I own Walt Disney (NYSE:DIS) shares in my portfolio. The company reported impressive earnings results last night and shares are up around 8% as a result. Sometimes, a strong earnings report can indicate that a stock is a good investment. But sometimes, an increasing share price can be an overreaction. So is it time for me to buy more Disney stock? Or is the jump in the share price an overreaction?

Fundamentals

By my calculations, the increase in the Disney share price takes the company’s enterprise value to around $323bn. In order to invest in more Disney stock, I need to be confident that the company will make enough money to provide me with a satisfactory return on my investment at this price. And as Warren Buffett says, it can’t be close—the answer needs to scream at me, otherwise the stock isn’t a buy for me.

The company divides its operations into two segments. The first is its Parks, Experiences, and Products segment, which includes Disney’s theme parks, cruise lines, and resorts. The second is its Disney Media and Entertainment Distribution segment, which covers things like Disney+, ESPN, and the licensing of the company’s titles. To invest in Disney stock, I’ll need to know how much cash each of these is going to produce.

Parks

The company reported $7.23bn revenue in its Parks segment during the holiday season, compared to $3.5bn in the same quarter a year ago. Operating income also increased from a loss of $119m to a profit of $2.45bn. There’s no doubt in my mind that this is impressive, especially in a quarter featuring theme parks operating at a reduced capacity due to Omicron. 

In order to take a view on whether or not this performance justifies buying Disney stock, I need to assess two things. The first is how quickly Disney’s theme parks will return to full capacity. The second is how much income they will generate when they do. To work out whether or not Disney stock is a buy, I need to know the answers to these questions.

Streaming

Disney added just under 12m new subscribers to its Disney+ service during October, November, and December. This represents an 8.5% increase in subscribers. I think that this is clearly impressive in a quarter where the number of Netflix subscribers increased by around 4%. The company also reported an increase in average revenue per subscriber from $4.12 to $4.41. 

Currently, Disney+ is a loss-making service. Clearly, this is expected to change and the business will start producing income. As with the theme parks, there are two crucial questions for me as an investor. The first is when Disney will optimise its streaming service for profit. The second is how much cash this will produce when it does. Only once I’ve figured this out can I make an investment judgement about Disney stock.

Conclusion

I think that Disney is one of the best businesses in the world and I’m delighted to own the stock in my portfolio. During the pandemic, when the price was much lower, Disney stock screamed out at me as a buy. At current prices, though, it doesn’t. So I’m going to hold onto the shares I have for now and concentrate on my other investment opportunities.

Stephen Wright owns shares in Walt Disney. 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.

Clipper Logistics (LSE:CLG) emerged from the 2020 market crash as one of the biggest winners. Demand for its services increased exponentially. Despite a recent share price dip and macroeconomic pressures, I’d still rate it as one of my best stocks to buy now and hold.

Warehousing and fulfilment

Clipper is a warehousing and e-fulfilment provider. It counts retail powerhouses such as ASOS, H&M, and M&S amongst its customer base. The changing face of retail, exacerbated by the pandemic, has led to a rise in demand for logistics services. 

As I write, Clipper shares are trading for 710p. At this time last year, the shares were trading for 572p, which is a 24% return over a 12-month period. When the stock market crashed in 2020, shares dipped to as low as 149p. Based on current levels, that’s a 376% return since mid-2020.

The best stocks to buy now have risks too

The Clipper Logistics share price has fallen in the past couple of months. Rising inflation has led to an increase in the cost of raw materials. More importantly, the supply chain crisis as well as the shortage of HGV drivers here in the UK has placed pressure on logistics companies such as Clipper. Although I don’t envisage this to be a longer-term issue, short- to medium-term performance could be affected.

At current levels, Clipper shares could be considered a bit expensive. The shares currently sport a price-to-earnings ratio of close to 34. If performance were to be affected or any other negative news were to affect Clipper, it could cause the shares to fall further.

Why I like Clipper shares

Most of my best stocks to buy now have a good track record of performance. I do understand that past performance is not a guarantee of any future performance, however. Looking back, I can see Clipper’s revenue and operating profit have increased for the past four years. Coming up to date, interim results released in December made for good reading, in my opinion. Clipper reported revenue, profit, and cash generation all increased compared to the same period last year.

