As a long-term investor, I often ask myself where I think a stock will be in 10 years. Historically, the BP (LSE:BP) share price hasn’t had the most remarkable run, as I’ve previously explored. But can management change all that moving forward? Let’s explore the bull and bear case for this business and whether I should be considering it for my portfolio.

The bullish view on BP’s share price

Today, BP is still very much a business that generates its income through the extraction, refinement, and sale of oil. That’s not exactly great news for the environment. But the recent surge in oil prices has turned the company into what CEO Bernard Looney, calls a “cash machine”. And it’s a key trait I like to see when evaluating long-term performance capabilities.

As extracting oil from the ground is largely a fixed-cost operation, the rising prices have worked wonders on BP’s profit margins. And consequently, analyst forecasts are estimating net income for 2021 will come in at $12.5bn (£9.23bn) versus $4bn (£2.9bn) in 2019.

What’s more, with the world slowly shifting away from its reliance on fossil fuels, BP has been aggressively investing in a renewable energy portfolio. The plan is to transition the business into a 50GW green energy powerhouse, with 40% of its oil & gas portfolio eliminated by 2030. That’s enough to power roughly 15m homes or around 60% of all UK households.

This is quite an exciting proposal. And if successful, it could send the BP share price to new heights.

Taking a step back

As compelling as BP’s future potential might be. I have some reservations. While the cost of installing and maintaining renewable energy technology is falling each year, the profit margins remain relatively tight compared to oil. Even more so when oil prices are trading above $80 a barrel. In other words, while revenues could surge, profits could actually suffer in the long term because of these increased costs.

But the short and medium-term performance of BP’s margins is also at risk. Like I said before, oil companies have fixed operational costs. That places them at the mercy of fluctuating oil prices, which could take a tumble before BP can complete its transition. Besides profits taking a hit, this may also disrupt management’s strategy. Why? Because the plan is to dispose of oil assets to cover the costs of going green. But if the price of oil drops, these assets will undoubtedly lose a significant chunk of value. Needless to say, that would be bad news for BP’s share price.

The bottom line

All things considered, I remain cautiously optimistic about this firm’s future. There is no shortage of challenges for management to overcome. But suppose the company can fulfil its green energy ambitions. In that case, the BP share price could be trading at a much higher valuation by 2030. Therefore, I am tempted to add some shares to my portfolio today.

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

There is no denying that Tesla (NASDAQ: TSLA) is one of the most popular stocks around. It routinely appears among the most traded stocks in the UK. But I think it is worth asking if the party might be slowing down for the electric vehicle (EV) stock now. 

Tesla stock price performance

Consider this. It is down some 6.5% in the past month as I write this Monday afternoon. And its performance over the past year it is not too impressive either. The stock rose only 11% or so. Of course this point-to-point comparison obscures the fact that at one time during the past year, the stock rallied significantly. But it did fall fast too.

Steep valuations

I think it could continue falling, in fact. When I last wrote about the stock, admittedly a while ago in April last year, it had a price-to-earnings (P/E) ratio of an unbelievable 1,187 times. While P/E is not the only factor to consider when buying a stock, this was one of the deterrents for me when contemplating buying Tesla. 

The stock’s tepid share price growth over the past year is also a sign that the Tesla share price had risen a bit too much since the November 2020 stock market rally. Interestingly, the company’s earnings have been robust in the meantime. In the third quarter of 2021, the latest period for which numbers are available, its net income rose by 4.5 times from the same time the year before. Optimism about the stock, it appears, is not rising with better performance or with the bettering prospects of EVs. In fact, its P/E has declined to a far lower 323 times.

Peers priced competitively

But even this is very high compared to the market valuations of its competitors. For instance, companies like General Motors and Ford Motor Company are committed to growing their EV presence. Unlike Tesla however, they are trading at P/Es of 7 times and 30 times, respectively. Of course their product profiles are different, which explains some of the difference in valuations. I cannot look away from the fact that they are strong brands that could give Tesla stiff competition in the near future, however. 

If Tesla’s earnings ratio were to come-off closer to that of Ford, that would mean that its share price would have to fall 10 times from here! This sounds impossible, but I assure you it is not. In January 2020, before the pandemic started, it was exactly at these levels. The EV rally really only started a little over a year ago. 

