I’ve been bearish on BT (LSE: BT.A) shares for a number of years now. It’s been a good stance, because the share price has been on a downward trend since 2016. In fact, If I’d bought £1,000 of BT shares at the peak in 2016, my investment would only be worth £372 today. Ouch!

But things have been turning a corner recently. The share price has rallied almost 10% in 2022 alone. It’s up by a whopping 38% across the previous 12 months too.

I’m going to dig a bit deeper to see if I should buy BT shares today.

The bull case

I see the demand for ultra-fast telecommunications networks only expanding from here. Working from home has created a need for fast and reliable internet connections. Furthermore, with more entertainment coming from streaming services nowadays, people are willing to upgrade to higher data speeds with unlimited download quantities. BT is well positioned to take advantage of this increasing demand. Its Openreach division is rolling out full fibre broadband, which now stands at 6m households. The target is to reach 25m homes by 2026, showing the potential growth ahead.

BT’s 5G network now also covers 40% of the UK’s population. I see this as another exciting growth avenue for the company going forward as more people adopt the — much faster — 5G network.

Alongside the increasing sector demand, the company itself has been undergoing change. The CEO recently commented that it’s resulted in £1bn in cost savings. Promisingly, this was achieved a whole 18 months ahead of schedule. He said it’s “all part of creating a leaner BT with simplified processes and improved customer experiences.”

BT was able to reinstate its dividend in the recent half-year results to 30 September too, so its financial performance is clearly improving.

The bear case

The first risk I see in the business is its heavy debt load. According to the latest filings for the half-year results, net debt on the balance sheet was £18.2bn. This is significant considering the company’s market value is only £18.5bn. With the prospect of rising interest rates, it’ll likely mean interest costs will rise, too. Any potential dividend payments may then decline.

Having said this, BT did confirm that all of the major debt ratings agencies confirmed an investment grade score for the company. This means there isn’t any impending risk of insolvency.

The growth forecasts for fiscal year 2023 (the 12 months to 31 March 2023) aren’t the most exciting either. City analysts expect revenue to stay broadly flat, while earnings are forecast to grow by almost 5%. The valuation on a price-to-earnings (P/E) basis has already risen from a lowly 5 in 2020, to a forward P/E of 10 today as well.

So, with tepid earnings forecast, and a doubling in the valuation recently, I don’t see BT surging much higher from here.

Should I buy BT shares?

There are some promising signs at BT. The cost savings strategy is being executed very well, and I like the sector tailwinds that the company should be able to capitalise on. Although I don’t think the share price will carry on surging at its current rate, there should still be some upside in the shares. The prospect of a 4% dividend yield today is also attractive for my income portfolio. So, on balance, I’d consider buying BT shares today.

Dan Appleby 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.

There is one company in the FTSE 100 I would avoid at all costs right now. That is materials group Croda (LSE: CRDA).

Before I continue, I should note that I think this company is a British champion. Over the past few decades, the group has helped develop a range of new technologies and specialist equipment, earning it a reputation as one of the country’s best businesses. 

However, as the stock has surged and profits have stagnated, the stock has become less appealing.  Unfortunately, it does not look as if this will change anytime soon. 

FTSE 100 company challenges

In some respects, I am attracted to Croda’s business model. It is a champion of the unexciting, manufacturing specialist goods such as lipids, a key component of vaccines. It has also tried to branch out into electric vehicle batteries, although management has now announced that it will be exiting this business. 

Croda made a strategic misstep with batteries. The company discovered it could not compete with larger competitors, which can manufacture more for less. 

The business has also recently decided to sell off its industrial division. When complete, the group will have transitioned to a pure-play chemicals company focused on consumer care and life sciences. These are defensive businesses where demand is expanding. 

If this is the case, then why would I avoid the business? I am worried about the FTSE 100 company’s valuation and growth potential.

Expensive business 

Over the past three years, Croda’s net profit has hardly budged. Nevertheless, its stock has moved steadily higher. As a result, the shares are currently trading at a forward price-to-earnings (P/E) multiple of 45. 

This premium multiple suggests the market is expecting a lot from the enterprise. But there is no guarantee it will be able to meet these lofty expectations.

Croda needs to stay on its toes to remain competitive. That means investing in new technologies and fast-growing industries. This strategy comes with its own risks. There the investments that may not work out and could lead to write-offs. 

Of course, I could be wrong. The company has a history of innovation and changing with the times. There is no guarantee it will fall behind. The market may continue to pay a high multiple for the shares if the enterprise can stay ahead of the competition. 