Clipper’s performance growth has led to dividend payments. It currently sports a yield of just over 1.5%. The majority of my best stocks to buy now make me a passive income through dividend payments. I do understand dividends are not guaranteed and can be cancelled, however. In its interim results, it declared a dividend of 4.5p per share.

Clipper has grown to become one of the best logistics firms in the UK and has an excellent customer base with long-standing contracts. It is actively seeking new business to grow too. I believe the market for logistics, warehousing, and e-fulfilment is a growth market. I would expect Clipper to continue to benefit from this burgeoning demand and continue to grow performance, in turn increasing any returns I hope to gain.

Overall, I’d add Clipper shares to my portfolio. There was a chance that Clipper could have seen a short-term boost due to the pandemic and dropped off once restrictions eased. It seems to have continued to grow. With the changing face of retail and shopping habits, I think its growth will continue. It is still on my best stocks to buy now list and I can’t see that changing for the foreseeable future.

Jabran Khan has no position in any shares mentioned. The Motley Fool UK has recommended Clipper Logistics. 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’m considering these three UK shares for my portfolio right now:

Luxury goods

Global luxury goods manufacturer, retailer, and wholesaler Burberry CLSE: BRBY) sells via stores, concessions, outlets, digital commerce, and franchisees in department stores. The company also licenses third parties to manufacture and distribute products using the Burberry trademarks.

In January, the company delivered a robust third-quarter trading update and said full-price sales grew at a double-digit percentage compared with two years earlier. Burberry reckons it is attracting new, younger consumers to the brand. And the directors said they are “confident” of finishing the year strongly.

City analysts have pencilled in an increase in earnings of around 55% for the current trading year to March 2022 followed by a further uplift of around 12% for the year after that. But estimates could be missed if operational challenges arise to thwart progress.

Meanwhile, new chief executive Jonathan Akeroyd starts on 15 March. And new blood at the top could will bring new energy and enthusiasm to drive the business forward.

The share price is near 1,957p as I write and that leads to a forward-looking earnings multiple of just over 19. And the anticipated dividend yield is around 2.7%. That’s not a cheap valuation and could lead to some risk for me as an investor. But Burberry scores well against quality indicators and has growth ambitions. I think the stock would make a promising addition to my long-term portfolio.

Sausage skins

Devro makes collagen products for the food industry around the world — think sausage skins. The company delivered its full-year trading update in January. And the directors said revenue growth at around 5% in 2021 was “encouraging” with positive movements in volume, price, and mix.  

Operating profit will likely be “in line with expectations”. And that means an uplift of about 10% compared to the previous year. Looking ahead, City analysts expect earnings to increase by a mid-single-digit percentage in 2022.

And with the share price near 220p, the forward-looking earnings multiple is about 12 with the anticipated dividend yield around 4.4%.

The valuation looks fair. But I don’t think Devro will ever set my portfolio alight with high growth. Nevertheless, the business operates in a steady, defensive sector and the firm’s dividend record reflects that. The stock looks like a useful hold for the long term and I’d consider it now.

Healthcare

The third stock I’m tempted by today is global healthcare company GlaxoSmithKline (LSE: GSK).

With the final results report on 9 February, chief executive Emma Walmsley said the business ended the year strongly. And the company saw “another quarter of excellent performance driven by first-class commercial execution”. Looking ahead, she said 2022 started with good momentum. And the year will likely deliver “a step-change in growth” and multiple R&D catalysts. The company also plans to demerge its Consumer Healthcare business in 2022.

The recent share price of 1,630p throws up a forward-looking earnings multiple of around 13 when set against analysts’ expectations for a mid-single-digit uplift in earnings in 2023. And the anticipated dividend yield is around 3.3%. I think that valuation looks fair.

There are no guarantees that growth will materialise as expected. But I think GlaxoSmithKline is at an interesting point in its development. And I’d add the stock to my long-term portfolio now.

Kevin Godbold has no position in any of the shares mentioned. The Motley Fool UK has recommended Burberry, Devro, and GlaxoSmithKline. 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.

A lot of people are used to buying things cheap from online retailer boohoo (LSE: BOO). But lately, the most striking thing on sale has been the boohoo share price. After collapsing 74% in 12 months, the company now trades as a penny share.   

Although I see risks, I do think the share price is a buying opportunity for my portfolio. Here is why.

