The UK market looks good value right now. It means there should be plenty of opportunities to find cheap UK shares for my portfolio. Here are two companies in the FTSE 100 I’d buy today.

A banking giant

The first company is Lloyds (LSE: LLOY). The share price has been on quite a rollercoaster since the financial crisis in 2008. But today, I think the shares look good value for its prospects ahead.

Starting with the valuation, and on a price-to-earnings ratio (P/E), Lloyds is rated on a multiple of 8. This looks very cheap to me. However, it’s important to form a forward-looking view of a company before I buy the shares.

Inflation is a key risk for markets and consumers in 2022. But for Lloyds, it might present an opportunity. When inflation rises, the Bank of England should raise interest rates in an attempt to control further price rises. Generally, rising interest rates favour banks, such as Lloyds, because they increase the rate of interest it can charge on its loans. This is measured by the net interest margin, and analysts are expecting it to rise in 2022. In support of this, Lloyds is expected to grow its dividend in the next two years. The forward yield should rise to 4.7% this year, and increase again in 2023 to 5.2%.

Lloyds is not without risk. For example, any economic slowdown could really hamper its lending business. On the other hand, rising interest rates may also reduce demand for mortgages, and therefore lower profitability for the company.

All things considered, I think the valuation is compelling for the risks ahead. The income potential is also attractive for my portfolio, so I’d buy Lloyds shares today.

Another cheap UK share

The next company I’d consider buying is ITV (LSE: ITV). It was greatly impacted by the pandemic as advertising budgets were cut. The share price fell from about 135p in February 2020, to a low of 50p. Since then, the shares have recovered to 113p as I write today.

The valuation still looks cheap, though. On a forward P/E the shares are trading on a multiple of 7, so there might be good value here.

Looking ahead and the dividend is expected to grow by 63% in 2022, and by almost 10% in 2023. The result would be a dividend yield of 5.3% for this year, which I consider good income for my portfolio. I have to keep in mind the risks here though. The dividend was stopped in 2020 due to the troubles caused by the pandemic. There’s always a chance that the dividend could be cut again if the company’s profits fall.

Having said this, I think ITV is in a better position today than in 2020. Net borrowing is forecast to reduce in 2021, and profit before tax is expected to rebound by a huge 122%. The company is highly cash generative too, which should support the dividend forecast. Not only this, but ITV is undergoing a digital transformation at present, and growing its video-on-demand offering. The company said it had been an “outstanding nine months” in its most recent trading update. This does sound promising, but I should monitor the progress here, as a potential shareholder. 

I already own ITV shares, but I’d buy the stock again today as I view it as a cheap UK share with attractive income prospects.

Dan Appleby owns shares of ITV. The Motley Fool UK has recommended ITV and 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.

Please note that tax treatment depends on the specific circumstances of the individual and may be subject to change in the future.

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Key points

• Strong December trading suggests demand is returning to normal
• Cineworld generated positive cash flow in Q4
• Debt problems and legal woes mean shareholders could still face big losses

The Cineworld (LSE: CINE) share price rose 20% in January. With the pandemic seemingly easing and Covid restrictions being lifted in the UK, my guess is that investors were buying into the reopening trade.

However, Cineworld shares are still worth 75% less than they were two years ago, at the start of the pandemic. Should I look at this as a buying opportunity for my portfolio, or are there hidden risks?

Let me explain why the stock rose in January — and what I think will happen next.

December boost lifts shares

The good news is that customers are heading back to the cinema. In January, Cineworld said revenue in December reached 88% of 2019 levels, thanks to popular new films like Spider-Man: No Way Home.

Even better, Cineworld managed to achieve positive cash flow in the final quarter of last year. That’s an important milestone on the road back to profitability, in my view. This should mean — hopefully — that the company didn’t need to draw any further debt to support its operations during the quarter.

The year ahead looks promising too. New films due for release include The Batman and Top Gun: Maverick — potential blockbusters.

I’m worried about the numbers

I’m confident cinemas will make a good recovery. I don’t think we’ll stop wanting to watch movies on the big screen.

What worries me is that the Cineworld share price could start falling again, due to the group’s financial situation. Cineworld’s latest accounts show net debt of $8bn. The company is also appealing against a recent legal ruling that could add a further C$1.25bn of liabilities.

Broker forecasts suggest Cineworld’s operating profit could bounce back to $680m in 2022. Unfortunately, this figure is calculated before financing costs, such as interest payments. My sums suggest these are likely to total at least $600m in 2022 — wiping out most of the group’s profits.

