One beaten down penny stock I think could be a great long-term addition to my holdings is IQE (LSE:IQE).

IQE is a UK-based firm, designing and manufacturing vital semiconductor parts. Semiconductors are core components in many hot new technologies at the moment. Some of these include the rollout of 5G, as they are used in 5G masts. Hybrid automobiles also require semiconductors. The rise in hybrid vehicles as many vehicle manufacturers are moving away from petrol and diesel vehicles means demand is set to explode in the coming years.

Penny stocks are those that trade for less than £1. As I write, IQE shares are trading for 42p. At this time last year, the shares were trading for 80p, which is a 47% loss over a 12-month period.

There has been a well documented shortage of semiconductors recently. I believe this is one of the reasons the IQE share price has tumbled. 

Penny stocks have risks

The global semiconductor market is unique in the sense that there is no one major player and it seems to be scattered throughout the world. Reviewing other semiconductor manufacturers, it seems IQE has lower profit margins, of just 17%, compared to others in the market. The market average is 25%. One competitor, Taiwan Semiconductor Manufacturing Co., has a 40% margin. This could hurt future growth for IQE.

The recent rise in inflation and costs has led to a spike in raw material costs. These surging costs mean IQE’s profit margins could take a hit too. The global supply chain crisis is affecting the shortage of semiconductors as well as the parts needed to manufacture them. This will also affect performance and progress.

A penny stock I’d buy

Many penny stocks do not have enough information or track record to review in regards to determining investment viability. IQE does and I can see it has a good track record of performance. Looking back, I can see revenue and gross profit have increased year on year for the past two years.

Coming up to date, IQE released a post-close trading update at the end of last month. It said revenue was expected to be in line with guidance, and close to £164m. This is less than 2020 levels but still strong performance based on market headwinds. Full results are due at the end of March.

The surging demand for semiconductors, which is currently outstripping supply, is one of the main reasons I am bullish on IQE shares. There are many applications of semiconductors, aside from the 5G rollout and hybrid vehicles, such as in TVs, smartphones, and gaming devices. As the adoption of technology continues, accelerated by the pandemic, I think IQE’s performance will continue to grow too.

Overall I’d happily add IQE shares to my holdings. I think the shares are currently very cheap and there seems to be enough demand that could last a very long time to boost IQE’s performance and balance sheet. I believe it is a excellent penny stock with long-term potential and returns ahead.

Jabran Khan 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.

There is little appeal to shelling out on an expensive sports car and then only driving it in reverse. But over the past year, Aston Martin (LSE: AML) has been firmly stuck in reverse gear. During that period, the Aston Martin share price has fallen 47%. That comes on top of previous poor performance. Shares now change hands for only 11% of what they cost when the company floated less than four years ago.

Could the recent poor performance be a good chance to add the luxury carmaker to my portfolio at a knockdown price?

Multiple challenges

The Aston Martin share price collapse reflects a number of challenges.

Building the high end cars at the pinnacle of the company’s portfolio has turned out to take longer than expected. That led the company to warn on profits last month, although it emphasised that the small number of cars in question had all been sold, so the profits, although delayed, should still materialise eventually.

To shore up liquidity over the past couple of years, the company took a number of measures. One of those was issuing new shares. That heavily diluted existing shareholders and I see a risk of the same thing happening in future if the carmaker faces another liquidity crunch. The company also borrowed money, but its precarious situation meant that lenders demanded high interest rates. That is bad news for profits, as they are now reduced by sizeable interest payments. The company has said it expects last year’s cash interest bill to total £120m, for example.

Bright spots

Despite the financial challenges and some production delays in the supercar range, there is clearly a business transformation under way at the company. Wholesales last year showed an 82% increase compared to the prior year. The company’s DBX model now has an estimated 20% market share of the luxury sports utility vehicle market, suggesting Aston Martin’s gamble in launching it is paying off.

Retail demand has also been high and the company’s renewed marketing efforts have helped emphasise the brand appeal to well-heeled buyers. Cost controls have also helped improve liquidity, with a cash balance of £420m at the end of last year exceeding expectations.

My move on the Aston Martin share price

However, despite the reasons for optimism, I see two different stories here at the same time.

One is the story of underlying business performance, which I think is positive. Sales are booming, demand is high, and the company’s range of models clearly has appeal in its market.

But the second story is one of how that business performance sits within a listed company saddled with high debt. Even if Aston Martin maintains its recent strong sales performance and cost control, I expect that servicing debt will use up a lot of its earnings for several years at least. That means that the improvement in the underlying business performance will not necessarily translate into an improving share price, as we have already seen. For that reason, I will not be buying Aston Martin shares for my portfolio.

