Since the start of the pandemic, the FTSE 100 has consistently underperformed other global financial markets, such as the S&P 500 and the Nasdaq. This has been due to the FTSE 100’s reliance on ‘old-economy’ companies, and a dearth of tech firms. Yet the sentiment has changed in 2022. Indeed, while tech stocks have been recording huge losses, UK stocks have been rising, with the FTSE 100 reaching its post-pandemic high. This rise has been aided by recent comments by JP Morgan that now is the time to buy “exceptionally cheap” London-listed shares. With this in mind, if I had £1,000, I’d use that money to invest in these two stocks.

A drinks giant

Diageo (LSE: DGE) has always been one of my favourite UK shares, with its reputation for excellence and significant brand loyalty. Indeed, Diageo owns over 200 different alcoholic brands, such as Guinness, Gordon’s, and Johnnie Walker. Due to the prominence of these brands, Diageo can rely on recurring sales, alongside some organic growth.

In fact, in the recent FY22 half-year results, Diageo managed to record net sales of £8bn, representing organic growth of around 20%. Organic operating profits were also to grow 24.7% to £2.7bn. Considering the worries surrounding cost inflation and supply chain constraints, these were incredibly strong results. It also allowed the company to increase the interim dividend by 5%, giving it a yield of around 2%.

There are some risks with the shares, however. For example, cost inflation is likely to increase capital expenditures, and this may strain profit margins. Supply chain constraints may also limit the company’s ability to meet demand for its products. Nonetheless, I remain confident in the future. Indeed, over the medium term, from FY23 to FY25, it expects organic operating profits to grow sustainably within a range of 6% to 9%. The company’s share buyback programme, where it plans to return £4.5bn to shareholders, is also likely to have positive effects on the Diageo share price. For these reasons, Diageo is a ‘no-brainer’ buy for me.

A lesser-known UK share

In contrast to Diageo, Pan African Resources (LSE: PAF) doesn’t receive much attention. Despite this, the gold miner is performing excellently. In fact, in the most recent full year trading update, it recorded profits after tax of $74.7m, which is a 69% increase from the year before. It also sports a dividend yield of over 5%, far higher than most other UK shares.

Things are also going extremely well in the latest half-year. In fact, the company managed to produce 108,000 ounces of gold in the six months ending December 2021, which is a record amount for the company. It also exceeded previous guidance of 105,000 ounces. Further, the company announced a further reduction in net debt, a factor which may allow further increases in the dividend.

Despite this, PAF is extremely reliant on the price of gold, which is entirely outside of its control. This is a risk that faces the company. But that’s not stopping me from buying. Due to the current inflation rates, I feel that gold has further to rise. As a top-class gold miner, PAF is, therefore, another UK share I’d buy with £1,000.

Stuart Blair owns shares in Diageo and Pan African Resources. The Motley Fool UK has recommended Diageo. 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 think Dechra Pharmaceuticals (LSE: DPH) could prove to be a very lucrative FTSE 100 stock for me to own this decade. People are spending more money on their pets than ever and this bodes well for animal medicine developers like this one.

Latest financials from Pets at Home this week illustrate how strongly spending on animal care is growing. The FTSE 250 firm claimed it was on course for “a record year of sales and profit growth” for the period to March. This particular spending phenomenon is a global one too.

It’s why researchers at Grand View Research predict the global veterinary medicine market will rise to be worth $30.8bn by 2028. That’s up a whopping $20bn from what it was valued at last year. This is good news for drugs manufacturers like Dechra, of course.

Expensive but exceptional

Dechra has a long track record of unbroken annual earnings growth. It’s a history that’s been helped by a long line of acquisitions to create a top-quality portfolio of animal drugs and boost its global footprint. City analysts are expecting this positive bottom-line trend to continue too. They expect profits to expand 5% and 9% in the financial years to June 2022 and 2023 respectively.

A word of warning however. At current prices, Dechra trades on a heavy forward price-to-earnings (P/E) ratio of 35 times. Such a high valuation could cause a sharp share price reversal if news flow surrounding the company starts to look a little squiffy. In the case of Dechra this could happen, for example, if it encounters trouble with developing a particular potentially-money-spinning drug.

It’s my opinion though that Dechra’s long-standing record of constant profits growth makes it worthy of a handsome rating. And, perhaps more importantly, so does its robust position in a fast-growing market and the company’s lasting appetite for profits-bolstering acquisitions.

