With the US Federal Reserve set to raise interest rates and bond yields rising, technology shares are having a hard time right now. Recently, the Nasdaq Composite index – which tracks a wide range of stocks listed on the Nasdaq Stock Exchange – fell into ‘correction’ territory (meaning it’s more than 10% below its recent highs). And right now, it’s not that far off ‘bear market’ territory (20% off its highs).

As a long-term investor, I’m looking at the weakness across the tech sector as a buying opportunity. And yesterday, I mentioned that I had recently picked up some shares in Microsoft and Kainos. These aren’t the only tech shares I’ve had a nibble at recently however. Here’s a look at two more stocks I’ve bought in the recent tech correction.

Investing alongside ‘Britain’s Warren Buffett’

Another tech stock I’ve added to in the recent market volatility is Amazon (NASDAQ: AMZN). I picked up stock near the $3,150 mark, roughly 16% below its 2021 highs.

Amazon is experiencing a few challenges in its e-commerce division right now. Supply chain issues are one problem. Higher costs are another. I expect these issues – which are predominantly related to Covid-19 – to moderate sooner or later. And when they do, Amazon’s profits should get a boost.

Looking further out, I’m excited about the potential in the company’s cloud computing division. This market is projected to grow by nearly 20% per year between now and 2028 and Amazon currently has a 40%+ market share. So I think there’s a lot of growth potential here.

Even after recent share price weakness, Amazon still has a high valuation. At present, the forward-looking P/E ratio is just under 60. I’m comfortable with this valuation however, given Amazon’s dominance in e-commerce and cloud computing.

It’s worth pointing out that fund manager Terry Smith (aka ‘Britain’s Warren Buffett’) has recently been buying Amazon stock for his flagship fund Fundsmith. So I’m not the only one buying at current levels.

Enormous growth potential

I’ve also taken the opportunity to add to my position in semiconductor company Nvidia (NASDAQ: NVDA). I picked up some more shares around the $255 mark, roughly 25% below its 2021 highs.

In the past, Nvidia was a play on the video gaming industry as its high-power graphics cards were predominantly used in gaming. Today however, the company is much more than this. Indeed, thanks to the power of its chips, it has become a major player in cloud computing, artificial intelligence (AI) and autonomous vehicles – all of which are projected to grow significantly in the years ahead.

What really excites me here is the company’s plans for the ‘Omniverse.’ This is an advanced technology platform that brings together Nvidia’s expertise in AI, simulation, and graphics and can be used to create virtual avatar characters, interpret speech, and create new 3D worlds. CEO Jensen Huang believes the Omniverse has the potential to benefit businesses in a wide range of industries.

Now Nvidia is a high-risk, volatile stock that has a high valuation (the P/E ratio is about 50). It’s certainly not a stock for those who prioritise capital preservation as its share price can fluctuate wildly. We’ve seen this in recent weeks.

As a long-term investor with a higher-than-average risk tolerance, I’m comfortable with the volatility here however. This is a stock I plan to hold for the long term.

John Mackey, CEO of Whole Foods Market, an Amazon subsidiary, is a member of The Motley Fool’s board of directors. Edward Sheldon owns shares in Amazon and Nvidia and has a position in Fundsmith. 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.

The two highest-yielding FTSE 100 dividend stocks currently offer forecast yields of 10%, or more. Should I consider buying these shares for my income portfolio, or are their payouts likely to be cut? I’ve been taking a closer look.

Is this 19% yield about to tumble?

The top yielder in the FTSE 100 today is coal, iron ore and steel producer Evraz (LSE: EVR), whose largest shareholder is Chelsea FC owner Roman Abramovich. Broker consensus forecasts suggest this Russian business will pay dividends of $1.27 per share in 2022, giving a forecast yield of just over 19%.

Is this really possible? I think it might be. Current broker forecasts suggest to me that Evraz could generate enough profit to support a dividend payout of this size in 2022.

Of course, profit forecasts can change quickly for miners if commodity prices slump. But I don’t think it’s impossible. In my view, Evraz really could deliver a dividend yield of 19% in 2022.

Should I buy today?

It’s worth remembering that commodity prices were quite extreme last year. One way to look at this is by considering Evraz’s dividends. I estimate the company has paid out $1,800m to shareholders over the last 12 months. That’s six times the company’s minimum dividend policy of $300m per year.

History suggests conditions like this don’t last forever. Indeed, coal and iron ore prices have already fallen by around 40% from the highs we saw last year. Even so, current prices still look quite high to me, by historical standards. If the global economy slows, I think commodities such as iron ore could have further to fall.

I expect Evraz’s dividends to dip in 2023, if not in 2022. But even if the payout was cut by 50%, the stock would still offer a tempting 9% yield.