What I’d do

Just based on these numbers, I am still quite convinced that Tesla shares are not for me as long-term investor right now. Its earnings report is expected to show bettering performance, but if its stock rallies then I reckon it would be only for a short time. I am just staying away from it. 

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

Key points

• Buffett’s principles have led me to BAE Systems
• A stock with solid earnings and revenue
• Expanding its US operations

After reading about Warren Buffett’s principles, I took that knowledge and applied it to my own investing. I bought Molten Ventures, a tech-focused venture capital firm, in 2020 and sold it for double the price one year later. I need no convincing that Buffett’s methods work. Now I’ve found a long-term growth stock, BAE Systems (LSE:BA) to buy in the FTSE 100.

Excellent earnings, remarkable revenue

Buffett first inspires me to look at basic company data, like revenue. From the years ending 31 December 2016 to 2020, the growth experienced by BAE Systems has been nothing short of sensational. I don’t mean this in the sense of a 10 times share price increase, or annual compounding growth of 50%. No, BAE Systems is sensational because it produces solid results year in, year out.

This stock has managed to increase its revenue by 5% for the calendar year 2020. I am impressed with this figure because it shows steady growth during the first year of the pandemic. For context, another stock engaged in defence contracts, Babcock, suffered a slight fall in revenue.

As a defence and aerospace business, the company has five distinct segments. These are mainly centred in the US and UK, but there are other operations in Europe, Scandinavia, and the Middle East.

What’s more, BAE Systems boasts exceptional earnings-per-share (EPS) growth. Warren Buffett is particularly keen on this data, because it shows how well or otherwise the stock is earning for its shareholders. This figure has increased to 46.8 in 2020 from 40.3 in 2016. Buffett would use these numbers to calculate compounding annual growth rates. In this case, BAE Systems EPS compounding growth is 3%. While this may not seem exciting, it tells me that this is a stock that delivers solid results year in, year out. On Buffett’s principles, this would be an excellent choice for my portfolio.

Dividends vs. retained earnings

Over the last five calendar years, BAE Systems has been consistent with its dividend cover. This usually stands at about 1.9p per share, except a bumper year in 2019. The yield has naturally moved around from 1.7% to 7.7% depending on share price.  

This stock uses whatever profits it retains to expand. Warren Buffett has consistently mentioned retained earnings over the years and it is something I try to factor into my investment decisions.  In November 2021, for instance, it bought Bohemia Interactive Simulations. This is a military simulation training and software company whose largest customer is the US military. JP Morgan has recently downgraded BAE Systems, however, because it is exposed to the US market. JP Morgan has recently said that this market is “now in a slowdown”. For me, though, the purchase of Bohemia will not only increase the company’s presence in the US, but it shows me that the management is constantly focused on putting earnings to work.

Buffett’s principles have guided me to success before. If I find a company with solid compounding growth and increasing revenue, then I will add it to my own portfolio. BAE Systems is no exception and I will by buying straightaway.   

Andrew Woods has no position in any of the shares mentioned. JPMorgan Chase 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.

Some economists and market commentators believe we could be headed for a stock market crash in 2022. With that in mind, I am putting together a list of stocks I would consider for my holdings, just in case.

Fintech stock

Wise (LSE:WISE) is a London-based fintech firm. It offers international money transfer services. As somebody who uses such services frequently, I look for the quickest and cheapest options. Wise claims to have one of the quickest and cheapest options on the market. It has strategic agreements in place to be able process these transactions, helping it to garner over 10m users to date.

Wise shares are currently trading for 590p. The shares listed to the FTSE last summer at a starting price of 880p, which means shares are down 32%. The shares could fall further in the event of a stock market crash.

From a risk perspective, some consider the shares to be expensive at current levels. In fact, analysts at CitiGroup have rated the shares a ‘sell’ recently. They are concerned by the valuation and believe revenue would need to grow by 20% year on year for eight years to achieve the valuation. Furthermore, the strategic partnerships I mentioned earlier could cease, leaving Wise without its unique selling point of faster, quick services to its customers.

If there a market crash does occur in 2022, I believe Wise could be an excellent growth option for my holdings for a few reasons. Firstly, the global market for payment services is growing rapidly. Next, Wise has a decent track record of performance to date, although I do understand past performance is not a guarantee of the future. Third, Wise’s customer-centric business model is set up for it to grow its customer base and continue to stay quick and cheap. It is continually reducing fees for each transaction its customers complete, even as the business grows. This should inspire customer loyalty and with growing customer numbers, the signs are it will. 