Bull case for boohoo

A lot of things can affect a company’s share price in the short term. I think that can be seen right now with what is happening at boohoo.

Cost inflation and logistics challenges have been eating into profit margins. That is true for many retailers right now. But as boohoo sells clothes at very low prices, it has less ability to absorb cost increases than some of its competitors.

On top of that, some large investors have been selling boohoo shares even as the price has been in freefall. Fund manager Jupiter used to own almost a tenth of the company, but has recently sold half its stake.

But I see these sorts of challenges as essentially temporary in nature. In the end, I expect the company to bring its cost base in line with its business needs, even if that means raising its prices. A large shareholder cutting a stake is part and parcel of doing business as a listed company. When the short-term noise dies away, what remains is the underlying business case for boohoo. I remain positive about that.

It has a well-recognised brand and has been growing revenues fast. Last year, for example, it reported a sales increase of 41%. Its aggressive expansion in the massive US market could help sales keep growing at speed. Profits have also been increasing for a few years in a row and last year reached £93m after tax. Despite the penny share status, this is a proven, profitable business, not some digital start-up with no pathway to earnings.

Bear case for boohoo

Clearly, the company continues to have a number of critics. The business model forces it to be very competitive and allows little margin for error, due to tight profit margins. That is a risk in clothes retail, where predicting upcoming trends or weather conditions accurately can make the difference between a healthy profit and a costly warehouse of unsold stock.

It has also led to criticism about sweatshop conditions at some of the company’s suppliers. I think boohoo has been serious about engaging with these concerns. But its low-price model means legitimate complaints about labour conditions could well come back in future. As consumers show more concern about the environment, the whole fast-fashion model could be a source of reputational damage for companies including boohoo.

Why I’m buying the boohoo share price

Despite that, I have been adding boohoo shares to my portfolio lately.

I think the concerns are valid, but the markdown in the boohoo share price has been overdone. The profitable company currently trades at a price-to-earnings ratio of around 12. Given its proven high growth potential, that seems cheap to me. The next couple of years may be tough for the business, but I see long-term value for my portfolio at the current boohoo share price.

Christopher Ruane owns shares in boohoo group. The Motley Fool UK has recommended Jupiter Fund Management and 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.

A lot of investors look to legendary stock picker Warren Buffett for inspiration when it comes to choosing shares to buy. But Buffett controls tens of billions of pounds’ worth of investments. That gives him advantages of scale. If I wanted to invest a more modest sum, such as £1,000, could the wisdom of Buffett still help improve my investment returns?

Buffett on the advantage of small amounts

The answer, I think, is quite surprising – and comes directly from Buffett himself. In an interview in 1999, he noted that the highest rates of returns he had ever achieved in his investing career to that point had been in the 1950s.

There could be a variety of reasons for that, including market conditions in that decade. But Buffett also pointed to the fact that he was managing far smaller funds than in the decades that followed. Here is what he said about his performance relative to the Dow Jones index of leading US shares: “I killed the Dow. You ought to see the numbers. But I was investing peanuts then. It’s a huge structural advantage not to have a lot of money. I think I could make you 50% a year on $1 million. No, I know I could. I guarantee that“.

Buffett actually says, contrary to common perception, that not having a lot of money is a “huge” structural advantage when it comes to investment returns. Why is that the case?

The burden of size

I think the answer can be seen in one of Buffett’s biggest investments today, his holding in Apple. It has been a huge success so far. An investment of $31bn started in 2016 was already worth $120bn at the time of his most recent shareholders’ letter.

But how many companies are big enough to enable an investment of such a huge scale in the first place? In many cases, it would trigger an automatic takeover bid for the whole company. In other cases, a company simply is not big enough to soak up $31bn of investment at any price.

By contrast, with only £1,000 to invest, I could buy a stake in almost any listed company without bringing attention to my investment and affecting the share price. Buffett cannot do that when he spends tens of billions of dollars on a firm’s shares. But, luckily for me, I can. That opens up a far wider universe of shares in which I can practically invest than is the case for Warren Buffett now. That is why he reckons he could do so well investing only $1m compared to the billions of dollars he actually invests.

Putting this Warren Buffett wisdom to work today

What practical application can this insight have for my investing choices?

