Much has been said about how copper, nickel and lithium demand will soar as electric vehicle (EV) sales grow. Much less has been said about how aluminium consumption is set to boom however. According to Bloomberg demand for the lightweight metal will jump 14 times between 2019 and 2030. That compares with the 10-fold increase copper is predicted to increase.

I think this makes Alcoa Corporation (NYSE: AA) a brilliant buy for the next 10 years. This US stock is one of the 10 biggest aluminium producers on the planet. Alcoa also set up a joint venture to enter the high-purity alumina market to meet increasing demand for sustainable products too. Applications here include the manufacture of lithium-ion batteries for EVs.

Alcoa may not have to wait long to receive a big profits bump either. Aluminium prices have just hit their highest since 2008 due to coronavirus-related production stoppages in China. Analysts are expecting material shortages to worsen considerably on the back of these stoppages too.

ING Bank for one now expects an aluminium deficit of 1.7m tonnes in 2022, up 200,000 tonnes from predictions of just a few months ago. The shortfall could get much worse too as Covid-19 problems worsen in China, the world’s number one aluminium producer.

Today, Alcoa trades on a forward price-to-earnings (P/E) ratio of 9.4 times. This sits below the well-regarded value benchmark of 10 times. I think the company’s a top buy even though demand could slump if China’s economy sharply cools.

Another of the best cheap stocks to buy right now!

Residential Secure Income (LSE: RESI) is a stock that’s closer to home that I’m also considering buying. I like this particular UK share because it offers plenty of all-round value right now. The commercial landlord trades on a forward price-to-earnings growth (PEG) multiple of 0.8. This is below the benchmark of 1 that suggests a stock could be undervalued.

Meanwhile, Residential Secure Income offers big dividend yields, thanks to its status as a real estate investment trust (REIT). This classification means at least 90% of the company’s annual profits must be paid out in the form of dividends. And it means this property stock’s yield sits at a big 4.8% today.

Profits are leaping at Residential Secure Income because the UK has a huge shortage of rental properties. This is, in turn, pushing private rents through the roof. In fact, the average rent has just reached its highest for 13 years and looks set to keep growing.

It will take years for the country’s rental homes shortage to be properly addressed, meaning tenant costs should continue rising for some time. But this is not the only reason I like Residential Secure Income today. I also reckon its exposure to the shared ownership and retirement housing sectors should pay off handsomely.

I’d buy this cheap UK share even though rising interest rates could damage demand for its properties from homebuyers.

Royston Wild 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.

Warren Buffett has had a long and successful investing career. He started out by focusing on value stocks, or companies that were selling for less than they were really worth. There were lucrative profits to be made by flipping investments in this way. But once he met Charlie Munger, Buffett refocused his efforts on finding quality companies.

This is what Warren Buffett said of the companies he looks for: “What we’re trying to do is we’re trying to find a business with a wide and long-lasting moat around it, protecting a terrific economic castle with an honest lord in charge of the castle.”

Here are two companies that match this description I’d buy today.

A strong network effect

Auto Trader (LSE: AUTO) is the UK’s biggest online marketplace for vehicles. For this reason, the company has a strong network effect, which I think forms the economic moat around its castle. Network effects are particularly good economic moats because they result from a high number of active users which is hard for a competitor to copy.

In particular, Auto Trader benefits from a large number of users looking to buy vehicles on its online platform. Therefore, car retailers and private sellers want to list their vehicles on the platform to reach the biggest audience. Auto Trader becomes more valuable as a business the more users it has. What’s more, every additional user comes at little incremental cost to the business.

I think this network effect shows in Auto Trader’s excellent profitability ratios. For example, the company achieves an operating margin of over 60%. This is the second-highest operating margin in the FTSE 100 today.

There are still risks to consider. Any slowdown in the UK economy will impact the sales of vehicles. The company isn’t fully immune to competitors, either. Other companies, such as Cinch, are investing heavily in advertising to try and take market share from Auto Trader.

Nevertheless, I consider the stock a buy for my portfolio.

Another business with a Warren Buffett moat

The next company is Rightmove (LSE: RMV), the online marketplace for the UK housing market. In many ways, it demonstrates the same network effect as Auto Trader, only this time for homebuyers and renters. Because its online property portal is the most widely used in the UK, homebuilders and estate agents must list properties on Rightmove so they gain access to this big audience.

Rightmove’s economic moat is again shown in the company’s outstanding profit measures. It achieves the highest operating margin in the whole of the FTSE 100 at 66%. Furthermore, it generates triple-digit returns on its equity, which is abnormally high for a company.

One factor to consider for the company is the strength of the UK’s housing market. Rightmove is only based in the UK, so any slowdown in home-moving would lead to reduced profits. This happened during 2020 when the pandemic unfolded. As a consequence, revenue fell 29% across the full year.

