Key points

• This company has warned on profits less than a year after its IPO
• Management lost £800k of orders before Christmas
• But there’s cash in the bank and the business remains profitable

A profit warning has caused FTSE AIM stock Virgin Wines (LSE: VINO) to crash more than 20% today. Management has warned investors that profits for the current year will be lower than expected, due to a slowdown in new customer sign-ups.

This home delivery wine retailer only floated on London’s AIM market in March last year. Growth was strong during the pandemic, but Virgin Wines’ share price is now 30% below the IPO price.

Existing shareholders are suffering a nasty hangover, but I’m wondering if today’s drop could be a buying opportunity for my portfolio.

Still trading well?

Today’s trading update covers Virgin Wines’ performance during the six months to 31 December. Management says total sales of £40.5m were unchanged from the same period in 2020, but were 55% higher than in 2019.

These numbers tell me that the growth seen during the first year of the pandemic — when many more people were at home — has now levelled out.

Although Virgin Wines is continuing to add new customers, the company says new sign-ups have slowed. This is blamed on a weaker response to marketing offers, especially “paper-based activity”.

My feeling is that a slowdown in growth is inevitable, given that pubs and restaurants are now open again. I’d guess that existing customers may be ordering less too.

Poised for a return to growth?

In fairness, staffing shortages and freight problems added to the company’s pain in December. Virgin Wines was forced to stop taking Christmas orders two days earlier than planned in order to make sure they were delivered. The impact was painful — CEO Jay Wright says the company lost £800,000 in sales.

My sums suggest Virgin Wines’ profits are now likely to be flat, at best, this year. In reality, I think profits are likely to fall.

However, the business still holds net cash of £13.6m and should continue to benefit from its well-known brand. In addition, broker forecasts suggest the 2022/23 financial year could be much stronger, with earnings rising by more than 20%.

If these numbers are correct, I think this stock could offer value after today’s crash. Unfortunately, I don’t feel very confident about such forecasts at this stage. I suspect City analysts may cut their earnings estimates for the firm after today’s news.

Should I buy this FTSE AIM stock?

Does Virgin Wines have much to differentiate it from other online wine sellers? I’m not convinced. In my view, last year’s flotation was well timed, given the strong growth during lockdown. I think further expansion will be tougher.

Even after today’s drop, I estimate that Virgin Wines could still be trading on 18 times forecast earnings. That seems quite high to me, given the uncertain outlook.

I’m also concerned there could be more bad news to come. According to an old stock market adage, profit warnings come in threes. I’ve often found this to be true.

Unless I see a strong recovery in profitable growth, I’d only consider buying Virgin Wines at a rock-bottom valuation. In my opinion, we’re not there yet.

Roland Head 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.

I am always looking for penny stocks to add to my portfolio. While investing in these companies can be incredibly risky, there are also some fantastic opportunities in the small-cap sector.

However, due to the risk of investing in these smaller businesses, I am only willing to allocate a slim percentage of my portfolio to penny stocks. As such, only a few make it through the strict criteria I use to analyse opportunities.

Here are two penny stocks I would buy right now for my portfolio. 

Penny stocks to buy for growth 

The first is the commercial property company Hammerson (LSE: HMSO). This business has come close to collapse in recent years, but it has managed to keep the lights on with emergency fundraisings and asset sales. Now, as commercial property prices start to rise from pandemic levels, it looks as if the outlook for the enterprise is improving.

In a trading update issue towards the end of January, the organisation announced that adjusted earnings for its 2021 financial year would range £75m-£80m, ahead of the £60m it previously expected. It collected around 88% of rents due for the period. 

The firm has also gathered 74% of rent due in the first quarter of its 2022 financial year. 

Clearly, the business is not out of the woods yet. It is still struggling to collect rents from tenants and will likely continue to do so as the brick-and-mortar retail sector remains under pressure. It is unclear how long this challenge will last for the business and is probably the most considerable risk hanging over the stock right now. 

Still, with the outlook for the enterprise improving, I would be happy to add the shares to my portfolio of penny stocks. On top of its improving outlook, the shares also look dirt-cheap. They are trading at a price-to-book (P/B) value of 0.6. This suggests to me the market could be overlooking the potential here. 

Profit potential 

Another opportunity where it looks to me as if the market is overlooking the potential of the business is at oil producer EnQuest (LSE: ENQ). 

Even though the price of Brent Crude recently hit a multi-year high of $90 per barrel, the stock is still trading at roughly the same level it was before the pandemic began. And it is not as if the business is not benefiting from the higher oil price. Analysts believe the firm will earn $156m this year and $312m in 2022. Based on these numbers, the stock is trading at a 2022 forward price-to-earnings (P/E) ratio of 1.5. 