Still, with risks in the global economy growing, I am planning to avoid richly-valued businesses. If the business disappoints, the shares could slump back to the sector average multiple. This is around 20-25. If this scenario materialises, shares in the business could drop significantly from current levels. 

Considering this risk, I think there are plenty of other FTSE 100 companies I would rather own in my portfolio. 

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

Over the past year-and-a-half, analysts have consistently stated that US tech stocks have been in a bubble. But instead of bursting, the prices of these stocks continued to rise. Some notable examples include Tesla, which reached a $1trn valuation, and Apple, which soared to a $3trn market cap. But recently, this bubble has finally burst. Indeed, the Nasdaq index has fallen 17% from its recent highs, and the S&P 500 has fallen around 10%, reaching correction territory. While this is not as severe as the stock market crash in 2020, they’re still very large falls. Yesterday was a particularly bad day for stocks, due to a mixture of geopolitical tensions and more worries about inflation. But a stock market crash can often be a great time to buy stocks. So, what am I doing with some of the big fallers?

Growth stocks crash

The majority of large fallers have been growth stocks. This is due to worries over inflation, which means that the Fed will introduce several interest rate hikes throughout 2022. The Bank of England has already raised interest rates. This will make it more expensive to borrow, which is particularly detrimental for growth stocks. However, I believe that the stock market crash has left some companies far too cheap, as this issue now seems to be priced in.

One example is SoFi Technologies (NASDAQ: SOFI). SoFi is a fintech that went public via a special purpose acquisition company (SPAC) last year. But despite the share price falling over 50% from its highs of $26, the company’s performance continues to impress me. For instance, in its Q3 trading update, it announced that it had around 3m members, which is a 96% year-on-year rise. Recently, it also received a bank charter, which will allow it to directly lend money to customers. I feel this will entice more customers to use SoFi, while also boosting profitability. Therefore, despite the issues that inflation will cause for the fintech, I think it is a great example of a broken stock but an excellent company. I’m using this mini stock market crash as an opportunity to buy.

The stock market crash doesn’t mean buy everything

Although the stock market crash has led to several bargains, I also believe that some stocks have been rightfully discounted. This means that it’s important to be discerning when picking stocks, especially during such volatility.

For example, Netflix (NASDAQ: NFLX) stock has fallen around 30% over the past couple of days. This has left the stock trading at a price-to-earnings ratio of around 33 which, in comparison to many other growth stocks, does seem relatively cheap. As the shares are now at cheaper valuations than historically, this may allow the shares to recover, especially as some profit growth is still expected for the next financial year.

But I’m slightly worried about its future prospects. Indeed, in its recent Q4 update, there were major signs of slowing subscriber growth. Further, in Q1 next year, Netflix only expects around 2.5m net subscribers, well short of the 4m recruited in the same period last year. This slowing growth is due to the competition in the market, as well as the end of lockdowns around the world. As such, this slowing growth makes Netflix’s valuation hard to justify, and even despite the recent crash, it’s a stock I’m leaving on the sidelines.

Stuart Blair owns shares in Apple and SoFI Technologies. The Motley Fool UK has recommended Apple and Tesla. Views expressed on the companies mentioned in this article are those of the writer and therefore may differ from the official recommendations we make in our subscription services such as Share Advisor, Hidden Winners and Pro. Here at The Motley Fool we believe that considering a diverse range of insights makes us better investors.

Warren Buffett has outperformed the market year-on-year and is known as one of the greatest investors of all time. One of Buffett’s most famous quotes is “be fearful when others are greedy, and greedy when others are fearful”. I feel this advice can be followed when considering growth stocks at the moment. Indeed, while many such stocks soared during 2020 and the start of 2021, they have since declined rapidly. Indeed, the Nasdaq index, home to many technology stocks, has fallen around 17% from its recent highs. But as Buffett states, this may be a good time to be greedy.

Why have growth stocks fallen so significantly?

There are a few reasons why growth stocks have fallen so heavily in the past few weeks. Firstly, there have been issues over the valuations of these companies, and many believed that they were in a bubble. For example, at its peak, the Nasdaq had an average price-to-sales ratio of over 6. This was far higher than pre-Covid levels, where the average P/S ratio was just around 4.5. This demonstrated that a bubble had started to emerge, and it was always likely to burst at some point. 

Secondly, and potentially most importantly, inflation has caused havoc among growth stocks, most recently reaching over 7% in the US. High inflation has already led to the Bank of England raising interest rates, and the Fed is expected to do so multiple times throughout the year. One reason why growth stocks were able to rise so significantly during the pandemic was due to the low-interest-rate environment. This is because it was extremely cheap to borrow. Therefore, higher interest rates are a major fear among investors at the moment, and a reason why there is so much nervousness in the markets. It is also a major risk in each of the following companies that I’m buying.