I think the pressure is mounting on CEO and shareholder Mooky Greidinger. This week, the company said it is now trying to reschedule some of its debt repayment obligations. While these talks are ongoing, the company has asked some of its lenders to waive, or overlook, any non-payment for a period of time.

Restructuring the group’s debts could push repayment dates further in the future. It might be enough to save Cineworld from having to raise money by selling new shares. But if an equity raise does go ahead, I think existing shareholders could see the price of their stock collapse.

Cineworld share price: my decision

Cineworld is the world’s second-largest cinema chain, with a big presence in the key US market. I think we’ll see a strong recovery in customer numbers over the coming year.

However, the company’s financial situation carries too many warning flags for me. There’s no way I can predict what might happen.

I have a golden rule in situations like this — stay away. I’ll be taking a close look at Cineworld’s 2021 results when they’re released in March. But, for now at least, Cineworld shares are far too risky for me.

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 believe investing in stocks and shares is one of the best ways to generate passive income for life.

There are other strategies I can use to create passive income, such as buy-to-let. However, I am not particularly comfortable using these strategies because I have never used them before. I do not want to dive into something I do not understand.

Doing so could incur significant losses, which may be difficult for me to recover from. 

Another benefit of using stocks and shares to generate passive income is that it only requires a small amount of money to buy equities. Indeed, I can start building a passive income portfolio with a little as £30 a week.

This strategy will not make me a millionaire overnight, but it could put the foundations of a solid income portfolio in place. I can then build on this portfolio in the years ahead to increase my wealth and financial nest egg. 

Passive income portfolio

An investment of £30 a week works out at around £1,560 a year. If I can keep this up for 10 years, I could put away £15,600, assuming the value of my portfolio does not change in the meantime.

Of course, the goal of investing in stocks and shares is to increase my wealth in the long run. I estimate that if the value of my portfolio grows at 10% per annum over a decade, I can build a nest egg worth approximately £27,000. 

There is no guarantee I will earn a 10% per annum return on my money. This is just a ballpark estimate. Nevertheless, I think it illustrates my passive income strategy relatively well.

I plan to save a modest weekly sum with a growth objective for the first 10 years. When I have reached a set figure, I can then switch from investing in growth stocks to investing in income stocks. For example, according to my research, there are a handful of stocks on the market right now that currently support dividend yields of 7% or more.

If I were to invest my portfolio of £27,000 in a selection of stocks yielding 7%, I would be able to earn a passive income of £1,900 a year.

I should clarify that dividend investing does not provide a guaranteed passive income. Dividend income is paid out of group profits. Therefore, if company profits suddenly collapse, it is likely the dividend will be eliminated.

This is something I will have to keep in mind as we advance. 

Foundations for the future

The great thing about this strategy is that it is pretty flexible. Investing in growth stocks and then switching from growth to income is possible with any amount of money. If I wanted to put away £100 a week, I would be able to achieve a much larger financial nest egg. 

My calculations show that it would be possible to build a portfolio worth around £90,000 by saving £100 a week over a space of 10 years, assuming an annual rate of return of 10%. By switching from growth to income, I estimate I would be able to generate a passive income of around £6,300 a year on this portfolio. 

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.

As I speculated in March last year, car dealer Lookers (LSE: LOOK) was to enjoy a brilliant 2021. Throw in 2022’s gains so far and it’s now in serious danger of losing its penny stock status. Not that I expect holders will complain. 

Penny stock power

Since February 2021, shares in the small-cap have soared over 150%! Contrast this with the 17% and 8% uplift in the FTSE 100 and FTSE 250 respectively and I have more evidence of how minnows have the potential to turbocharge my wealth. This is assuming, of course, I select them carefully. A healthy bit of luck goes a long way too. 

Still, the reasons for Lookers incredible returns aren’t hard to fathom. A shortage of semiconductors and a consequent slowdown in manufacturing has accelerated the price of new and second-hand vehicles. This, when combined with the growth in savings as a result of multiple UK lockdowns, was always likely to benefit the £380m-cap company.

With Covid-19 travel restrictions throwing holiday plans into disarray, the rush to buy a new (or nearly new) set of wheels was inevitable in hindsight.

Can this continue?

January’s trading update certainly made for pleasant reading. Trading “remained strong” and “above the Board’s expectations” in the final quarter, thanks to “excellent new and used vehicle margins“. Like-for-like after-sales revenues were also up 7.1% compared to the previous year. 

The share price also received another huge boost at the end of last month after Constellation Automotive Holdings snapped up almost 20% of the company. According to chairman Ian Bull, the new investor regards the company as “significantly undervalued“. Then again, you wouldn’t expect them to say anything different. No less than 102p was paid for each share!