These numbers assume the price of oil remains high. If it does not, the company may miss these earnings expectations. This is probably the most considerable risk to my investment thesis at this point.

Nevertheless, even after factoring this risk into consideration, I think EnQuest is one of the cheapest penny stocks on the market at the moment. In my opinion, even a modest improvement in investor sentiment could lead to a significant increase in the company’s share price.

Therefore, I would be happy to add the stock to my portfolio today. 

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

My top FTSE 250 growth stock to buy today is Diploma (LSE: DPLM). I believe this business flies under the radar for most investors because it fulfils a relatively unexciting role in the manufacturing chain.

It supplies and distributes components for three primary sectors: controls, seals and life sciences. For example, in the controls division, the company supplies specialist wiring and cable connectors for specialist manufacturers. 

This business model hardly gets the pulse racing. However, I believe the company fulfils a unique niche, which gives it a competitive advantage. And this is the primary reason why I would add the FTSE 250 growth stock to my portfolio today.

As the business continues to expand and develop, it can continue to grow profits at an attractive rate and produce desirable returns for investors. 

Expansion plans

Since 2016, Diploma’s sales and net profits have grown at a compound annual rate of 16% and 13% respectively. The company’s top- and bottom-line expansion results from its organic growth and bolt-on acquisition strategies. 

The company is primarily looking for high-quality, scalable business opportunities. These are where management can increase revenue with minimal capital spending. During the financial year to the end of September, the group acquired 10 businesses for £456m. 

Further acquisitions are planned. But the corporation will only acquire a business if it meets its strict returns targets. It has to achieve a double-digit return on assets with room to grow and expand this return. 

While past performance should never be used as a guide to future potential, if management continues to adhere to this strict acquisition roadmap, I think the company can maintain the impressive growth rate it has achieved over the past six years.

It certainly looks as if the enterprise is on track to report a strong performance in its current financial year. Underlying revenue growth hit 16% in the three months to the end of September. Organic growth initiatives and recent acquisitions helped power the company forward. 

FTSE 250 growth stock risks 

Still, while the corporation has a good track record of growth, there is no guarantee this will continue. Challenges the company could encounter include high interest rates, which would raise the cost of its debt.

Competition in the sector could also drive prices for acquisitions above the level it is willing to pay. This would ultimately lead to lower returns and a slowdown in growth. 

Despite these potential challenges, I think the outlook for the company is incredibly exciting. By pursuing a growth strategy in a unique niche sector, Diploma has the potential to continue growing over the next decade.

What’s more, with sales of less than £1bn, the group is still a relatively small enterprise in the grand scheme of things. With such a long runway ahead, I would be more than happy to add this FTSE 250 growth stock to my portfolio right now.

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

January was a highly volatile month for the stock market. While the UK’s FTSE 100 index held up relatively well, due its exposure to the energy sector, some areas of the market were hit hard. Hyper-growth stocks, for example, were decimated.

While the market had a bit of a rebound towards the end of the month, I’m not convinced we’ve seen the end of the volatility. Here, I’ll explain why. I’ll also explain what I’m doing in preparation for another stock market crash.

Why we could see another stock market crash

The main driver of the volatility in January was interest rate uncertainty. Right now, there’s a lot of uncertainty over how many interest rate hikes we’re going to see from the US Federal Reserve this year, and this is unsettling investors. This is largely because higher rates lower the appeal of owning stocks.

While the stock market has largely regained its composure more recently, the issue with the Fed and its interest rate hikes is far from resolved. For example, while most economists expect at least four US interest rate increases this year, some think we could see up to seven.

Given the lack of clarity, I think there’s a good chance we’ll see more market volatility in the near term on the back of uncertainty over the Fed’s interest rate moves. We could even be seeing the beginning of it already. Yesterday, a lot of high-growth stocks experienced sharp declines.

More volatility to come?

It’s worth noting that it’s not unusual to see multiple bouts of volatility within the space of a few months. For example, in September 2020, the S&P 500 index fell by around 10%, recovered most of its losses quite quickly, and then fell by nearly 10% again in October.

We saw a similar kind of ‘W’ pattern with the S&P 500 in early 2016. That’s why I wouldn’t be surprised to see more near-term volatility as the market struggles with interest rate uncertainty.

Of course, stock market volatility is not something to be afraid of. It’s a very normal part of investing. The key to handling it is to be prepared. If we are prepared, we can take advantage of the lower share prices on offer. And that means potentially boosting investment returns in the long run.