Should I buy Evraz for my portfolio today? In my experience, mining shares are often more volatile than other FTSE 100 companies. Evraz’s Russian exposure adds extra risk, in my opinion.

For these reasons, I plan to wait until mining stocks are really bombed out before buying Evraz shares. I don’t think that’s true at the moment.

This FTSE 100 dividend stock yields 10%

Housebuilder Persimmon (LSE: PSN) has become a popular choice for income investors in recent years, thanks to its regular 235p per year dividend. At the current share price, that gives this FTSE 100 dividend stock a forward yield of 10% for 2022.

Based on Persimmon’s recent performance, this payout looks affordable to me. Profit margins have been high in recent years, giving the group’s strong cash generation. Management reported a chunky net cash position of £1.3bn at the end of June.

What worries me about Persimmon is that it’s paying out almost 100% of its earnings as dividends. This suggests to me that if profits dip for any reason, then the dividend might have to be cut.

I think this could happen. Persimmon’s profits peaked in 2018 and have fallen steadily since. Buyers are now battling rising inflation and the risk of higher interest rates.

However, management says housing demand remains strong and City analysts are forecasting higher profits this year. If they’re right, then I think Persimmon could offer an affordable and sustainable 10% dividend yield.

Personally, I’m wary about the outlook for housing after a decade of unbroken growth. I plan to wait until housebuilders become less popular before adding one to 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.

I was right to be bullish on the prospects for Hargreaves Services (LSE: HSP) in an article a year ago.

Back then, the small-cap’s share price was near 270p and after that, it rose to around 570p by August 2021. However, it then dropped back to lows near 380p in December 2021. And now, after shooting up this morning on the release of the half-year results report, the stock price is about 480p as I write.

An improving business

There’s some risk for investors in the move higher today because the valuation won’t be as keen as it was. But the main thrust of my old article was I couldn’t understand why the valuation was so low given the robust-looking prospects of the business. Hargreaves had been trading well and forecasts for improved cash flow, profits, debt-reduction and revenue growth were all bullish.

It seems the stock market began to form a similar opinion as it re-rated the stock higher. But today, my view is similar to last year’s given the ongoing news flowing from the company. I still think the valuation looks too low. And the market isn’t fully recognising the growth story emerging from the carcass of the company’s old set-up and its historical business.

Hargreaves describes itself as a diversified group delivering key projects and services to the industrial and property sectors. And today’s report contains some impressive figures. Earnings per share rose by 812% compared to the year-ago number. Net debt plunged by 85% to £3m. And the net cash figure ballooned to £8.5m after the company posted a net debt position of £8m last year.

Something is clearly going right for the business. And the directors kept positive momentum going for shareholders by increasing the interim dividend by almost 4% to 2.8p per share. However, ordinary dividends aren’t the only source of shareholder income from this company. The directors intend to continue to pay additional dividends relating to income from the firm’s German joint venture, Hargreaves Raw Materials Services (HRMS).

Diversified operations

HRMS supplies specialist raw materials to European customers in several industries. And profit after tax from that business rose to £9m from just £0.9m last year. It was to HRMS that Hargreaves previously sold its coal assets. And that’s why revenue to Hargreaves decreased by just over 17% “as expected” after exiting direct involvement in the coal business in December 2020.

Elsewhere, profits also increased. The Services division is building a “sustainable profit stream” with stable term contracts and framework agreements in the energy, environmental, infrastructure and industrial sectors. And the Land division focuses on maximising the value of its existing portfolio as well as developing a strong pipeline of new opportunities. Part of that is a renewable energy land portfolio.

The directors’ expectations “increased materially” for the current and future years. And with the share price near 480p, the price-to-asset value is just over one and the forward-looking dividend yield is above 4%. There are no guarantees for shareholders. And the value proposition isn’t as compelling as a year ago. But I think the potential in the business could lead to further gains in dividends and the stock price in the years ahead.

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.

Was this article helpful?

YesNo

World famous investor Warren Buffett has a surprisingly simple approach to investing. While some share pickers have very complex mathematical models or monitor thousands of charts each month, Buffett has a more straightforward approach to choosing stocks. I am following it to find cheap UK shares to buy for my own portfolio.

What Warren Buffett looks for

Buffett focuses on industries and businesses he understands. If he does not understand something he reckons he is unable to assess it properly. I think that is a helpful approach for me in hunting for cheap UK shares too. How can I assess whether a company offers me good value as an investor unless I understand the basic elements of its business model?