Sometimes, Warren Buffett’s own investment picks may also make sense for my own portfolio. But with just £1,000 to invest, I would also be able to invest by choosing from a far wider variety of shares than is practical for Buffett. If I hunt for and find winning investment ideas, that could hopefully enable me to achieve the sorts of returns about which even Buffett can only dream!

Christopher Ruane has no position in any of the shares mentioned. The Motley Fool UK has recommended Apple. 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.

A stock market crash could be on the horizon. UK shares, and others across the world, could drop in value. If a crash did happen, I’d look to add certain shares to my holdings that I believe could bounce back.

Stock market crashes can occur for a number of reasons. These include major world economies struggling with growth or battling inflation. In addition to this, geopolitical issues, such as the threat of war, can also cause a market downturn.

I believe all of these factors are currently present. The US and Chinese economies are struggling with inflation and growth issues, respectively, as well as a real estate crisis in the Chinese economy. As two of the world’s premier economies, if further trouble were to occur, the market could crash. The Russia-Ukraine tensions are a geopolitical issue to keep an eye on too.

Tech stock with a competitive edge

If a stock market crash were to occur, Auto Trader (LSE:AUTO) is one of a number of UK shares I would look to add to my holdings.

Auto Trader is recognised as the UK’s largest online vehicle marketplace. It makes money by charging sellers to list their vehicles to reach millions of consumers looking for their next car.

As I write, Auto Trader shares are trading for 655p. At this time last year, the shares were trading for 581p, which is a 12% return over a 12-month period.

UK shares have risks

Auto Trader’s main risk for me moving forward is that of competition. The recent rise of e-commerce and the digital revolution, which has been sped up further by the pandemic, has meant many competitors are now vying for market share. If a competitor with a better user experience or cheaper fees or another unique selling point were to come along, it could affect Auto Trader’s performance and any returns.

If any new variant of the Covid-19 virus were to appear, a slowdown in the sale of cars could affect any performance and returns. This happened previously for Auto Trader when the pandemic first struck.

A stock I’d buy

Auto Trader has a huge competitive edge in its respective market and has excellent brand recognition. The UK shares on my best stocks to buy list all possess a competitive edge or significant market share.

Due to its competitive edge, Auto Trader has excellent record of performance and dividend growth. I do understand past performance is not a guarantee of the future, however. Looking back at performance, prior to 2021, which was affected by the pandemic, revenues increased year on year for three years. More recently, it’s half-year results were excellent and the highest ever half-year revenues achieved.

Auto Trader pays a dividend that would make me a passive income too. Its yield stands at just 1.2%, but it has an annual growth record of 23% over a five-year period. I do understand dividends can be cancelled. This could be the case if a market crash were to occur. I would expect them to be reinstated over the longer term, though.

Auto Trader is one of a number of UK shares on my radar for possible additions to my holdings. I believe it could bounce back and provide a lucrative return for my holdings over time if cheapened by a crash.

Jabran Khan has no position in any shares mentioned. The Motley Fool UK has recommended Auto Trader. 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.

FTSE 250 incumbent Softcat (LSE:SCT) has been on a growth trajectory for a few years now. I still think it can grow further, so I’d add the shares to my holdings at current levels and hold them. Here’s why.

IT infrastructure supplier

Softcat sells IT infrastructure to public and private sector firms through four main areas. These are cyber security, IT intelligence, hybrid infrastructure, and digital workspace tools. It partners up with many tech giants who manufacture but don’t sell directly to businesses, and makes money by adding value to its customer base with these products and services.

As I write, Softcat shares are trading for 1,591p. At this time last year, the shares were trading for 2% less at 1,560p.

FTSE 250 stocks have risks

One of the main issues Softcat could face is competition. The IT reseller market is large and very competitive. I know this due to my research and the fact I have worked in this space myself some years ago. All the firms in Softcat’s sector are competing for the same business and looking to sign up businesses they can then sell their products and services into.

At current levels, Softcat shares could be considered a bit expensive. The shares are currently trading with a price-to-earnings ratio of 33. This worry me as a lack of continued growth and performance or negative news could affect the share price negatively.

Why I like Softcat shares

Softcat pays a dividend that could make me a passive income. It currently sports a dividend yield of over 2%. The FTSE 250 average dividend yield is currently very similar at just under 2%. I do understand that dividends can be cancelled, however.