If there were a crash, Wise shares would drop substantially, which could affect the current high valuation concerns. In terms of progress, Wise’s business model, partnerships, and track record indicate it could grow exponentially over the long term. In turn, this could offer me a lucrative return as a potential investor.

Stock market crash 2022?

Macroeconomic factors at play right now have led many to believe a crash could occur. Soaring inflation is a concern for many in the world economy. The rise of consumer prices is affecting some of the premier economies in the world, such as the US and China. It is worth noting that soaring inflation has triggered stock market crashes in the past. Speaking of China, recent growth there has slowed and it is in the midst of a real estate crisis. When the Chinese economy struggles, many economists are worried for the rest of the world’s economy too. It is worth noting that nobody could truly predict a stock market crash. All of the above points mentioned could cause a crash but are nothing but speculation and conjecture right now.

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.

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After Netflix (NASDAQ: NFLX) released its results last week, its share price plunged. It is now at levels not seen since mid-2020, when it had just started inching up as we went into lockdowns. As a potential investor in the stock, I can either see the decline as a buying opportunity or a reason to stay away. The big question for me is, which one is it? 

Netflix’s stellar 2021

To answer it, I first tried to figure out why the stock fell so drastically in the first place. The streaming service starts out the earnings release by talking about its achievements in 2021. These include producing the biggest TV show of the year, which is (surprisingly for me as a viewer) Squid Game. It also produced two of its biggest films, Red Notice and Don’t Look Up. It also says it is the most Emmy-winning TV network and the most Oscar-nominated film studio in 2021. 

The list of Netflix glory does not end there. In the final quarter of 2021, the company’s revenues grew by 16% on a year-on-year basis, just a little below the 19% growth for the year as a whole. It also grew its profits in the final quarter. The number of paid memberships has also continued to rise, reflecting its continued popularity. It is also optimistic about its long-term prospects, “even in a world of uncertainty and increasing competition” it says.

What’s wrong with the earnings update?

So what is the problem? It’s near-term outlook, that’s what. Its revenues are expected to continue growing, but the rate of growth is consistently slowing down. In the first quarter of 2022, it is expected to slow down to 10.3%, almost half the growth seen in 2021. Significantly, its earnings are actually expected to decline next quarter compared to the corresponding quarter of 2021. 

It is not hard to see why, really. There is a lot more competition in the streaming space. Post-lockdowns, there might just be far less time spent watching streaming services. I know from my own experience, that my recent Netflix watches have been restricted to a sporadic episode or two of Parks and Recreation. There is just so much more competing for time and attention now. The appreciation in the US dollar is also expected to impact its revenue by $1bn in the next year, since the company also has a big market outside the US. This, I imagine would also affect its earnings. 

Would I buy the stock?

Despite the fact that the winds seem to have turned against the Netflix stock, I don’t think it is a write-off. In fact, I think the stock looks far more attractive to me now after its share price fall. I do think that more stock price correction might be coming, before it rises more. I would ideally buy it then. For now I am observing its share price movements but am quite likely to buy the stock this year, especially when I consider its long-term share price trend. 

Manika Premsingh 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.

With its large customer base and iconic brand, aeronautical engineer Rolls-Royce (LSE: RR) is a well-known name in the FTSE 100 index of leading shares. Despite that, the Rolls-Royce yield is zero.

Below I explain why that is — and whether Rolls-Royce might offer me a more attractive dividend yield in future.

Dividend history

The company has paid dividends to shareholders in the past. For its 2018 year, it paid 11.7p per share in dividends. That was flat – the company had paid the same the previous year.

If the company was to pay 11.7p per share in dividends at the current share price, that would make for a yield of 10%. That certainly sounds attractive to me. But that will not be happening any time soon. The company cancelled its final dividend for 2019 (that was scheduled for payment in 2020). It has not paid out since.

Why Rolls-Royce stopped its dividend payment

The company suspended its dividend after the business went into a tailspin. A key part of the Rolls-Royce business is selling and servicing engines for commercial aircraft. When the pandemic hurt demand for flying, that business saw revenues plunge. The company introduced a programme of cost cuts. But until aviation demand gets close to its old levels, I expect profits will remain sharply lower than before.