Another FTSE 100 share to buy

That said, I also love the thought of loading up on bargains. And that means Ashtead Group (LSE: AHT) remains high on my list. Like Dechra, a robust appetite for acquisitions helped profits at this FTSE 100 share rise consistently in recent years. And while Covid-19 has caused some temporary turbulence, the rental equipment business is expected to storm back straight away.

City analysts think earnings at Ashtead will rise 41% and 18% in the years to April 2022 and 2023 respectively. This leaves the business trading on a rock-bottom price-to-earnings growth (PEG) ratio of 0.5.

Acquisition activity in the past decade has also made Ashtead an industry giant in the US. The company has the balance sheet strength to continue splashing out on acquisition targets as well continuing to deliver monster shareholder returns.

I’d buy more Ashtead stock for my portfolio even though worsening economic conditions in the US could hit demand for its services. In recent days, the IMF has slashed its GDP growth forecasts for the US to 4% for 2022, from 5.2%. But I think the potential rewards here far outweigh the near-term risks.

Royston Wild owns Ashtead Group. 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.

If I wanted to boost my passive income, I could try to do it by buying dividend shares. With a lump sum of £5,000, I reckon I could set up substantial passive income streams. In fact, I would aim for £500 a year in income.

Given the ambitious target, there are risks involved. Let me explain my approach.

Three high yielders

I would split the money evenly between three dividend paying shares that have high yields. Those shares are Diversified Energy, yielding 11.1%, Persimmon, offering 10%, and Income and Growth Venture Capital Trust, on 9.6%.

That would give me an annual passive income of around £511 if things go according to plan. I have some diversification here as the companies operate in very different business areas.

Risks with high yield shares

High yields are often accompanied by investor worries that a share may face significant risks that could see its dividends cut. Is that true here?

Diversified Energy basically sells natural gas and oil. Moves in energy prices can boost its revenues and profits. But they could also hurt them, depending on which direction prices move. While energy prices are currently strong, the market is cyclical so at some point in future they are bound to fall.

Persimmon’s dividend – which is often only narrowly covered by earnings – could suffer if the UK housing market falls. That is where Persimmon makes its profits that fund the dividend. Like energy pricing, I see housing as cyclical. At some point I expect that Persimmon may struggle to maintain its current dividend if housing prices fall a lot. That could happen tomorrow — but on other hand, the market may remain robust for years to come.

Income and Growth is less exposed to cyclical forces in my view, as it invests in a wide range of early stage businesses. Its ability to pay dividends relies on it continuing to extract more money from its investments than it puts in. As a market awash with capital pushes up prices, that could become harder to do.

Why I would consider these dividend shares

Despite the risks, I see considerable opportunity here. All three companies have proven their willingness to pay substantial dividends. I think they each have proven business models that can be highly lucrative. Although that may only be the case when conditions are favourable in their respective markets, the same could be said of most businesses.

Diversified operates 67,000 gas wells in a geographically concentrated area. That unique asset base gives it a competitive advantage. Persimmon has strong profit margins and demand for new housing in the UK remains robust. Income and Growth has demonstrated its ability to identify promising investments. For example its largest holding — almost £13m in Virgin Wines — cost it only £65,000. 

Even if a downturn did lead to the dividend being slashed in future at one of the companies, each would probably still have an asset base that could continue to deliver value in the future. So a market downturn might spell a dividend cut, but they could return in future. Persimmon, for example, previously stopped paying dividends in 2013 but restarted them in 2016. Income and Growth’s net asset value exceeds its current share price.

Fully recognising the risks, I would still consider spreading £5,000 evenly across these three dividend shares in my portfolio to target annual passive income of £500.

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

The NASDAQ 100 index closed yesterday at 14,172 points. After closing the first Monday in January at 16,501 points, this reflect a fall of just over 14%. Back in 2008, the index fell 9.9%, to register the then-worst January on record. Although there are still a few trading days left in the month, it does look like this will take the biscuit as the worst January ever. With that in mind, here are some of the best stocks that I’m considering to buy given the fall.

Reasons for the slump

Before I get into the stock specifics, I think it’s important to understand why the market has been falling. From this, I can then gauge which stocks I need to stay away from, versus others that have simply been caught up in the negative sentiment. 

The main reason for the slump in January is down to investors expecting a much more hawkish US Federal Reserve. This means that people are expecting the central bank to raise interest rates more than previously expected last year. In the latest update last night, it looks like the Fed is going to raise interest rates in March, and then several times later this year.