He looks for companies that have the likelihood of generating strong free cash flows in future. So he is basically looking to see whether a business has something that customers will still pay for in future but cannot easily be replicated by rivals. An example might be a product like the famous sausage roll at Greggs, a proprietary drink formula such as Irn-Bru at AG Barr or a distribution network it would be prohibitively expensive to replicate, like the one operated by Domino’s Pizza.

Hunting for value

The challenge is that Warren Buffett is far from the only investor who realises such attributes can help a company generate cash flows for decades. Many other buyers look for similar attributes. That can push the prices of shares up.

Just because a business can be very profitable does not make its shares good value. If they trade at too high a price, they could offer little return or even a loss to a shareholder over the course of several years, even if the underlying business is performing well. That is why valuation is important when considering which shares to add to my portfolio.

Buffett’s approach to valuation is to look for what he calls “great companies at good prices”. So he is not starting with the share price as many value investors do. Instead he starts the way I explained above – by looking for great businesses. Only then does he move on to consider a company’s share price.

Patience as a virtue

He will not necessarily buy shares even when he thinks the company is excellent. It depends on price. But he may watch a company – sometimes for years, or even decades. Occasionally a share price correction can offer him a buying opportunity. That may be a broad-based market crash, or it could simply be that a company he likes has seen its shares tumble after a profit warning.

I can apply that approach to finding cheap UK shares for my portfolio too. I have a shopping list of companies I would consider buying if their prices tumble in a market crash. But sometimes a company I like comes upon hard times for reasons of its own when the rest of the market is doing well. In such cases, I would also think about acting on the price movement and adding the stock to my portfolio.

Christopher Ruane has no position in any of the shares mentioned. The Motley Fool UK has recommended AG Barr and Dominos Pizza. 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.

Was this article helpful?

YesNo

Key points

• Two FTSE 100 stocks for a global recovery
• The copper price is up 22% in a year
• A global pandemic recovery is on the horizon 

The FTSE 100 index is made up of many strong stocks. They are among the biggest and most established companies operating all around the world. I’ve found two recovery stocks that I think will prosper in 2022, Antofagasta (LSE: ANTO) and InterContinental Hotels Group (LSE: IHG). Let’s take a closer look.  

A FTSE 100 miner

Antofagasta is a FTSE 100 copper mining company operating in Chile. It also mines gold and the mineral molybdenum. Another segment is transport-focused, featuring rail and trucking activities to support the transport of metals.

This company has been profitable over the past five calendar years. It has registered a yearly average increase in profit before tax of 38%. Furthermore, its earnings-per-share (EPS) have also grown over the period.

One way to calculate whether this stock is undervalued, or not, is to refer to its price-to-earnings (P/E) ratio. This comes from dividing a company’s market value per share by the EPS. This results in a reading of 13.6, indicating the stock is slightly undervalued, because it is below the industry average of nearly 14. 

With the price of copper up 22% over the past year and this metal now playing a large role in electric vehicles, the future is bright for Antofagasta, I feel. The strong performance of this stock’s underlying commodity supports my view that the company will prosper as the world reopens.

In its Q4 report for the three months to 31 December 2021, however, Antofagasta reiterated its forecast for declining copper production. This is due to the drought Chile is experiencing. Nonetheless, the company stated that a desalination plant will be operational for the second half of 2022 to assist with the water shortage.  

A global recovery play

With the world now emerging from the nightmare of the Covid-19 pandemic, an interesting FTSE 100 recovery stock could well be InterContinental Hotels Group. This company owns many well-known hotel brands, including Crowne Plaza and Holiday Inn. It operates globally.

The business environment for this sector is improving as we leave the pandemic behind. Indeed, the less severe Omicron variant appears to have paved the way for a global recovery and this prompted Jefferies to state in November 2021 that “higher internet searches and web traffic” indicate a “recovery in US hotel footfall”. This could be the first of many positive news reports.

In spite of this positive news, its EPS declined in 2020 because of the pandemic. The normally profitable company recorded a $280m loss. In the report for the three months up to 30 September 2021, room revenue was still down 21% for the same period in 2019. However, I believe these difficulties are already factored into the current price. Indeed, compared with the 2020 period, room revenue is up 66% and I expect these figures to keep improving.

These two stocks will prepare me for a global reopening. I won’t be wasting any time before I add them to my portfolio. With a bright future for copper and a global recovery hopefully around the corner, I think these FTSE 100 stocks could perform very well indeed. 

Andrew Woods has no position in any of the shares mentioned. The Motley Fool UK has recommended InterContinental Hotels 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.

There have been some bumps along the way, but Britain’s banks have gained decent ground over the past year. Take Barclays (LSE: BARC) as an example. The FTSE 100 business has risen 52% in value since this point in 2021, as optimism concerning the global economy has improved.