On top of that, to shore up its liquidity during the downturn, the engineer borrowed money. As part of the loan terms, Rolls-Royce is restricted from declaring or paying dividends to shareholders until the end of this year at the earliest. Those restrictions are due to change next year. But even then, the company will need to meet certain conditions before paying any dividends.

Where next for the Rolls-Royce yield

So there will definitely not be a dividend in 2022. What about next year?

In principle, the company may return to paying dividends if it meets its debt conditions and business results allow for a payout. From a positive perspective, the company’s business is showing strong signs of operational improvement as well as demand recovery. It has hit its target of returning to positive free cash flow. If it can sustain that, Rolls-Royce will reduce the risk that liquidity concerns force it to dilute shareholders in a rights issue, as it did in 2020. I also think resuming the dividend would be a sign of confidence, even if it were to begin at a token level far below the former dividend.

More bearishly, though, the business case for restoring the dividend in the next few years looks weak to me. The company has been through a painful period of cost cutting. Its finances right now are geared more towards short-term survival than medium-term growth. Civil aviation demand remains lower than it was before the pandemic. That could be the case for some years to come. Shifting rules may put many passengers off committing to travel plans. Even when the business does start to perform strongly again, its priority could be restoring its balance sheet. That may mean paying creditors and building up a cash reserve, not necessarily funding dividends. From an income perspective, I am not tempted to add the zero-yielding Rolls-Royce to my portfolio any time soon.

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.

One of the ways investor Warren Buffett has grown his fortune is by being clear about the difference between price and value. Price is what one pays, but value is what one gets.

So when Buffett talks about shares being cheap, he is not referring only to their price. Instead, he is looking at what they cost and then comparing it to how much value he thinks they may generate in future. As a private investor, I see that as a lesson I can apply to my own portfolio.

Hunting for value

How does Buffett try to judge the future value a share may generate? It is an imprecise science. But basically he estimates what free cash flows a company can generate in future, per share. It is easier to create such cash flows in the long-term if a company has unique assets that allow it to charge a premium price. For example, it may have a proprietary product formula like Coca-Cola or an entrenched customer base like National Grid.

Future cash flows also rely on future demand. There is little point in a company having a unique edge in an industry that is about to become extinct. That also can be hard to assess, especially with the fast pace of technological development. Buffett reckons some goods or services will remain in demand no matter what happens. For example, people will still need to buy food. They will still need healthcare.

Warren Buffett pays close attention to such enduring industries. He also applies another principle when trying to select shares that have long-term potential. He only invests in businesses he understands. By staying inside his ‘circle of competence’, the Sage of Omaha reckons he is better able to judge what the future prospects may be for a company. I can apply the same approach no matter how small my portfolio is.

After considering a company’s possible future free cash flows, Buffett looks at its share price. The lower it is compared to a company’s future cash flows, the more interested he is likely to be. Estimating those cash flows in detail can be difficult. So Buffett pays close attention to business assets he thinks might help generate lots of cash, such as iconic brands or distribution networks a competitor would struggle to match.

Looking for cheap UK shares

I think this method can help me identify cheap UK shares like the US ones that form most of Buffett’s portfolio. That is because the underlying principles are basically the same on both sides of the pond. Drivers of long-term value such as an iconic brand or unique technology are relevant to business success in the UK as much as the US. The gap between a company’s likely future free cash flows and its current price can help me identify value in either market.

Applying the Buffett approach, I would consider adding three UK companies to my portfolio. Given their future earnings growth potential, they look cheap to me right now.

Unilever

Buffett actually made a bid for Unilever (LSE: ULVR) a few years ago, although his approach was unsuccessful. Today I can pick up Unilever shares at a lower price than Buffett offered.

The underwhelming performance of the Unilever share price in recent years reflects some challenges that continue to threaten the business. For example, cost inflation may lead to profit margins being squeezed. Consumers tightening their belts in struggling economies could cut demand for Unilever’s premium brands like Dove.

But I think such brands are also a source of long-term competitive advantage. That could help Unilever continue to produce strong cash flows for decades to come. Buffett is a big fan of premium consumer brands. Unilever owns a portfolio that it would be almost impossible for a competitor to replicate from scratch. They are used by billions of people daily. That is why I have taken advantage of recent share price weakness to add the company to my portfolio.