Time will tell if this proves to be a good bit of business. Lookers certainly appears cheap at face value. Even with the near-39% drop in earnings per share expected in 2022, the stock still changes hands at a P/E of just nine. A forecast dividend yield of 3.3% is also in the offing to prospective owners.

Based on these attractions, I’m cautiously optimistic this penny stock can continue rising. That said, I don’t doubt they’ll be some profit-taking soon. I also need to remember that margins are wafer-thin and demand will surely moderate as supply chains get back to normal.  

Bouncing back in 2022?

Since I highlighted its potential at the same time as Lookers, it’s worth mentioning that I remain optimistic about freight manager Xpediator (LSE: XPD). That’s despite the company’s share price coming back down to earth after motoring during the first half of 2021.

January’s trading update on FY21 didn’t contain any nasties as far as I could see. Revenue “in excess of £300m” is now expected. That’s growth of at least 36%. Adjusted pre-tax profit will also be “well in excess of £8.5m” compared to the £7.2m achieved in 2020. 

Looking ahead, a new 200,000 sq ft facility in Southampton is predicted to bring efficiency and capacity benefits this year. Increased business in Europe is also likely as Covid-19 restrictions are lifted.

For balance, it’s worth mentioning that this penny stock’s margins are as thin as those of Lookers. The current P/E of 13 is also fairly high, relative to the industry average, although the shares do come with a well-covered 3.1% dividend yield.

Paul Summers 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.

Key points

• Royal Mail looks cheap against a key European rival
• RMG shares offer a tempting 5.4% dividend yield
• But I can still see some turnaround risks

As the New Year rolled in, the Royal Mail (LSE: RMG) share price was happily bumping along at over 520p. One month later, the shares are down by 13% or so, at around 450p.

At this level, Royal Mail shares look cheap to me — and as I’ll explain, I think there are some good reasons to suggest that a fair value for the business could be much higher.

The pandemic has put pressure on Royal Mail’s staff, but it’s been a massive success for the group’s parcel business. Parcel volumes during the final quarter of 2021 were 5% lower than during the same period in 2020 but were 44% higher than in the final quarter of 2019.

Royal Mail boss Simon Thompson is convinced that there has been a permanent shift in parcel volumes since before the pandemic. I think there’s still a risk that volumes could fall further, as people return to the shops in more normal numbers. That wasn’t the case before Christmas, in my experience.

I’m also concerned that cost pressures may end up being worse than expected. Royal Mail has a large workforce and significant energy costs — both areas where costs have risen sharply over the last year.

Could the Royal Mail share price hit 780p?

Despite these concerns, I think Royal Mail shares could be seriously cheap at current levels. My view on this is based on the valuation of rival firm Deutsche Post, the German group which owns DHL and operates the German postal system.

Although Deutsche Post is a larger business, I think there are many similarities with Royal Mail and its GLS international parcels business (which owns Parcelforce in the UK).

Deutsche Post shares are currently valued at 13 times forecast earnings, with a 3.3% dividend yield.

In contrast, Royal Mail shares currently trade on just 7.5 times forecast earnings with a 5.4% dividend yield. If the UK firm was valued on the same P/E ratio as Deutsche Post, then Royal Mail’s share price would rise to around 780p. That’s more than 70% above its current level of 450p.

A massive bargain?

I think there are a couple of reasons why Deutsche Post deserves to be more expensive than Royal Mail. One is that the German group is larger and has slightly higher profit margins. Another advantage is that Deutsche Post has a much longer record of strong performance — Royal Mail is a very recent turnaround.

Even so, I would be comfortable valuing Royal Mail on at least 10 times forecast earnings. That would price the stock at around 600p — well above current levels.

If Royal Mail continues to perform as well as it has done over the last year, I think the share price is likely to recover steadily. At today’s price, I’d consider Royal Mail a possible value stock for my portfolio.

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.

A stock market crash can be an excellent opportunity to acquire shares that may have previously looked expensive. I plan to follow this playbook in the event of a market slump over the next 12 months. 

Indeed, I have put together a list of stocks I would like to buy if they suddenly fall in value. And there is one stock I would like to buy more than any other on the London market. 

Potential acquisition for a stock market crash

I believe one of the most underappreciated companies on the London market is XP Power (LSE: XPP).  This business designs, manufactures and sells electrical transformers. These are relatively unexciting components, but they perform an essential function. 

Specifically, XP’s products convert power from the electricity grid into the appropriate form of energy the equipment requires to function.