Christopher Ruane 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 Indivior (LSE:INDV) share price was up 14% today on the back of a positive full-year report. In the 2021 fiscal year, Invidior, a pharmaceutical company specialising in opioid addiction treatments, grew its revenues by 22%. The return of routine visits to clinics and hospitals has undoubtedly helped Indivior. But the company has also been expanding the market share of its SUBLOCADE injectable treatment for opioid addiction. Sales of PERSERIS, a treatment for schizophrenia, are up 21% in 2021, representing good progress in treatment portfolio diversification.

Indivior reported a net income of $205m in 2022 compared to a loss of $148m in 2021. But, for all the fiscal good news, what seems to have garnered the most attention is the board mulling over the possibility of a dual-listing for Indivior shares.

Dual-listing Indivior shares

Indivior derives about 80% of its revenue in the US. The large US revenue component has got Indivior’s board thinking about an additional US listing for the company’s shares. Today, the board has indicated they are actively assessing the possibility of a dual-listing but would consult Indivior’s shareholders before moving forward.

The most common way for a non-US entity to list on American exchanges is with American Depositary Receipts (ADRs). To create an Indivior ADR, Indivior stock is bought on the London Stock Exchange and given to a depositary bank in the US. The depositary bank issues ADRs, which represent one or more or a fraction of the Indivior shares it holds. Brokers or dealers then take the ADRs to the US stock markets to be bought and sold.

Would dual-listing be good for the Invidior share price

Dual-listing can improve a company’s profile and visibility. Raising capital in two capital markets should be easier. A dual-listing across the US and UK would increase the time Invidior shares trade on a given day and increase liquidity. These factors sound positive for the Invidior share price.

On the other hand, dual-listings incur an expense to set up. There are also ongoing expenses from dealing with different regulatory and accounting requirements (the US uses GAAP and the UK, IFRS) and from communicating with two investor bases. Dual-listed companies tend to be quite large, perhaps a reflection of the complexities involved. Indivior, at a market cap of £1.6bn, is small compared to the other dual-listed companies.

Dual-listing might be positive for the Invidior share price. But then again, it might not. I would point to some old but still relevant research from Mckinsey that suggests that, on average, dual-listings do not create value in any measurable way.

Why did the Indivior share price rise today?

Given the buzz around the dual-listing, I would suggest this helped lift the share price. However, the solid financial performance Indivior produced in 2021 is also a massive factor. Of the two reasons, I think the second, if it continues, will drive the share price in the future.

Indivior entered agreements in 2020 to resolve criminal charges and civil complaints related to one of its opioid addiction treatments in the US. There are penalties for failing to meet them. In addition, there are hundreds of preliminary stage civil lawsuits brought against the company as part of the opioid class action litigation. Legal risks remain high for Indivior.

James J. McCombie owns shares in Indivior. 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.

Key points

• Calculating compounding growth of earnings, like Warren Buffett does, can be effective in finding consistently profitable companies
• Learning Technologies Group and Frontier Developments both boast strong earnings growth
• These firms have also reported significant increases in revenue

As one of the most successful investors of all time, Warren Buffett knows a thing or two about picking stocks. His technique of calculating the compound growth of earnings per share (EPS) can be very helpful for finding exciting growth stocks. I’m looking closely at this metric, then applying it to two FTSE AIM stocks. Let’s take a closer look. 

How Warren Buffett uses compound growth

Warren Buffett has long stated that investment growth requires time. This is because the power of compounding — that is, the constant rate of return over a given time period — may only truly be seen over a long period. In essence, calculating compound growth allows me to see which companies are consistently profitable over time.

The formula for working out compounding growth is: (V_final/V_begin)^1/t − 1, where V = value and t = time.   

To use the formula, we would take a data set, in our case the EPS figures. The ‘final value’ is the most recent figure in the set. The ‘begin value’ is the oldest figure.

One of Warren Buffett’s biggest holdings is Coca-Cola and we can apply the above formula to understand why he likes this business. Even in the last four calendar years, the EPS displays consistent growth. Its 2021 EPS was ¢2.26 and 2018 was ¢1.51. 

We begin by dividing 2.26, the ‘final value’ from 2021, by 1.51, the ‘begin value’ from 2018. This equals 1.49 and we then calculate 1.46^1/t. The period of time is four years, so 1.46^1/4 gives us 1.106. This result, minus 1, finally equals 0.106, which is 10.6% in average yearly growth in EPS. In my experience, this formula has been ruthlessly effective for finding the best growth stocks.