What am I doing?

There is no doubt that these are extremely serious risks, and some expect that growth stocks will continue to fall. However, through following the advice of Warren Buffett, I feel that now is a good time to be greedy. This is because the recent crash has led to several discounts in quality companies, which present some great buying opportunities.

For example, the Latin American e-commerce company MercadoLibre has been growing revenues at rates of around 80% per year and is on track to reach $7bn in revenues this year. Despite this, the shares have dropped 50% over the past year to below $1,000. For me, this is an excellent company I’ll continue to buy on the dip.

Teladoc is another growth stock that seems too cheap, currently trading below $70. It has not been this price since 2019. However, since 2019, revenues have quadrupled, in part due to the boost of the pandemic. Therefore, this is another stock that seems too cheap, and I’ll continue to buy.

In terms of UK stocks, I like Darktrace, the cyber-security firm. This has recently dipped to below 400p and is near its IPO price. Even so, revenue growth for the next financial year is expected to be around 43%, and cyber-security is a growing industry. Personally, this recent price drop offers a great opportunity to buy.

Stuart Blair owns shares in Darktrace plc, MercadoLibre and Teladoc Health. The Motley Fool UK has recommended MercadoLibre and Teladoc Health. 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.

It is almost incomprehensible for the younger generation of investors that there once was a time where banking stocks were considered bastions for solid, safe and secure stock market returns.

In the decade following the financial crisis, investors fled this idea. Performance inconsistency, paired with an increase in regulatory pressures and general uncertainty, this area of financial markets has been a rollercoaster (not an enjoyable one for shareholders).

Looking at the long-term share price graphs since 2008 for both Barclays and Lloyds Banking Group, it is enough to send shivers down your spine. A sharp decline followed by over the long term, very little (if any) growth from after the crisis, with lots of volatility in between.

However, with the clear need for a change in current monetary policy due to the inflationary environment we are in, rate hikes are inevitable. Put simply, increases in the base rate of interest positively affects banks, allowing them to earn more from lending in comparison to how much they pay on deposits. This should be the single largest factor affecting the performance of banking stocks in 2022.

Headwinds

Fundamentally, this is heavily dependent on rate hikes. Despite being expected by the financial world, the extent of these raises is key to seeing moves in banking stocks’ share prices. Some individuals in the western world, such as legendary investor Bill Ackman, are advocating large raises, with others warning against potential overcorrections and the economic fallout this could cause.

If these raises do occur, especially in a short time frame, I expect to see sudden positive price changes simply due to the increased profits and consequent shareholder returns that go “hand in hand” with this.

Tailwinds

I suspect many cunning Foolish investors will have the same question. Has this all been priced in? There certainly is an argument for this. However, as is always the case when it comes to uncertainty and regulatory announcements, share prices still move with positive news no matter how expected it is. Moreover, too much variation from expectations could also prove to be harmful. Lower-than-expected rate hikes would decrease expected profits as a result the share price will follow the same trajectory. On the flip side, higher-than-expected raises — if extreme — could cause an overcorrection.

It is clear that rate hikes have to be sensible and perceived well to see the rewards for banking stocks in 2022.

Conclusion

The fundamentals of UK banking stocks are solid. In a setting of increased interest rates, I believe they will outperform the market. Despite potentially being largely priced in already, I believe there arestronger gains to come, especially given the market corrections we are seeing currently. While stocks are trading cheap in comparison to a few weeks ago, with a long-term Foolish viewpoint, I think now is the time for me to get in.

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

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These past couple of weeks have been pretty brutal for tech stock investors as this part of the stock market has seemingly crashed. The combination of fears surrounding inflation, rising interest rates, the pandemic, and now a growing geopolitical situation in Eastern Europe has culminated into a lot of uncertainty. And as many investors now know, uncertainty leads to sharp declines in share prices, especially those of tech companies that typically carry high valuations.

But with such rapid declines, have buying opportunities emerged? I certainly think so. Let’s explore two disruptive tech stocks that I believe have enormous growth potential ahead.

A disruptive tech stock taking on big data

Elastic (NYSE:ESTC) has had a fairly rough run of late. Like many stocks in the ongoing tech market crash, the share price has dropped nearly 60% since November. That brings its 12-month performance to a disappointing -51% return.

So, what does this company do? Elastic is essentially a tool for data searching and analysis. The technology has proven to be essential for countless prominent enterprises. The long client list includes Netflix, which uses it to power its show-searching feature, and Just Eat for finding restaurants near a hungry customer’s location.