These higher rates are needed to combat the high (7%) rate of inflation in the US. However, increasing rates quickly has historically been negative for stocks. This is because it increases the cost of borrowing for large corporations. It also provides less of an incentive for individuals to invest versus holding cash.

The best stocks I’d buy

On the basis of the above reasoning, I’m not looking to buy a tracker fund of the NASDAQ. Some stocks in the index have a lot of debt, which will get more expensive to service with higher rates. However, there are some selective stocks that I do think have been oversold in January.

Take Amazon (NASDAQ:AMZN), as an example. The share price is down 18% over the past month, putting it down 14% over a one-year period. Even though the Q3 results weren’t amazing, this is by the lofty standard that Amazon and the market has set. Net sales still increased 15% year-on-year, to pass the $100bn mark again ($110.8bn). 

It’s also an incredibly profitable company, without high levels of debt. I’d be happy to pick up some Amazon shares as part of this NASDAQ slump. When I look out a year or more, I think that Amazon shares will bounce back. This is because there is a dislocation between the performance of the company and the performance of the share price.

Another one of the best stocks I’m considering to buy is Rivian Automotive (NASDAQ:RIVN). I recently wrote about the reasons why I like the company. Since the IPO last November, the share price had doubled but is now back below the IPO price. I think that electric vehicles are the future, and so I see this dip as a good opportunity to invest in the sector for the long term.

The risk with buying either stock now is the fact that negative sentiment could cause both stocks to continue to fall. There’s nothing to indicate that the sell-off has finished. I need to be aware that even though I think these stocks are good value, I could be holding an unrealized loss for a long period to come.

Jon Smith has no position in any stocks mentioned. John Mackey, CEO of Whole Foods Market, an Amazon subsidiary, is a member of The Motley Fool’s board of directors. The Motley Fool UK has recommended Amazon. 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

• Short-term cost-cutting may negatively impact Royal Mail shares
• Parcel service suffered a 7% year-on-year decline in the fourth quarter of 2021
• Royal Mail has historically strong earnings and revenue 

A quintessentially British establishment, the Royal Mail Group (LSE: RMG) is a major postal carrier operating around the globe, with well-known subsidiaries, like Royal Mail and Parcelforce Worldwide. The shares have been volatile as of late. 

Royal Mail shares jump prematurely on trading update

On the release of the latest trading update, on 25 January 2022, Royal Mail shares jumped about 6%. This was likely in response to the news that revenue for the three months up to 31 December 2021 was up 17.1% compared with the same period in 2019. This market excitement quickly faded, however, and shares are down 5.4% since that intraday high of 460p.

On closer inspection the update was not as positive as a first glance might suggest. The company announced cost-cutting measures and it plans to lose around 700 manager-level employees. This will come at a cost of £70m. JP Morgan warned in January 2022 that while these cost-cutting measures should save money in the long term, it may result in operational cost and negatively impact Royal Mail shares.

Indeed, the domestic parcel service segment suffered a 7% year-on-year decline, owing to fewer parcels being ordered as the world reopens from the pandemic. The poor reopening performance contrasts with other sectors, like airlines. Furthermore, Royal Mail Group lowered profit guidance for the 2022 fiscal year from £500m to £430m. For me, these all feel like warning signs.

Some reasons for optimism

While revenue for the fourth quarter of 2021 was down 2.4% from the same period in 2020, it is still up an impressive 17.1% on a two-year basis. In addition, recent negative news may be balanced with Royal Mail’s longer-term performance.

The company’s earnings-per-share (EPS) have increased by around 18% between the fiscal years from 2017 to 2021. This consistent growth over an extended timeframe certainly attracts me to Royal Mail shares. Indeed, Bank of America maintained the company’s ‘top pick’ status, owing to the strong performance of freight markets throughout the last two years.   

Although the 2021 fourth-quarter revenue showed a decline, longer-term revenue figures paint a different picture. Reporting £9.7bn revenue in 2017, this has grown to £12.6bn in 2021. What this means is that the average annual growth rate in Royal Mail revenue sits at about 5.3%.  

I find Royal Mail Group an attractive long-term investment. This is based on its strong earnings and revenue record. As we emerge from the pandemic, though, there are a couple of aspects that I find concerning. The cost-cutting measures could be expensive in the short-term and this could negatively impact the share price. The lowering of profit guidance, as mentioned in the most recent quarterly report, is also likely to dent Royal Mail shares. Long term, I think this stock will perform well, but I’m waiting for short-term issues to subside before I think about buying.  