The company is in a better position today, in my view. For example, the UK’s housing market has been strong in 2021, so analysts are expecting revenue growth of 47% across the full year.

So, for me, I think Rightmove and Auto Trader are two quality UK companies due to their network effects. In Warren Buffett’s words, I think they have economic moats, and I’d buy the shares today.

Dan Appleby owns shares of Auto Trader and Rightmove. The Motley Fool UK has recommended Auto Trader and Rightmove. 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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With his record as one of the most successful investors in history, I doubt I will match the returns of Warren Buffett. But even if I do not end up in the same league, I think I can improve my investment returns by applying lessons I have learnt from Buffett’s approach.

Here are five practical ways I can apply the Sage of Omaha’s investment approach to my own portfolio as a private investor.

1. Do a lot of research

It consistently surprises people that the way Buffett spends most of his working day is sitting in his office alone, reading. Buffett typically reads hundreds of pages a day and has done so for decades.

Some investors think that to spot the next big thing, it is crucial to get out to industry events or travel around looking for inspiration. Buffett does little of either, preferring to bury his head in the written word. The reason for that is simple. In the US and the UK, companies are required to file regular reports including financial statements. They include useful information such as revenue, profit, cash flow, and much more. As the accounting approach within a stock market is largely standardised, it is relatively easy to compare one company to another. While some firms may talk a good game or camouflage their figures beneath unusual accounting metrics, the use of standardised formats can allow an experienced investor like Buffett to see through such efforts.

A company’s report can help him understand how it is doing and what sort of competitive advantage it may have. The financial reporting element can also help him understand in cold, hard numbers how the business is performing. This sounds like basic stuff – and to some extent, it is. Yet often people are taken in by charismatic executives, talk of shifting customer behaviours, and the fear of missing out. Buffett ignores all that chatter and instead just sits and reads.

As a private investor, I can do the same, for free. Not only do I think it can help me spot good opportunities before some other investors do, it can also help me stay away from shares whose accounts raise too many red flags for my comfort.

2. Keep things simple

I do not think I need to understand a wide variety of industries or business models to become a successful investor. But I do want to make sure that if I invest in a company, I understand the basics of how it makes money.

Looking at some of Buffett’s portfolio, it is notable that he owns a number of companies with very simple business models, such as Coca-Cola, American Express, and Chevron. Not only do these companies have simple business models – the models have hardly changed in decades – they could still be using the same business model decades from now, in fact.

That is not a coincidence. The less a company changes what it has to do to make money, the less risk there is that it could make a strategic mis-step that eats into its profitability. That does not always work, as sometimes the ground changes beneath a company’s feet as the market in which it operates shifts. That is why Buffett looks for markets where he expects demand dynamics to stay roughly the same. He reckons people will still drink cola, make payments, and use oil for decades. So the three holdings above could continue to profit from such behaviour. In a world where many so-called investment experts try to bamboozle people with complexity, it is refreshing to see Buffett’s successful approach is focused on simplicity. I can easily apply a similar frame of thinking to my own investment choices.

3. Buy good shares and hold them

Buffett is not a trader, he is an investor. His investment time frame is typically not just years, but decades.

Applying the sort of long-term approach Buffett uses when investing to my own portfolio decisions can help me in a number of ways, I think. At a practical level, trading less often can reduce my fees. Over time they can mount up, so that is helpful.

But it should also enable me to benefit from the long-term success of companies. Sometimes it can be tempting to sell a share after it moves up 20%, 50%, or 100%. But if I invest in high-quality companies with sustainable competitive advantages, selling too early may cost me the majority of the gain I could make. That is why, like Buffett, I aim to buy shares in great companies and then hold them for long enough that my investment thesis is hopefully proven in a very big, profitable way.

4. Warren Buffett diversifies

Another way in which I can easily draw inspiration from Warren Buffett for my own portfolio is not putting all of my investment funds into a single company.

Even though Buffett has had some very successful investments, such as Apple, he has always diversified his portfolio by holding shares in different types of business at one time. That means that if one company unexpectedly performs poorly, the impact on his overall portfolio will be reduced. That is a very simple risk management principle – but I still think it is a valuable one I can apply to my own portfolio, no matter what size it is.

5. Focus on  business models over management

Many investors see Buffett himself as the reason for success of his company Berkshire Hathaway. Despite that focus on a single executive, Buffett himself does not invest in other companies purely because he respects their management.

That is because management can change. Eventually, indeed, every company will change its managers. If profit depends on them personally, that could be bad news for shareholders. That is why Buffett regards good management only as a bonus, not a reason to invest in itself. Instead, he looks for a company to have a business model that gives it an enduring competitive advantage. That could be a unique technology, well-developed brand, or market monopoly. But whatever it is, Buffett buys companies for their business models and prospects – not their leaders.