How I’m preparing for another crash

In terms of what I’m doing to prepare for another stock market crash, there are two main moves I’m making right now. Firstly, I’m stockpiling cash in my ISA and Self-Invested Personal Pension (SIPP).

My cash levels are a bit low at the moment because I did a fair amount of buying in January during the volatility. I want to have a ‘war chest’ ready in case we see more days like last Monday, when fear levels were high and nearly every stock was down significantly.

Secondly, I’m working on my shopping list. I’m putting together a list of the stocks I want to buy and the prices I’d like to pay. This way, I’ll be ready to strike if shares prices fall. Some examples of stocks on my shopping list include Apple, Microsoft, Visa, Nvidia, and Diageo.

Teresa Kersten, an employee of LinkedIn, a Microsoft subsidiary, is a member of The Motley Fool’s board of directors. Edward Sheldon owns Apple, Diageo, Microsoft, Nvidia, and Visa. The Motley Fool UK has recommended Apple, Diageo, and Microsoft. 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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The FTSE 100 is filled with dividend-paying stocks. Yet Persimmon (LSE:PSN) seems to be one of the biggest yielders available today. The share price has taken a slight tumble over the last 12 months, falling by just over 11%. But despite this downward trajectory, management has actually increased its dividend payout. So, it’s not surprising to see shares currently offer a yield of 9.8%!

Is this one of the best dividend stocks to buy for my portfolio? Let’s explore the income potential and the risks that come with it.

Falling share price, rising business

I’ve already said that the FTSE 100 stock hasn’t had the greatest run lately. But looking at the latest trading update, it’s hard to fathom why.

Yes, the pandemic has been pretty disruptive to Persimmon’s home-building exploits. And while construction sites are once again active, supply restrictions on certain building materials continue to impede progress. But the situation is improving.

As a result, a total of 14,551 new homes were completed in 2021. That’s a 7% jump from a year ago, but it remains below pre-pandemic levels. Fortunately, rapidly rising home prices have actually elevated new housing revenue above what was reported in 2019 to £3.45bn.

Combining this with a balance sheet flooded with £1.25bn of cash, and suddenly I’m not surprised to see dividends per share return to 235p – the same as 2019.

As construction operations continue to recover and housing prices climb, I wouldn’t be surprised to see dividends do the same. And that, to me, looks like an excellent buying opportunity for my income portfolio.

The risks of this FTSE 100 dividend stock

As exciting as this recent performance is, some headwinds are approaching. Inflation is partially contributing to the rising house prices, and at the moment, this is working in Persimmon’s favour. But higher inflation has resulted in the Bank of England hiking interest rates, which makes mortgages and in turn, properties, less affordable.

To make matters worse, government support for first-time buyers is coming to an end in March next year. This could further impact affordability. And if property sales start to suffer while more homes are completed, it could cause an imbalance between supply and demand.

Needless to say, that’s not good news for this FTSE 100 stock or its dividends. Even more so when considering the margin pressure currently being applied due to higher materials costs.

Time to buy?

While this risk factor is quite concerning in the near term, over the long term, I’m not too fussed. This market does have a cyclical nature, which could adversely affect the dividend yield. But over the next decade, I don’t see the need for UK housing to disappear, especially with a growing population.

Therefore, despite the risks, I’m personally tempted to add this FTSE 100 stock to my passive income portfolio today.

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

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Billionaire hedge fund manager John Paulson described cryptocurrencies in an interview last year as “a bubble with little to no intrinsic value.” And more colourfully he said, “I would describe cryptocurrencies as a limited supply of nothing.” He then explained that the price will go up when there’s demand for the limited supply of Bitcoin and other cryptos. But when demand falls, the price will go down.

He concluded by saying, “There’s no intrinsic value to any of the cryptocurrencies, except that there’s a limited amount.”

Slow and steady can win the race

But I’m aiming to get rich using the time-tested strategy of buying the stocks of quality businesses and holding them for a long time. My portfolio may not move as fast as it would if it was stuffed with cryptocurrencies. But it may not be as volatile either.

Some of the best stock-picking investors around manage to achieve annualised gains of around 30%. For example, Peter Lynch achieved gains close to that level when he ran Fidelity’s Magellan fund. However, the most famous investor of them all — Warren Buffett — achieved annualised gains of 20% between 1964 and 2020.

That might seem like a stock investing tortoise compared to the cryptocurrency hare. But the trick is to keep compounding those gains year after year. And the outcome can be spectacular. For example, Buffett reckons his overall gain over the entire period came out at 2,810,526%!