2 FTSE AIM stocks that display growth    

This process helped me find two growth stocks. The first, Learning Technologies Group (LTG), is a software support services firm. For the 2020 calendar year, EPS was 4.42p, compared to 1.29p in 2016. With the aid of the above formula, I have calculated that the compound annual growth rate of this company’s EPS is 27.9%. This is very appealing to me as potential investor.  

Its price-to-earnings (P/E) ratio, that may reveal if a company is under- or over-valued, is 73. This is far higher than a close competitor, Tribal Group, that has a P/E ratio of 28.79. Nonetheless, a recent trading update forecast that revenue for the 2021 calendar year will not be less than £254m. This is a major improvement from 2020, when revenue was just £132.3m.

Another business, Frontier Developments, a video games developer and publisher, has earnings growth of 19.5%. For 2021, this company’s EPS was 55.4p, having increased from 22.7p in 2017. The firm did swing to an interim loss for the six months to 30 November 2021, due to higher costs. Nonetheless, revenue increased 33% to £49.1m on a year-on-year basis.

The technique of calculating compound earnings growth is regularly used by Warren Buffett. While it should be supported with other information, like revenues, it is a good indicator of whether a company is performing for its shareholders or not. Both Learning Technologies Group and Frontier Developments fit the bill and I will be buying shares in both firms now.

Andrew Woods has no position in any of the shares mentioned. The Motley Fool UK has recommended Frontier Developments and Learning Technologies. 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.

When the film The Big Short came out, many viewers thrilled to its gripping storyline, if not its frequent swearing! But the film’s storyline about the 2008 financial crisis also contains practical lessons for me as a private investor, I feel. Here are two that I apply when buying shares for my portfolio.

The importance of timing

In one scene, investor Michael Burry is confronted by an angry investor about the growing cost of a trade that is still in the red. “I might be early, but I’m not wrong.” says Burry. His investor shoots back, “It’s the same thing”.

I do not think being early as an investor is always the same thing as being wrong. But bad timing can definitely make an investment far less attractive even for a long-term investor. Consider Computacenter as an example. Imagine I had looked at the emergence of the internet and decided in early 2000 that increased digital workflows could be good for the company’s share price. I would have been proven right – but not for two decades. That is how long it took the Computacenter share price simply to get back to where it had been in 2000, even though earnings per share had more than quadrupled in the meantime.

So although Burry’s financial analysis turned out to be correct, I think his investor was also correct to emphasise the importance of timing in investment. As the Computacenter example demonstrates, even if being early does not make me wrong about a share, it could come with a high opportunity cost. 

Doing the research

There is another scene in The Big Short that I think offers a valuable investment lesson for me as a private investor. When Burry is asked how he knows what is in the complex financial instruments on which his trade depends, he reveals that he read them line by line. That also meets with an incredulous response from his own investor: “You read them? No one reads them. Only the lawyers who put them together read them.”

I think that is true of documents that could affect my shareholdings too. In many cases, few investors will actually take the time to read them in detail. But doing so could reveal crucial information.

For example, I own shares in British American Tobacco. I already realise declining smoking rates could hurt sales and profits in future. But is that the only risk? The company’s most recent annual report devotes no less than 25 pages to a single footnote to BAT’s accounts, entitled “Contingent Liabilities and Financial Commitments”. It details a variety of ongoing risks to the company’s profits, many caused by ongoing litigation. Wading through such detailed information can help me spot red flags as an investor. Just like Burry, in some cases simply taking the time to read publicly available information could help me spot situations where the market has mispriced risk. That could help me spot opportunities as an investor.

Learning from ‘The Big Short’

High finance on Wall Street can seem a long way from being a small shareholder. But I think The Big Short has some useful lessons for me as a private investor. Learning them is a simple, practical way in which I can try to improve my investment returns.

Christopher Ruane owns shares in British American Tobacco. The Motley Fool UK has recommended British American Tobacco. 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.

With energy prices riding high, it has been a good time to be a shareholder in energy major BP (LSE: BP). The BP share price has grown 43% over the past year. Lately it has been hovering around the £4 mark. In assessing the share as a candidate for my portfolio, I want to consider whether the momentum can continue. Can BP hit £5 this year?