I mentioned earlier Softcat has an exceptional track record of growth. I understand that past performance is not any form of guarantee for future performance. Looking back, however, I can see that total revenue and gross profit have increased year on year for the past four years.

Coming up to date, Softcat’s recent performance has been good too. A Q1 update released last month mentioned revenue, gross profit, and operating profit grew compared to the same period last year. Cash generation was also in line with expectations.

As well as performance, Softcat is a major player in a growth market. Many businesses have still not undertaken the digital transformation required to continue operating in current tech-savvy times. The pandemic did hasten the need for such digital IT tools and benefitted Softcat and its performance. Continued demand should boost Softcat’s performance in the coming years. This could help increase any returns I hope to make.

Overall I’d happily add Softcat shares to my portfolio. I believe Softcat is a major player in a burgeoning growth market and can benefit from the continued demand due to the need for digital transformation. It has a good track record with recent trading looking positive too. A dividend is a bonus that could help me make a passive income. 

Jabran Khan has no position in any shares mentioned. The Motley Fool UK has recommended Softcat. 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 stock market crisis caused by Covid-19 took a toll on the Lloyds Bank (LSE: LLOY) share price. Before the pandemic, the shares were trading for just over 60p. To see them go below 30p at their lowest moment was quite a shock. However, they’ve gained 55% in the last year, compared to 13% for the rebounding FTSE 100. I believe this is only the beginning, and I’ll explain why.

Banking and interest rates

Banking underpins the whole economy and lending is a big part of that economy. This means banks are often the first to suffer when commerce is slow. Between Covid-19 and Brexit, it’s hard to imagine a worse time for UK businesses and, therefore, banks like Lloyds. This is why the share price fell so much at the start of the pandemic. And has stayed low for so long.

Lloyds has taken a lot of measures to recover, especially in terms of cost-cutting and concentration on lower-risk businesses. However, regardless of how tight the bank has grown, the UK base lending rate is still just 2.5%. There isn’t much room for earnings there.

But in November 2021, the Consumer Price Index recorded a general price increase of 5.1%. A whole host of factors are driving price inflation, but the best way for the Bank of England to curtail it is by raising interest rates. Higher rates mean larger profits for lenders.

A stronger economy

Back in November, UK economic production finally topped pre-pandemic levels. Assuming no new Covid variants cause significant disruptions, the economy should be returning to more conventional patterns before long. This includes achieving long-term economic growth, returning to typical inflation levels, and maintaining appropriate interest rates.

Lloyds is already the UK’s largest mortgage lender. I believe Lloyds’ income will improve if loan volumes increase and higher base rates create better margin possibilities.

Then there’s the matter of dividends. On a pure share price basis, Lloyds may seem unimpressive, but as someone interested in passive income, the company’s dividends do make it an attractive option for me.

Dividends were temporarily halted in response to the pandemic, but have already been reinstated. They’re quite low for now, (2.35% at the time of writing) but improving, and I don’t believe it’ll be long before they reach more appealing levels.

Lloyds share price value

What about the value of Lloyds share price? The bank recorded earnings of 5.1p per share at the midway point. If it happens again in the second half, the price-to-earnings ratio will only be 5.5. That is far too low, in my opinion. However, doubling the share price would bring it to 11, which I believe is a bit ambitious at the moment.

Even if interest rates do rise, they might stay historically low for a few more years. There’s still a risk of a severe downside here.

Overall, I don’t think Lloyds’ stock will double this year. But a repeat of last year’s more than 40% rise would still be astonishing. That’s why I’ll be adding it to my portfolio.

James Reynolds has no position in any of the shares mentioned. The Motley Fool UK has recommended Lloyds Banking 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.

Could Bloomsbury Publishing (LSE:BMY) be one of the best shares for me to buy now for my holdings? Let’s take a closer look.

Harry Potter publisher

Bloomsbury is a leading independent publishing house, established in 1986. It is perhaps best known for publishing the famous Harry Potter series of books and still owns the rights and benefits from sales to this day. Many of its authors have won the Nobel, Pulitzer, and Booker prizes for writing. It has offices in London, New York, New Delhi, Sydney, and Oxford.

As I write, Bloomsbury shares are trading for 389p. At this time last year, the shares were trading for 293p, which is a 32% return over a 12-month period.