However, it’s possible to achieve respectable gains from the stock market by simple passive investing as well — without all the effort of picking and monitoring the stocks of individual companies. For example, Buffett reckons that over the same period as he achieved his spectacular returns, America’s S&P 500 index delivered annualised gains of 10.2%. And the overall return works out at a very decent 23,454%.

If I could have invested £1,000 in a passive index tracker fund following the S&P 500 in 1964, I’d have had an investment worth well over £200,000 in 2020 — not too shabby!

A hybrid approach to stock investing

Of course, there’s no guarantee the stock market or individual stocks will deliver a similar outcome for me in the future. However, I’m investing in a few index tracker funds and individual company stocks I’ve chosen carefully rather than in cryptocurrencies.

For example, I put regular money into a tracker fund that follows the fortunes of America’s S&P 500 — it would almost be silly of me not to after Buffett’s illustration! And I’m also tracking the UK’s FTSE 100, FTSE 250 and small-cap indices. Then for added spice, I’ve got collective investments following emerging markets around the world.

But many investors feel a compelling itch to develop their own stock-picking prowess over the years, including me. So I’m having a shot at raising the level of annualised returns in my portfolio by following a strategy to select and hold the shares of individual companies. Of course, all shares carry risks. But my overall strategy is a hybrid of passive and active investments. And I’m hoping that mix will help me become richer over time.

The content in this article is provided for information purposes only. It is not intended to be, neither does it constitute, any form of investment advice. Bitcoin and other cryptocurrencies are highly speculative and volatile assets, which carry several risks, including the total loss of any monies invested. Readers are responsible for carrying out their own due diligence and for obtaining professional advice before making any investment decisions. 

Kevin Godbold 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.

Buying shares of UK businesses when they’re dirt-cheap is a proven strategy to generate significant wealth over the long term. But finding these opportunities is often easier said than done.

Fortunately, that task is less complicated at the moment since fears surrounding rising inflation have got the stock market in a bit of a huff. And that’s how I spotted Anglo Pacific Group (LSE:APF). Let’s explore what this business does and why I’m keen to buy more shares, even with as little as £100.

A royalty company for a renewables world

I’ve explored this UK share before. But as a quick reminder, Anglo Pacific is a mining royalty company. It provides the necessary funds for other mining businesses like BHP and Rio Tinto to develop an extraction site once all the initial exploration surveys are completed. In exchange, it receives a percentage of the materials extracted from the ground throughout the lifetime of the mine.

Inflation is bad for most businesses, but it’s actually quite beneficial for mining groups. Why? Because mining is a largely fixed cost operation. So, when inflationary pressure pushes commodity prices up, profit margins begin expanding. And just looking at the company’s latest results, the effects are evident.

Total income from its royalty portfolio throughout 2021 grew by a staggering 80% reaching £85.6m. That’s even higher than 2019 levels when the pandemic wasn’t disrupting operations.

£48m of this income originated from its Kestrel coking coal mine in Australia. That obviously poses as a single asset risk, as well as a commodity that the world is slowly phasing out. But thanks to portfolio diversification over the years, this proportion of income has been steadily falling.

What’s more, it’s being replaced with new renewables-facing commodities, including copper, vanadium, and more recently, cobalt. This latter metal was responsible for £16.5m of royalty income alone last year and is a critical ingredient in electric vehicle batteries.

Is this UK share too cheap?

Despite generating record-breaking royalty income, the share price of this UK business doesn’t seem to reflect that performance. It’s true that over the last 12 months, the stock has climbed by a respectable 10%. But it’s still trading well below pre-pandemic levels, even though from an operational standpoint, the group is in a much stronger position. Yet there might be a reason why the stock is trading at a discount.

A lot of the growth seen throughout 2021 was primarily thanks to rising metal prices from surging demand in the automotive and renewable energy industries. But with other mining businesses trying to capitalise on the opportunity, the market might become saturated in the future.

Suppose that were to happen? In that case, metal prices would fall, taking out Anglo Pacific’s profits in the process with little recourse for management available. Needless to say, that would not be good news for its UK shares.

Personally, I think this is a risk worth taking. Vanadium and cobalt are pretty hard to come by, which gives Anglo Pacific a bit more protection from potential oversupply. Plus, with many countries aiming to go green within the next decade, I don’t see demand for these materials disappearing any time soon.

Therefore, to me, this looks like a fantastic buying opportunity for my portfolio.

Zaven Boyrazian owns Anglo Pacific. The Motley Fool UK has recommended Anglo Pacific. 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.