A rising tide

The reason for the increase in the BP share price over the past year is not difficult to fathom. While it is up 43%, rival Shell is up by 41%, Chevron 44% and ExxonMobil 50%. As the saying goes, a rising tide lifts all boats. That is not always true in the stock market, but the increase in oil prices over the past year has clearly been a key factor in the share price performance of energy companies, including BP.

What is less apparent is whether BP has done anything that justifies the share price rise more than rivals. Like Shell, it slashed its dividend in 2020. BP has also been vocal about its plans to increase its focus on energy sources other than fossil fuels. I am sceptical about what that means for the company’s profit margins in the medium term. But the share price movement in the past year suggests that many investors feel that it is a promising strategy. That sentiment could help support the BP share price, by attracting ESG investment funds.

Income and growth prospects

I was not impressed by BP’s large dividend cut in 2020, which I felt suggested management out of touch with its shareholders and its own business model. Energy is a cyclical market and suddenly slashing the dividend when prices are low implies a lack of long-term planning, in my opinion, despite the unprecedented Covid crisis. Nonetheless, the shares currently yield 4% even after their price increase over the past year. So from a dividend perspective, I find BP attractive for my portfolio at the moment.

Turning to growth, I also feel quite upbeat about the prospects for the company. One benefit of the dividend cut is that it gave BP more flexibility to strengthen its balance sheet over time. Energy prices have soared – but I think they could still go higher. That could boost revenues and profits at the company in coming years. Slashed capital expenditure in the sector during the pandemic has led to a possible drop in future supply, but demand remains high. I see that as good for BP as oil and gas remain key to its business results.

The share price at £5?

Just as I think a lot of the explanation for the increase in the BP share price over the past year lies not in the company’s strategy but simply in energy prices generally, I think oil prices will continue to be important for the share price. If they remain high or go higher than they are now, I think that could propel BP shares to £5 this year.

Reaching £5 is around a 25% increase from the current share price, a smaller rise than over the past year. It is not an unprecedented valuation, either. It would actually put the share price back to where it was in 2019. So, from both a growth and income perspective, I would consider buying BP for my portfolio.

Christopher Ruane owns shares of ExxonMobil. 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.

Key points

• Both of these FTSE 250 businesses demonstrate strong and consistent growth in revenue and profits
• Tate & Lyle will pay a special dividend after the imminent sale of its Americas primary products business
• Plus500 is launching a $55m share buyback scheme 

The FTSE 250 is an index full of exciting companies with strong growth prospects. I think I’ve found two firms that could perform as part of a portfolio geared up for the long term. While Tate & Lyle (LSE: TATE) has a record of results indicating constant growth, PLUS500 (LSE: PLUS) has just confirmed a share buyback scheme. Why should I add these two businesses to my portfolio? Let’s take a closer look. 

A food and beverage heavyweight

Tate & Lyle, a supplier of ingredients to the food and beverage industry, has delivered growth over the past five fiscal years. Revenue has grown — albeit only slightly — from £2.7bn to £2.8bn, and while this is far from heart-stopping, it is remarkably consistent.

What’s more, the firm is dependable regarding profitability too. Over the same period, profits before tax rose from £233m to £283m. Again, this is very consistent. Earnings per share (EPS) have also grown, boasting a compounding annual growth rate of 2.6%. These steady gains are exactly what I’m looking for in my long-term portfolio.

In a recent trading update for the three months to 31 December 2021, Tate & Lyle confirmed it was trading in line with expectations, but that the discontinued bulk sweetener and industrial starch segments were “significantly weaker”. In spite of this, revenue from continuing operations was up 18% compared to the same period of the previous year.

Furthermore, the firm will pay a special dividend of £500m after the imminent sale of stakes in its primary products business in the Americas. This is due in March 2022.      

A FTSE 250 trading platform

Plus500 is a trading platform that enables customers to trade contracts-for-difference (CFDs) on over 2,500 financial instruments. Company revenue increased over 64% to $718m between calendar years 2017 and 2021. During this period, profits have also grown over 50%.

In the firm’s preliminary results, for the year to the 31 December 2021, active customers fell 6%. Furthermore, revenue was down 18% year-on-year. This is actually indicative of the unprecedented growth the company enjoyed during the pandemic and on a two-year basis, revenue was still up 103%. 

Furthermore, PLUS500 announced a new share buyback scheme of $55m. In essence, this means the business is repurchasing some of its stock. This is a way for the company to return cash to shareholders. I view this development with some optimism, because it suggests the firm is in a strong financial position. 

Both of these companies display strong growth in their results and could be great additions to my portfolio. With a view to holding for the long term, I am encouraged by the special dividend and share buyback schemes. 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.

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