Demand for these products has grown steadily over the past decade. Still, the outlook for the industry is changing rapidly as green energy takes over an increasing share of the electricity infrastructure. 

Green energy uses a different form of power from traditional power. As a result, the demand for electricity transformers is growing. XP’s order book is already starting to reflect this expansion. The company ended its 2021 financial year with a record order book, providing excellent revenue visibility for 2022.

What’s more, the organisation’s revenues grew 10% on a constant currency basis last year. That is particularly impressive because the company benefited from a significant uplift in revenues in the pandemic due to rising sales of healthcare equipment. 

Investing for growth

Management plans to capitalise on the pandemic windfall by investing in new manufacturing capacity for the year ahead. These plans suggest XP’s sales and profits could grow substantially as the business rises to meet the challenge of its record order backlog.

This potential is the reason why I would acquire its shares in the event of a stock market crash. XP has developed a niche in its market, and it looks as if its customers are fighting for the company’s capacity. 

That said, the business does face some significant headwinds. These include rising cost inflation and supply change challenges. The company has already warned that both of these issues are having a substantial impact on its ability to fulfil orders. I will be keeping an eye on these risks as we advance. 

Still, with a growing order backlog, I think the enterprise can navigate these issues. At the time of writing, the stock supports a dividend yield of 1.6% and is trading at a forward price-to-earnings (P/E) ratio of 22.6.

Considering the company’s potential, I do not think this ratio is that expensive. If it falls further in a stock market crash, I think this stock could be a no-brainer buy for my portfolio, considering the factors outlined above. 

Rupert Hargreaves has no position in any of the shares mentioned. The Motley Fool UK has recommended XP Power. 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.

Yesterday, I highlighted three stocks from the FTSE 100 that, thanks to their generous dividends, could be great ways for me to beat the rise in the cost of living. Today, I’ve expanded my search for inflation-busters to the FTSE 250.

Again, there’s no guarantee any of the companies mentioned below will always be in a position to return cash to holders, hence the need to stay appropriately diversified.

Green dividends

Renewables Infrastructure Group (LSE: TRIG) is a highly attractive option for tackling rising prices, in my opinion. The £3bn-cap company is expected to return 6.85p per share to holders in the current year. That’s a yield of 5.1%. By comparison, the FTSE 250 index can only offer 2.1% in passive income at the moment.

Another reason this company stands out for me is that it’s not missed a chance to hike annual dividends since listing on the UK market. True, these increases have been small, but I’d take this over big hikes that then become unsustainable.

At just over 15 times earnings, TRIG shares aren’t cheap, relative to the industry in which the company operates. However, they still look reasonably priced compared to the market as a whole. And buying here will allow me to tap into the sustainable energy trend that is only likely to get more popular with investors in the future. 

As a source of stable income, TRIG definitely grabs my attention.

Down… but not out

I’ve been a stockholder in price comparison website Moneysupermarket.com (LSE: MONY) since last year. While I originally bought in for its recovery potential, the dividend stream is welcome in the interim as inflation ticks higher. The forecast yield for this year stands at a solid 6.7%. 

One thing worth highlighting with Moneysupermarket is that profits only just about cover the payout. This could mean the company is forced to reduce its cash returns if (and that’s a big if) trading doesn’t bounce back as expected in 2022. Personally, I’m of the opinion that it will, hence why I remain invested here. Of course, I could be utterly wrong, which is why I’m also continuing to spread my money into other parts of the market.

Based on a 31% jump in earnings per share in 2022, MONY stock changes hands for a P/E of just under 13. For such a quality stock, that still looks a steal to me! But then I would say that.

8.3% yield from this FTSE 250 stock

Jupiter Fund Management (LSE: JUP) is by far the largest dividend payer of the three discussed here. Analysts have it returning an inflation-beating 8.3% in 2022.  

Similar to other asset managers, Jupiter is unlikely to have benefited from the poor start to the year for markets. It will be interesting to see what CEO Andrew Formica has to say about the outlook later this month. Full-year numbers are revealed on 25 February.

I’m also conscious that the company is not exactly consistent when it comes to raising its cash returns to investors. This may continue in the future if Jupiter is forced to reduce its fees to compete with rivals. The huge popularity of passive funds is another headwind. 

However, it seems that quite a lot of negativity is already in the price. Down 21% in the last 12 months, Jupiter shares now trade on a little less than 10 times earnings. I’d buy.

Paul Summers owns shares in Moneysupermarket.com. The Motley Fool UK has recommended Jupiter Fund Management and Moneysupermarket.com. 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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