For and against investing

FOR: One of the most important factors I look at in all my potential best shares to buy now is performance and track record. I do understand past performance is not a guarantee of the future, however. Looking back, Bloomsbury has increased revenue and gross profit year on year for the past four years. Coming up to date, a trading update released last month, providing a snapshot of upcoming full-year results, mentioned revenue and profit will be “comfortably ahead” of guidance for the year ending 28 February.

AGAINST: Competition in the publishing business is fierce and everyone is looking for the next big book or franchise that could be turned into the next Harry Potter. If a new smash hit is written by a competing publisher, this could affect demand for Bloomsbury’s products. This will affect performance and any returns I’d hope to make.

FOR: Nigel Newton founded the company in 1986 and is still involved now as CEO and a significant shareholder. I like when founder-owners have a vested interest in the company and possess a track record of navigating a company to success. This fills me with confidence and tells me his interests are aligned with that of shareholders, as he has his own money invested as a shareholder too.

AGAINST: Some of my best shares to buy now regularly acquire businesses in the same market. This can be to beat them as they are competing directly, or the other businesses can enhance its own offering. Bloomsbury has acquired three businesses in 2021. Sometimes, acquisitions don’t work out, however, so I must be wary of this. They may not integrate into the main business or firms like Bloomsbury may end up overpaying and paying the price financially.

One of my best shares to buy now

Overall, I like Bloomsbury shares for my holdings and would buy the shares at current levels. I think the current share price represents value with a price-to-earnings ratio of 15. In addition to this, I could make a passive income too through its dividend payments. I am aware that dividends can be cancelled, however. I do believe Bloomsbury is one of the best shares I could buy now and I’m keen on seeing full-year results in the coming months too.

Jabran Khan has no position in any of the shares mentioned. The Motley Fool UK has recommended Bloomsbury Publishing. 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 has been a good year for Lloyds (LSE: LLOY) shareholders. The Lloyds share price has added 41% over the past 12 months. But after a strong start to 2022, the bank’s shares have stalled recently.

Is this just a temporary setback I can use as a buying opportunity for my portfolio? Or might the Lloyds share price be headed for a lasting pullback?

Positive drivers for the share price

First, it is worth considering what has been behind the shares’ impressive performance over the past year. Investors have warmed to the strong recovery in business performance seen at Lloyds last year. After 2020 had been hit by an uncertain trading outlook and the potential for sizeable loan defaults, 2021 offered something much closer to business as usual.

In fact, last year’s performance underlined just how attractive a business Lloyds can be when it has the wind in its sails. At the end of the third quarter, it reported a mammoth loans and advances book of £450bn. It is the biggest mortgage lender in the country and that scale translates into large profits – post-tax earnings came in at £5.4bn for the nine months in question. The company also took the opportunity to improve its outlook for the full-year. The final results are scheduled for this month.

Last year the company also reinstated its dividend, which it had been forced by the regulator to suspend during the pandemic. I think that dividend restoration helped support the share price. Positive news either on business performance or the dividend in this month’s final results could help boost the share price further, in my opinion.

Some risks with Lloyds

However, after the surge we have seen in the share price, high expectations are already being factored in by investors. If the company’s results this month and its 2022 outlook meet or surpass those expectations, I think there could be further upside potential from here. But I see risks too.

After all, why has Lloyds with its £37bn market capitalisation doggedly remained a penny share since the last financial crisis? The most likely explanation in my view is that many investors remain wary of the viability of the company’s business model during a severe economic downturn. The heavy reliance on property lending, focused in the UK, means that if a recession causes mortgage defaults to soar, Lloyds could see its profits collapse.

Right now the UK property market seems resilient. That could help support the Lloyds share price. Indeed, as long as the property market remains robust, I reckon the price could keep going higher. So I do not think it has necessarily peaked. But given the cyclical nature of the economy, sooner or later house prices will cool. I expect that to hurt the the share price, although it may still be some years in the future.

My next move

As a Lloyds shareholder, I will be interested to see what the company unveils in its final results this month. A meaty dividend increase would not only be good news in itself, I think it could also boost the Lloyds share price.

I see further possible upside in the shares and would consider adding to my holding this month before the results.

Christopher Ruane owns shares in Lloyds Banking Group. The Motley Fool UK has recommended Lloyds Banking 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.