Are there risks? Of course. This remains an unprofitable business making it dependent on external financing. Yet with the share price dropping so much, raising capital through equity is less of an attractive option. This means it may have to turn to debt financing to keep the lights on. The group does have $879m (£650m) of cash on its books providing plenty of liquidity for now. But obviously, this won’t last forever.

Having said that, data is quickly becoming the world’s most valuable commodity. As such, the ability to search through and analyse it, is gaining ever more importance. And in my opinion, that creates an exceptional growth opportunity for Elastic. Therefore, while the risk is high, I am considering opening a small position in my portfolio.

Another tech stock sold off in the market crash

Continuing the theme of big data, another tech stock to have caught my attention is MongoDB (NASDAQ:MDB). This company is trying to revolutionise the data management industry with its document-oriented database system.

Most databases today are built using relational tables. However, this architecture is over 50 years old and was never designed for handling enormous quantities of information. MongoDB’s solution allows data structures to evolve rapidly without performing time-consuming migrations. And since data points that are frequently used together can be stored in the same location, read & write speeds become near-instant. In layman’s terms, it’s significantly faster than legacy databases provided by industry giants like Oracle.

Of course, taking on massive enterprises isn’t a risk-free process. Switching from a relational table to a document-oriented database is an arduous task that has generated high switching costs for businesses already using the older architecture. In other words, MongoDB could struggle to expand its roster of large clients. And, in turn, its revolution could fail.

But management is fully aware of this and has since begun targeting smaller enterprises, resulting in revenues climbing by an annual average of 57% over the last five years. And with the stock market crash pushing shares down nearly 25% since the start of 2022, I think now could be an excellent buying opportunity for my portfolio.

Zaven Boyrazian has no position in any of the shares mentioned. The Motley Fool UK has recommended Elastic and MongoDB. 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 idea of receiving unearned income on a regular basis appeals to me. Investing in dividend-paying shares could be one way to make it happen. But the problem is that to buy shares I need to have money. And if I already had lots of spare money, I might not be thinking about setting up passive income streams in the first place!

I do think it is possible to start earning regular income by putting aside £45 a week. But is doing that worthwhile? Below I consider both sides of the equation.

How dividend shares generate passive income

If I invest in a company that pays dividends – such as BP or Tesco – I will receive a payment for each share I own. So the more shares I own, the bigger a payment I should receive. On top of that, if I buy dividend shares today I will be entitled to any dividends paid for as long as I own them. So I might spend money buying BP shares today and still be getting regular passive income from that move for years to come.

But dividends are never guaranteed. I would reduce my risk of a disappointing investment by diversifying across different companies. Even then, I might still find that my dividend income falls if a company performs poorly or a recession leads multiple firms to cut their payouts.

Passive income streams on £45 a week

£45 a week is a manageable enough amount that I could fund it regularly. But it is substantial enough to have a real impact in helping me hit my passive income goals. It adds up to over £2,300 each year that I could invest in dividend shares.

I would first set up some sort of account in which I could trade shares, such as a Stocks and Shares ISA. Then I would use the money I saved in it to buy shares that offered me an attractive passive income. As I would be looking for future dividend opportunities, I would focus on companies that I felt had strong future potential to generate cash. That is what funds dividends, after all.

Setting my expectations

How much income I would receive depends on the average dividend yield of the shares I bought. But say I targeted an average of 5%, which I think is an achievable aim. That could earn me around £117 of income per year in future.

If I kept putting aside £45 each week in years two, three, and beyond, my investment pile would grow. Hopefully my passive income streams would also start to get bigger as I used the funds to buy more and more dividend shares.

Is it right for me?

One interesting point here is that at first the maths might not seem attractive. If I just saved £45 in cash each week for three weeks, I would already have more than £117 cash in hand. So what is the point of saving for a whole year to generate that level of passive income?

It is the difference between having money that I spend once and is gone, compared to passive income streams that hopefully will keep generating unearned income for years to come. I find that attractive given my personal financial objective of boosting my income. I would happily use £45 a week to make that happen.

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

With the deadline for my Stocks & Shares ISA only a few months away, I’m on the prowl to find the best UK stocks to buy to potentially double my money over the long term. With that in mind, I’ve discovered one unlikely company which could have this growth potential. Let’s take a closer look at PayPoint (LSE:PAY).

A UK stock to buy with enormous hidden value?

PayPoint hasn’t exactly been much of a growth stock over the years. In fact, before the pandemic, its share price pretty much hovered around 900p for over five years, with revenue growth stagnating. As a quick reminder, this company provides payment solutions for convenience store owners. So far, this doesn’t sound like much of a growth stock. But is that all about to change?