Andrew Woods has no position in any of the shares mentioned. JPMorgan Chase is an advertising partner of The Ascent, a Motley Fool company. Bank of America is an advertising partner of The Ascent, a Motley Fool company. 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 certainly has not been a dull month so far in the stock market. I think that could provide me with some buying opportunities. If I had £1,000 to invest in UK shares today, here is what I would do.

Clarify my objectives

First, I would think about what I want to achieve with my investment. Recent stock market moves mean that some growth shares are cheaper than they have been for a while. That does not necessarily mean that they are cheap in objective terms, however. If the market nervousness about tech valuations worsens, some growth shares that have already seen steep falls could still tumble further.

There has also been a swing into more defensive shares. So some popular dividend shares now offer lower yields than they did a couple of months ago. I still find some of the yields on offer attractive for my portfolio. So I would split the £1,000 evenly across two growth shares and two income picks. That diversification would reduce my risk if any one company performed poorly.

Two UK shares for growth

For growth, my first pick would be JD Sports. The retailer’s share price has dropped over 20% over the past couple of months. But its business outlook remains strong. Indeed this month the company said that it expects the current year’s results to top market expectations. One caveat, though, was that revenues and profits could be hit if the company faced any more trading restrictions on its shops in the UK and North America.

Second, I would buy digital ad holding group S4 Capital. Its shares have tumbled 46% since September. But I think the business performance in that time has continued strongly. Indeed, this month S4 said that its full-year outlook remained in line with market expectations, which were already high. With its large tech exposure, the company could struggle to maintain its historically fast revenue growth. Growing headcount could also add costs into the business, hurting profitability. But the company says it is working to keep its profit margins attractive. I see the share price fall as a buying opportunity for my portfolio.

Two UK shares for income

After upwards price moves in the past couple of months, British American Tobacco now yields 6.8%. That is lower than it had been but still an attractive level that could boost my dividend income. I think the price recovery partly reflects the market recognising some of the strengths in BAT’s business that had become somewhat overlooked, such as the rapid growth in its next generation products like vaping. That could help to offset the risk of falling cigarette revenues as smoking becomes less common in many markets.

Another share I would buy is natural gas and oil company Diversified Energy. The owner of around 67,000 wells in the US can generate attractive cash flows especially at a time when energy prices are strong — like now. That funds a generous dividend, paid quarterly. Right now the Diversified Energy dividend yield is 11.1%. Energy prices falling back could hurt both revenues and profits. But with a double-digit yield, I would happily buy the shares for my portfolio.

Christopher Ruane owns shares in British American Tobacco, Diversified Energy, JD Sports and S4 Capital. The Motley Fool UK has recommended British American Tobacco. Views expressed on the companies mentioned in this article are those of the writer and therefore may differ from the official recommendations we make in our subscription services such as Share Advisor, Hidden Winners and Pro. Here at The Motley Fool we believe that considering a diverse range of insights makes us better investors.

Dividend growth stocks have a track record of consistently growing their dividends. These types of stocks are attractive to me for a couple of reasons — first, the dividend. Getting paid a higher dividend each year is good. Second, there should be capital growth. Let’s say a dividend growth stock has a 4% yield on a trailing 12-month basis. The stock paid a dividend of 4p per share and is priced at 100p. Next year the dividend increases to 5p. If investors are still happy with a 4% yield, they will be willing to pay 125p per share now.

So long as the dividend keeps increasing, so should the share price. That’s something I want for my portfolio. So I had a look for top UK dividend growth stocks that I might want to buy for 2022 and beyond.

Screening for dividend growth stocks

I looked for stocks that grew their dividends at a compound annual growth rate (CAGR) greater than 5% measured over five years. Also, I required a CAGR in earnings, again measured over five years, of over 5%. Next, I looked for a less than 60% dividend payout ratio. If at least 40% of earnings are being invested in the business, that should grow future earnings, supporting further dividend increases. I did not want companies paying most of their earnings as dividends.

My screen returned over 30 stocks. I selected two from different industries. The two UK dividend growth stocks that I would consider adding to my portfolio for 2022 and beyond are life-saving technology company Halma (LSE:HLMA) and international distribution and services company Bunzl (LSE:BNZL). Both of these stocks are members of the FTSE 100 index.

