn’t look all that compelling at this level either. On a forward price-to-earnings ratio, Rolls-Royce shares are valued on a multiple of 20. This is high, in my view, and would demand high growth rates for me to want to buy the shares.

One other factor to consider is that Rolls-Royce isn’t expected to pay a dividend until at least FY23.

So, for now, I don’t expect the Rolls-Royce share price to increase much from here. If there’s a significant pick-up in air traffic and no further Covid setback, then I can see the share price rising. Then, if Rolls-Royce is able to start paying a dividend sooner than expected, it may be a more attractive investment.

But I won’t be buying the shares in my portfolio just yet.

Dan Appleby has no position in any of the shares mentioned. The Motley Fool UK has no position in any of the shares mentioned. Views expressed on the companies mentioned in this article are those of the writer and therefore may differ from the official recommendations we make in our subscription services such as Share Advisor, Hidden Winners and Pro. Here at The Motley Fool we believe that considering a diverse range of insights makes us better investors.

The Scottish Mortgage Investment Trust (LSE: SMT) share price has fallen by almost 25% since the market closed on New Year’s Eve. It’s been a tough start to the year for shareholders.

However, SMT stock is still 55% higher than it was two years ago. What’s more, the trust’s management makes no secret of the reality that it only looks for long-term growth opportunities. It admits short-term performance can be unpredictable. For this reason, I’m wondering whether SMT’s share price slump could be a buying opportunity for me.

Is SMT cheap?

To find out whether Scottish Mortgage might be starting to look cheap, I decided to take a look at the trust’s largest holdings. If these looked cheap to me, then Scottish Mortgage shares might also be cheap.

At the end of January, the trust had 101 holdings. I don’t have the time to investigate all of these, so I decided to focus on the 10 largest holdings. These represented 41.4% of total assets at the end of January and included big names such as Moderna, Tesla, Tencent, Alibaba, and Amazon.com.

What I found was these largest holdings are trading on an average of 35 times forecast earnings. On average, these 10 companies are expected to deliver earnings growth of 14% over the next 12 months.

Based on this quick snapshot, my feeling is that the price is high for this level of growth. On balance, my view is that SMT’s largest holdings are probably not cheap. This suggests to me that Scottish Mortgage shares may not be cheap either. However, I think it’s possible that I’m focusing too much on the short term.

Scottish Mortgage share price: still up 2,500%

One thing I like about Scottish Mortgage Investment Trust is that it has a very long history. Using free tools like Google Finance, we can check the trust’s share price progress right back to 1993.

I’ve just done that, and what I’ve found is that SMT shares have gained 2,500% since then. Over the last 10 years alone, they’ve delivered a 650% gain. Those are exceptional figures. Very few investment funds ever achieve this kind of result.

Even so, it’s worth remembering these gains haven’t come in a straight line. The Scottish Mortgage Investment Trust share price fell by 50% after the dot-com crash in 2000, before starting to rise again in 2003. SMT stock also fell by 50% after the 2008 crash, before returning to growth.

I think we’ve just seen another tech stock boom. Although the SMT share price has already fallen by more than 30% from the 1,500p+ highs seen in November, I think it could have further to fall.

Despite this concern, I still believe the trust holds some great businesses that should do well over the long term. One option for me now would be to buy some Scottish Mortgage shares and forget about them for 10 years.

However, I’m just not comfortable with the risk/reward balance right now. For this reason, I’m going to continue to stay away from this stock. I hope that if I’m patient, I’ll find a better opportunity to buy.

John Mackey, CEO of Whole Foods Market, an Amazon subsidiary, is a member of The Motley Fool’s board of directors. Suzanne Frey, an executive at Alphabet, is a member of The Motley Fool’s board of directors. Roland Head has no position in any of the shares mentioned. The Motley Fool UK has recommended Alphabet (A shares), Alphabet (C shares), Amazon, and Tesla. 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.

Last week saw the release of the full-year report for NatWest Group (LSE:NWG). Although the shares dropped on Friday when it was released, I actually think the results were positive overall. When I add a solid financial year into the mix along with other reasons to be optimistic, I think NatWest shares could perform well for the rest of the year. Here’s why I’m thinking of buying the shares now.

Bouncing back from 2020

Let’s delve into the results in more detail. After losing £481m in 2020, NatWest posted a profit of £3.98bn this time. Part of the driver behind this was a large increase in net new money flowing into the bank from customers. This came in at £3bn for the year, up from £1.5bn the previous year. It also benefited from releasing £1.2bn in cash that was previously set aside for potential loan defaults from the pandemic. 