Over the last two years, management has been rigorously modernising its strategy. The vast majority of its merchant customers are now using its PayPoint One EPoS terminal. This is essentially a glorified checkout system. But it comes equipped with a cloud platform that provides automatic inventory management, a data analysis suite, and direct access to wholesaler price lists to generate and place orders instantly.

Meanwhile, its operations in the cash-first economy of Romania have been disposed of. PayPoint then used the proceeds to make a series of bolt-on acquisitions to improve its existing technology and market reach. For example, the addition of RSM 2000 introduced mobile payment support, while the Handepay acquisition added 30,000 additional merchants into PayPoint’s ecosystem.

Looking at its latest results, its PayPoint One division saw sales surge by 58.5% versus a year ago, pushing total revenue up by 21.3%. Given its pre-disposal average growth rate was basically flat, this is quite a promising sight for the UK stock and its shareholders.

Taking a step back

As encouraging as PayPoint’s performance has been of late, there are some risks to consider. The company operates in a strict regulatory environment. And recently, it ran into a bit of trouble surrounding its relationships with gas & electric companies. Utility firms can use PayPoint’s network of merchants to allow customers to pay bills using cash. However, Ofgem filed an objection against the firm as exclusivity clauses in its contracts were deemed anti-competitive.

Management has since resolved the situation by removing the exclusivity requirements from utility companies and voluntarily paid £12.5m. However, future regulatory intervention will remain a risk for shareholders. And while this particular scenario was dealt with quickly, other situations could be a lot more disruptive and potentially damaging to the business and its reputation.

The bottom line?

So, can PayPoint double my investment? I believe this rests on whether or not management’s new strategy will be successful. At this stage, it’s too early to tell, but the initial performance seen in the last year is encouraging to me. Personally, I remain cautiously optimistic about the future growth prospects of this UK stock. And therefore, I am considering increasing my existing position in this business.

Zaven Boyrazian owns PayPoint. The Motley Fool UK has recommended PayPoint. 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.

Scottish Mortgage Investment Trust (LSE:SMT) shares have dipped recently. Let’s take a closer look and see if I should add these cheapened shares to my holdings or avoid them.

Scottish Mortgage Investment Trust shares drop from all-time highs

SMT is recognised as the largest investment trust in the UK. In simpler terms, it is a publicly traded trust that invests in stocks throughout the world in one big pot. SMT’s mantra has been to focus on stronger businesses that provide above-average returns to the trust.

As I write, shares in SMT are trading for 1,042p, whereas at this time last year, shares were trading for 20% higher at 1,306p. The shares have dropped 32% since the beginning of November from 1,543p to current levels.

When shares are trading at all-time highs, there is always the risk that any market movements or negative news can send shares tumbling. This is what I believe has happened to Scottish Mortgage Investment Trust shares recently. SMT focuses on high growth stocks and had managed to navigate itself to a respected position in the market and yielded impressive returns. I believe recent interest rate rises and inflation has led to many investors moving away from high growth stocks and towards value or defensive stocks. This has hurt the individual stocks themselves, and trusts like SMT.

Outlook ahead and risks

Fund managers Tom Slater and James Anderson have led SMT to new highs and excellent returns over the past decade or so. The SMT share price has been affected by Anderson’s fast approaching departure, on 30 April. Slater is staying on and I believe he will be able to navigate current headwinds.

Many investors may believe the duo’s combined efforts are why Scottish Mortgage Investment Trust has succeeded and provided excellent returns over the past 10 years. I believe under Slater’s guidance alone, the trust will continue to excel and provide positive returns over the long term.

I review past performance as a gauge when determining investment viability. Past performance is not a guarantee of the future, however. But, with SMT, it is hard to ignore such an impressive track record. The Scottish Mortgage Investment Trust share price is up over 200% in the past five years. The fund has returned over 12% annually over the same period too. More specifically, SMT consistently purchased shares in excellent picks that yielded above-average market returns. 

The current macroeconomic outlook with rising interest rates and inflation could still hamper SMT shares in the short to medium term. Those at the top will need to change tack and look at different options as growth stocks seem to be out of favour right now.

My verdict

Despite the falling Scottish Mortgage Investment Trust share price, I would happily add shares to my holdings. The recent blip is a consequence of market movements out of SMT’s control as well as a change in the leadership structure. I believe the fund will continue to provide excellent returns to investors and its share price will also head upwards once more. Historic performance and the new sole leadership support my position that SMT is a buy for my portfolio.

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