FTSE 100 dividend growth stocks

Bunzl certainly has the hallmarks of a UK dividend growth stock. It has grown its dividend at a five-year CAGR of 9.55%. The company has grown through a mixture of organic growth and bolt-on acquisitions. Revenues have been growing well, and earnings have followed. In fact, earnings have grown faster than dividends. This has seen the company’s dividend cover increase over time, giving the dividend a good margin of safety. However, Bunzl shares trade at a price-to-earnings ratio of 18. That is relatively high compared to the industry and wider market. In addition, operating margins are consistent but slim at around 5.5% on average. Slim margins do not allow a lot of room to absorb increasing costs before earnings start to be affected. Growing earnings in part from bolt-on acquisitions require attractive purchases to be available. There is always the chance that these will dry up.

Table 1. Halma and Bunzl: key stock characteristics

Source: Company accounts and Yahoo finance

Halma has five-year CAGRs for dividend and earnings of 6.6% and 13.3%. Like Bunzl, earnings growth is outstripping dividend growth and has increased the dividend cover to a healthy 3.81 times earnings. That makes the dividend relatively safe. Like Bunzl, Halma grows revenue organically and by sensible bolt-on acquisitions. But, Halma’s operating margin averages closer to 18%. Again, revenue growth at Halma is partly dependent on being able to find attractive bolt-on acquisitions, which may not always be possible.

I would consider adding Halma and Bunzl to my portfolio for their potential as long-term dividend growth stocks

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

When I opened my groggy eyes to early market movements today, I actually had to rub them to check if I was seeing right. All the top risers in early FTSE 100 trading were banks. Mid-way through the trading day, the top performers look slightly different. Even then all banking stocks are up appreciably today.

The biggest FTSE 100 riser is still a banking stock, Standard Chartered. It is up by almost 6% as I write. The second biggest riser is a bank too, HSBC, which is almost up 4.3%. Natwest, Barclays, and Lloyds Bank follow with rises of 2.1%, 2%, and 1.9%, respectively. 

What is going on here? 

Interest rate increases due

I reckon this is correlated with more confirmation that interest rates are indeed going to harden in 2022. Yesterday, the US Federal Reserve said that it will start the rate tightening process from March onwards to curb high inflation. This follows the increase in interest rates seen by the Bank of England (BoE) in December 2021, following a steep rise in inflation.

Banking stocks had rallied at that time as well. I reckon they have even more reason to do so now, considering that a number of FTSE 100 banks operate in international markets as well. Even if their biggest market is not the US, like in the case of HSBC, I think the writing is on the wall that other central banks could also start raising interest rates soon too.

UK’s growth forecasts positive for FTSE 100 stocks

This is one of the reasons that I have been bullish on these stocks for 2022 for a while now. But there are others too. For instance, the International Monetary Fund released its updated 2022 forecasts yesterday. As per these, the UK is expected to see a robust 4.7% growth in the year, which bodes well for credit demand. Further, it is expected to be the fastest growing developed economy in Europe after Spain, which could be a positive for FTSE stocks. 

Moreover, I expect to see their dividends rise as well. I believe that banking stocks have lagged behind in recovery compared to many other FTSE 100 stocks because they were held back from first paying dividends and then allowed to pay them only in restricted amounts during the pandemic. However, as these regulations have been progressively relaxed, their dividend yields have risen. They are still fairly low, to be sure. Definitely lower than the average FTSE 100 yield of 3.4%. But they could improve over the year, I believe. 

What I’d do now

The only catch is that we never know what happens next with Covid-19. The recent experience with Omicron being a case in point. Investors could turn bearish, which in turn could send all stocks tumbling. This would particularly be likely for more economy sensitive ones like banks.

Despite Omicron though, the FTSE 100 made a lot of progress in 2021. And I would invest in 2022 keeping that big picture in mind. Banking stocks look like really good buys to me for this year. So much so, that I am beginning to wonder why I still do not hold any in my own portfolio!

Manika Premsingh has no position in any of the shares mentioned. The Motley Fool UK has recommended Barclays, HSBC Holdings, 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.

Animal nutrition specialist Dechra Pharmaceuticals (LSE: DPH) has been giving both animals and its own shareholders something to chew on lately. The Dechra Pharmaceutical share price has crashed 24% so far this month.

Could this present a buying opportunity for my portfolio?

Long-term growth prospects

The recent price tumble comes after a strong run for the company’s shares. Indeed they are still up 9% on the past year. Over five years, Dechra has been even more rewarding – the shares have gone up 180%.