These figures all made for good reading, and I think this positivity can give it momentum for 2022. The excess capital is being used partly to pay out a dividend, partly for a share buyback and partly to retain within the business. This will help to keep shareholders happy, yet at the same time provide ammunition for the coming year for investing back into businesses within the overall group.

NatWest shares did fall on the release. I think this is potentially due to the market having a high expectation of results already priced in. It was known that the results would be good, and so the bar to impress was already set quite high. Further, some investors might have been worried by the size of some expenses. This included a £265m fine for money laundering and also a rise in overall compensation for top executives.

Higher rates should support NatWest shares

A second reason why I think NatWest shares could do well this year is due to rising interest rates. In the latest report, the net interest margin for the bank fell by 0.07% to 2.39%. This doesn’t sound like a lot, but when we’re talking about the impact on hundreds of millions of pounds, it does add up.

Despite this fall, rising interest rates in the UK this year should allow the net interest margin to rise in 2022. This margin measures the difference between the rate paid on deposits versus the rate charged on lending money out. With the Bank of England looking to raise rates again in the spring, positive expectations of how this could help the group should help to lift NatWest shares.

Interest from dividend seekers

Finally, I think the group should be able to benefit from more interest from income investors. The results detailed how a dividend per share of 10.5p for 2021 was recorded (a combination of paid and proposed dividends). This is up from the 3p in 2020. The current dividend yield for the bank is 4.48%, which is above the FTSE 100 average by over 1%.

Given the positive outlook, I think dividends could continue to flow this year. This could help to boost NatWest shares as those wanting income payouts will pile in. However, I do need to be aware that if the shares rally too much, this will depress the dividend yield and make it look unappealing.

These reasons make me keen to buy now for my portfolio.

Jon Smith and The Motley Fool UK have 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 past couple of years have been a struggle for IAG (LSE: IAG) as global travel was entirely shut down. It was particularly severe for IAG compared to some other airline operators as it is heavily involved in transatlantic flights. These were hit even harder than European travel. This forced the company to issue more shares and more debt to survive. But things are starting to look far more promising, and a return to normality may not be too far away. As such, can the IAG share price finally start to soar?

Recent results

In the company’s third-quarter trading update, there were several promising signs. For example, passenger capacity in the quarter was 43.4% of 2019, up from 21.9% in the second quarter. While 43.4% is still underwhelming, it’s clearly a major improvement. Recent market data has also indicated that demand for flights in Britain is edging back to pre-pandemic levels for the summer period. This makes me expect further improvements, a factor that should boost the IAG share price.

Operating losses have also narrowed. For example, in the first nine months of 2021, IAG reported an operating loss of €2.5bn, down from nearly €6bn the year before. This shows the company has been effectively cost-cutting. Hopefully, this will increase its overall profitability post-pandemic.

Other factors

There are further indications that travel is continuing to recover to pre-pandemic levels. For example, in the UK, it’s recently been announced that fully vaccinated travellers no longer require a Covid-19 test on arrival. Further, both Norway and Sweden are allowing all passengers to enter, regardless of their testing or vaccination status. The continuing reopening of tourism around the world will certainly be a benefit for all airlines, including IAG.

Despite this, there are a couple of risks that do not concern the pandemic. For one, the tensions between Russia and Ukraine, could disrupt travel to Eastern Europe. Unlike some other airlines, such as Wizz Air, IAG’s business extends far beyond travel to Eastern Europe, so the impacts should not be too severe. Even so, it is still likely to have ramifications. And if the war we all desperately hope doesn’t happen actually breaks out, I believe the IAG share price will fall heavily as a result.

There is also the issue of the rising oil price, which has hit $90 per barrel recently. This will increase costs, which may force the airline to raise ticket prices or accept lower profit margins. Both these scenarios are certainly not ideal, especially as it attempts to recover from the pandemic.

Is the beaten-down IAG share price ready to fly?

Before the pandemic, the IAG share price stood at over 600p. This compares to its current price of around 160p. Due to issues of share dilution, increased debt, and the large losses the airline has incurred, a return to 600p over the next few years seems extremely unlikely to me. Even so, I believe there is certainly upside potential. This is because the general population seems very keen to go on holiday in 2022. For this reason, I’m adding IAG to my watchlist. 

Stuart Blair 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.