Barclays is a giant in the fields of retail and investment banking. Theoretically then, it should see demand for its financial services rise from both individuals and companies as the world bounces back from the shock of Covid-19. Meanwhile, improving economic conditions might feed through to a much-better performance from the investment bank, shareholders are hoping.

I’d claim it’s a little too early to expect a strong and sustained recovery at this FTSE 100 firm however. With inflation soaring and the Covid-19 crisis dragging on, I think profits at economically-sensitive shares like banks remain in danger. Barclays operates in the UK and the US, economies whose growth outlook were both cut by the International Monetary Fund just yesterday.

The organisation noted that “the global economy enters 2022 in a weaker position than previously expected”. This should give all share investors like me food for thought.

Trouble for Barclays’ investment bank?

That ascent in bank share prices over the past 12 months also coincides with market expectations that central banks will periodically raise rates over the next year or so. This is beneficial for the likes of Barclays as it widens the difference between the rates can offer to lenders and to savers, boosting profits in the process. The inflation explosion of more recent months has fed speculation of several strong interest rate hikes too.

For Barclays however, the prospect of higher interest rates is a double-edged sword. Sure, positive central bank action would boost earnings at the retail business. But Barclays’ gigantic investment bank could take a hit as higher rates push up investment costs. They also hit spending levels and push up borrowing in the broader economy, denting GDP growth and indirectly damaging investor returns.

Should I buy other cheap FTSE 100 shares?

That said, Barclays’ share price still looks pretty cheap, despite the gains of the past year. The question then, is whether the stock’s worth a ‘punt’, despite those risks discussed above. At current prices of 204.5p per share, the FTSE 100 bank trades on a forward price-to-earnings (P/E) ratio of 7.5 times. It also offers great value on paper from an income perspective. Its 4.1% dividend yield for 2022 beats the Footsie average of 3.5% by a decent margin.

Of course, a share’s cheapness doesn’t necessarily offset the colossal risks it faces though. Some UK shares are ultra cheap for a reason, and I believe this is the case with Barclays. The economic landscape remains packed with danger for cyclical shares like this.

Besides, there are many other cheap FTSE 100 stocks for me to choose from that face lesser dangers than Barclays. So why should I take a chance with this high-risk bank? I’d much rather go shopping for other bargain stocks right now.

Royston Wild has no position in any of the shares mentioned. The Motley Fool UK has recommended Barclays. 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.

Was this article helpful?

YesNo

With annual inflation recently reaching its highest level in nearly three decades, I reckon unearned income could help me combat the impact on the cost of living. That is why I have been thinking about my 2022 passive income plans.

Even starting from scratch, I think it is possible to build passive income streams for just a couple of pounds a day. They may be modest in the beginning. But over time, hopefully little acorns could grow into oaks.

Why £2 a day makes sense

Why would I think about a passive income plan using only £2 a day? If I had more money would it not make sense to use that too?

Yes it would. If I could use more funds, indeed there would be some benefits to me. I could build bigger passive income streams faster. But I like the idea of using £2 a day precisely because it is a modest place to start. It is easy to begin with big ideas, but then when the first obstacle comes along, like an unexpected bill, I may lose momentum on my passive income plan. I think putting aside £2 a day should be consistently achievable. That could help me build discipline, which is a bedrock of long-term investing success in my view.

Dividend shares as passive income ideas

Just putting a couple of pound coins in a jam jar each day will not earn me any income on its own, though. That is just saving. To start generating money from it, I would invest it in dividend shares. That way I could benefit from the hard work of successful companies when they pay out profits as dividends.

£2 a day adds up to £730 a year, so I need to be realistic about my expectations. The average FTSE 100 yield tends to be around 3-4% most of the time. So I would expect annual passive income of around £22 to £29 from my first year of putting aside £2 a day. But if I keep up with the disciplined habit, hopefully the income will increase. Once I buy shares, I can receive dividends until I sell them. So over the years my passive income streams should mount up, even if I am still only putting that £2 a day into my plan.

Putting my 2022 passive income plan into action

Dividends are never guaranteed, as companies can run into unforeseen difficulties or simply change their spending priorities. So I would diversify across different shares and business sectors. That should help me reduce my overall risk.

Some shares yield far more than 3-4%, such as British American Tobacco, M&G, Legal & General and Rio Tinto. But I would not focus only on dividend yield when building my passive income streams. With a long-term approach I would want to find companies that I thought might actually be able to pay higher dividends in future as their business prospects improve. Those will not necessarily be the highest-yielding shares today. To choose such shares, I would keep a lookout for companies with a strong competitive advantage and the opportunity to generate substantial cash flows for years to come.

Christopher Ruane owns shares in Imperial Brands. The Motley Fool UK has recommended Imperial Brands. 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.