That reflects the fact that the company has seen strong growth and operates in a financially attractive industry. Animal nutrition is potentially very profitable, because both farmers and pet owners want to ensure the health of their animals. Revenues tend to be resilient, as animal medical needs remain the same no matter the state of the economy.

Last year, Dechra saw revenues increase 18%. Earnings per share improved even more, jumping 56%. Not only do those results speak to the strength of Dechra’s business model, I reckon it still has a long growth runway ahead of it. For the first half of its current year, the company increased revenues by 15%, excluding currency impacts. This month it updated the market and said its full-year outlook is in line with the upper end of management expectations.

All of that is very positive and at the right price, I would definitely consider buying Dechra for my portfolio. Right now, though, I am steering clear of it. Here is why.

Dechra Pharmaceuticals share price and valuation

A good business does not always make for a rewarding share. For example, investor enthusiasm for a company can push a share price up to a level where the valuation is excessive.

I think Dechra is an example of that right now. After the big jump I mentioned, post-tax profits came in at £56m. Earning more than a million pounds a week from animal supplements shows the business is in rude health. But the market capitalisation – the combined value of its shares – currently stands at £4.4bn. That means that Dechra’s price-to-earnings ratio is 79. I regard that as very high. Even allowing for the prospect of strong earnings growth in coming years I still feel the shares are expensive.

Pricing in risks

On top of that, such earnings growth is not guaranteed. The recent headline revenue growth of 15% excluding currency impact in fact only came to 10% when actual exchange rates were included. Double-digit sales growth is still impressive. But the difference between the two figures is a reminder that exchange rate fluctuations can hurt both revenues and earnings at a company doing business internationally like Dechra.

The company faces other risks to profits, too. In mature markets vets have increasingly been consolidating their practices into large chains. Such chains have strong buying power. That could damage profit margins for animal supplements.

I think this is a good business. At the right price I would be happy to buy its shares for my portfolio to hold for the long term. But I will not be buying at the current Dechra Pharmaceuticals share price.

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

The stock markets might be doing fairly well, but many travel stocks are still struggling. No points for guessing why, of course. We all know the impact of Covid-19 on these stocks, and the uncertainty drags on for them. This is evident in the latest updates from two FTSE 250 airline stocks released earlier today. The stocks in question are Wizz Air (LSE: WIZZ) and easyJet (LSE: EZJ), both of which paint a mixed picture. Here, I explore each case individually and try and figure out if this is a good time to buy either or both the stocks. 

Wizz Air recovers fast

Wizz Air’s recovery does not look too bad to me. For the three months ending 31 December 2021, the company reported an impressive 243.4% increase in passengers carried from the same time the year before. Of course there was barely any travel happening in 2020, so there is the advantage of a low-base effect in these numbers. Still, it does show what a long way it has come. Revenues also increased considerably, by 172.5%.

However, its reported loss has actually risen by 130% during this time as well. And it does not seem likely that will turn around anytime soon. In fact, it expects the operating loss next quarter to be higher than during the last one, as the Omicron variant continues to impact travel demand. 

Optimistic outlook 

Wizz Air is “cautiously optimistic” that the recovery will continue from spring onwards, which is encouraging. A similar optimism is evident in easyJet’s outlook as well. In its trading statement for quarter ending 31 December 2021 as well, the airline sounds even more bullish than Wizz Air. It says, “We see a strong summer ahead, with pent up demand that will see easyJet returning to near 2019 levels of capacity”.

easyJet halves losses

Even though full details for the quarter’s financials are not available yet, the numbers so far also look good too. EasyJet has noted that the relaxation of the pre-travel testing rules on 5 January 2022 resulted in an uptick in bookings. It also says that load factors improved through much of last quarter. December saw a decline because of Omicron, however. Nevertheless, it says that its loss has halved during the year and the cash burn has reduced significantly too. 

Which FTSE 250 stock would I buy?

Clearly, things are looking up for airline stocks. But there is still a whole lot of uncertainty in the air, as is evident from the recent Omicron episode. I am not sure if we are out of the Covid-19 woods yet, so there might be still more challenges in store for them. So I would continue to be cautious about buying them.

Of the two of them, however, the Wizz Air share price has run up far more than that of easyJet. I have already bought easyJet shares but even if I had not, if I had to buy one of the two of these FTSE 250 stocks, it would be my pick. 

Manika Premsingh owns easyJet. 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.