Victrex

Another example of a company with the sort of competitive advantage or ‘moat’ that Warren Buffett likes is Victrex (LSE: VCT). The industrial firm supplies business customers with polymers. These are used in a range of applications, including in cars and planes.

Victrex has its own product technology. That gives it a unique place in its market. The products are used in situations where safety is critical. That allows Victrex to charge premium prices, helping to support profits.

This all adds up to an attractive business model in my view. But there are risks too. Victrex has a concentrated manufacturing footprint. So any unexpected shutdown at its main factory could seriously reduce revenues and profits. Like Buffett, I try to reduce my risks by diversifying across different companies. I would therefore happily add Victrex to my portfolio, alongside other companies.

Judges Scientific

A company that reminds me of Buffett’s own Berkshire Hathaway is Judges Scientific (LSE: JDG). Judges does not have a wide spread of businesses like Berkshire. But it uses a similar business model in which a small central office buys subsidiaries and allocates capital between them. That helps to keep overheads low. But the company’s focus on the scientific instrument market means it can charge premium prices. Similarly to Victrex, catering to applications where quality is crucial means that customers are willing to pay high prices.

This is a lucrative business. Judges has delivered double-digit percentage dividend increases in recent years. One concern I have is the low barriers to entry in building a copycat business. A competitor attracted by Judges’ profit margins could aim to build a similar holding company by bidding for the sorts of assets Judges has been targeting. If that happened, it could push up acquisition costs and harm margins.

Judges’ management has proven the potential of its business model so far. Given Judges’ strong growth prospects, I see the shares as offering value. I would consider adding them to my portfolio.

Christopher Ruane owns shares in Unilever. The Motley Fool UK has recommended Judges Scientific, Unilever, and Victrex. 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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As investors have started to mark down the price of many tech shares, it is little surprise to me that Argo Blockchain (LSE: ARB) has seen its shares tumble. Indeed, after falling 20% in today’s trading session, at the time of writing this article, the Argo Blockchain share price is 27% lower than a year ago.

Is this a buying opportunity for my portfolio? Or could it simply be a sign of worse things to come for Argo shareholders?

Crypto exposure

The company operates data centres, which are focussed on mining cryptocurrencies like Bitcoin. It also mines crypto itself. I think most of the investor enthusiasm about Argo over the past couple of years has centred on its own crypto mining efforts rather than the business potential of leasing space in its data centres to other users. I reckon the data centres could provide helpful revenue streams, though. That does not necessarily rely on them being used just to mine crypto. Data centre demand in general has seen strong growth in recent years and I expect that to continue.

Crypto pricing has been highly volatile recently. I also expect that to remain the case. As investors have worried about falls in crypto pricing, those concerns have hurt the Argo investment case. Its own mining operation and crypto assets are affected by crypto valuations. As Bitcoin pricing slides, the Argo share price will likely follow.

Growth costs

On top of that, Argo has been investing to scale its business. It is constructing a big new data centre in Texas. The growth plans have added costs to the business and Argo has issued debt to help fund them. There is also a risk that to raise more money in future, the company will issue more shares. That could dilute existing shareholdings.

The financial case for expansion hinges on crypto pricing. If crypto values crash, the data centre could turn out to be an expensive white elephant. On the other hand, if prices recover or improve, the data centre might help Argo scale its business profitably.

Political risks

Yet another factor weighing on the Argo share price is the growing number of countries banning crypto mining. If that leads to price falls, I see it as bad for Argo.

But I think it could also be an opportunity. If the US allows mining to continue while some other countries ban it, the Texas facility could prove to be a competitive advantage for Argo.

My next move on the Argo Blockchain share price

The sheer variety of risks that are weighing on miners including Argo indicate the risky nature of investing in Argo.

Risks can sometimes bring opportunities and indeed reward. I think the Texas facility could help boost the company’s mining output. Depending on crypto pricing, that could help its future profitability. I also like the company’s expertise in data centre business, which as a business model I do not think relies solely on crypto pricing.

But the quickly shifting political risks involved mean I am wary of buying more Argo shares, even after the recent price falls. Argo shares are being strongly affected by the price volatility of crypto, over which the company has no control. For now, I plan to keep holding my Argo shares — but not to increase my position.

Christopher Ruane owns shares in Argo Blockchain. 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.