Christopher Ruane has no position in any of the shares mentioned. American Express is an advertising partner of The Ascent, a Motley Fool company. 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.

First Group (LSE:FGP) is one nearly penny stock I’m currently considering for my holdings. Here’s why.

Transport provider

First Group is one of the UK’s largest transport providers. As well as its UK operations, it has a presence in North America too. In the UK alone, First Group has over 30,000 employees and carries upwards of 700,000 passengers a day via its bus and rail operations.

A penny stock is identified as one that trades for less than £1. First Group shares are trading for 105p, hence my calling it a “nearly penny” stock. At this time last year, the shares were trading for 78p, which is a 34% return over a 12-month period.

Risks involved

The pandemic threw up a myriad of problems for First Group. Due to restrictions, customer numbers dropped substantially but costs remained. This led to performance being negatively affected and it needed to borrow cash to keep the lights on. Companies with lots of debt usually put me off, unless they have a way to service and pay down said debt. I believe First Group is well placed to do this due to its vital place in the UK’s transport infrastructure. However, new variants could lead to new restrictions and another drop in passengers. This could once more put pressure on the balance sheet.

Recent labour shortages here in the UK, such as a shortage of bus drivers, could also place unnecessary pressure on First Group’s operations. Reduced or affected operations could affect performance as well as consumer confidence.

A nearly penny stock I’d buy

I believe First Group’s position in the UK’s transport infrastructure is one of its biggest strengths. It possesses a large presence throughout the UK, in all major towns and cities, and possesses a large market share in its respective sector. As reopening continues, its operations could be vital to getting the public around, back to work, schools, and stimulating the economy. 

A bonus factor I like about First Group is its recent commitment to cut harmful emissions and move towards greener vehicles. There has been a rise in ethical investing in recent times and more firms are focusing on reducing their carbon footprints.

First Group also has a good track record of recent and past performance, barring the pandemic period. I do understand past performance is not a guarantee of any future performance, however. In its most recent half-year report, announced in December, it revealed good progress financially and operationally. It reported that revenue increased by 8% and operating profit by a mammoth 162% compared to the same period last year. In addition to this, earnings per share increased and debt levels reduced. Operationally, passenger numbers are edging closer towards pre-pandemic levels.

There is lots to like about First Group, in my opinion. It has a good track record of performance and recent results look good to me. Its crucial position in the UK transport network as well as other international operations lead me to believe it will continue to grow and perform well. I would add the shares to my holdings and believe it is an excellent nearly penny stock.

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.

Working more hours to get extra income can be hard. There are only so many hours in a day and many people have more exciting things to do with them than work. That is where passive income comes into play.

One of my favourite sources of such effortless income is investing in dividend shares. Here is how I would do that with the aim of generating £250 a month — £3,000 a year!

Start with the end in sight

To figure out how much I would need to invest in dividend shares to aim for that level of passive income, I need to know what ‘yield’ I can hope to earn. Yield is basically the percentage of my purchase cost I would hopefully earn back in income each year. So, for example, Vodafone shares cost around £1.39 each at the moment. The annual dividend per share is around 7.6p. So the yield I would expect to earn if I buy Vodafone shares today is about 5.6%.

That is higher than the average FTSE 100 yield, but there are quite a few blue chip shares that offer a yield of around 5%. At that level, to earn £3,000 each year in dividend income, I would need to invest £60,000.

Putting my passive income plan into action

One reason I like owning dividend shares to generate passive income is that it is not an all-or-nothing plan.

If I can invest £60,000 today at a 5% yield, I could hopefully hit my monthly target of £250 in passive income fairly soon. But if I can only afford to invest a much smaller sum at first, I could start by doing that. I would not earn as much passive income, but at least I should earn some. Over time, if I can add to my investment pot, hopefully my monthly passive income could get closer to my target.

Learning about shares

Simply having the money does not earn me passive income, though. For that, I would invest it in dividend shares.

It can be tempting to go after very high-yielding shares in an attempt to maximise one’s passive income. But shares with a high yield sometimes come with elevated risks.

So I would instead focus on a company’s likely future ability to pay out dividends. What are its free cash flows currently? Such information is available in a firm’s annual report, free online. Next, how likely is the company to be able to sustain such free cash flows? That is a matter of judgment not fact. But if a company has a sustainable source of competitive advantage that gives it pricing power, such as a famous brand or proprietary technology, I often take that as a good sign. I also look at a company’s net debt. After all, if it needs to spend its free cash flows servicing debt, there will not necessarily be anything left over to pay dividends.

Moving to next steps

Having found some shares that matched my investment criteria and risk tolerance, I would be ready to start investing. To reduce my risk, I would invest in companies across a variety of business areas. That way, if one of them of them underperformed my expectations or cut its dividend, the impact on my overall passive income would be limited compared to putting all my eggs in one basket.

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