I’m a big fan of investment trusts — companies that invest their own money. In my view, they’re a great way to get an instant, diversified portfolio on a limited budget. I also find trusts useful for getting exposure to sectors such as private equity, where I can’t invest directly.

Beating the market

The investment trust I’m going to look at today was listed on the stock market in 1924. Today it’s a member of the FTSE 250. Shares in this trust have risen by 144% over the last 10 years, compared to 93% for the FTSE 250 and just 30% for the FTSE 100.

The trust in question is Witan Investment Trust (LSE: WTAN). This stock has been one of the most popular buys among Hargreaves Lansdown investors over the last week — and I think they could be right.

Investing in everything

Witan has a long record of beating the market with its multi-manager strategy. Essentially, the trust owns a mix of individual stocks and funds to provide a broad range of exposure that includes private equity, renewables, tech, and consumer goods.

The trust’s top holdings include the GMO Climate Change Fund, Unilever, Google owner Alphabet, and the Apax Global Alpha private equity fund. In addition to growth, Witan’s portfolio also delivers useful dividends, with a current yield of around 2.2%.

Witan’s strategy is designed to create a diversified, global portfolio that can deliver market-beating growth. Although past performance is no guide to future results, this approach does seem to have worked well for many years.

A safe approach?

I can see a few potential downsides to this strategy. Multi-manager funds often carry higher fees than single manager funds, due to all the external management fees they must pay.

That seems to be the case here. Witan charges around 1.7% per year. This compares to a charge of just 0.63% per year at Scottish Mortgage Investment Trust, one of the UK’s top-performing trusts in recent years.

However, Witan’s strong long-term performance means that its higher fees would not stop me investing.

Witan: the ideal investment trust?

I’m wondering if Witan could be the ideal investment trust for my portfolio. Owning a mix of global growth and income investments has helped the trust beat the market and support a dividend that’s risen for 46 years.

Witan’s share price has fallen by around 6% so far this year. This reflects the market sell-off that’s hit many growth stocks. The shares are now up by just 3% from one year ago and are trading below their book value of 258p.

I’m not sure the current market sell-off has finished just yet. But as a long-term investor I don’t try to time short-term movements. I prefer to have my money invested in quality stocks that I can leave untouched for many years.

For me, I think Witan shares are starting to look reasonably priced. I think there’s a good chance the trust’s strong performance will continue, thanks to its consistent long-term strategy.

For these reasons, I’d be quite comfortable adding Witan shares to my portfolio today, as a long-term hold.

Suzanne Frey, an executive at Alphabet, is a member of The Motley Fool’s board of directors. Roland Head owns Unilever. The Motley Fool UK has recommended Alphabet (A shares), Hargreaves Lansdown, and Unilever. 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 are two stocks in the FTSE 100 that look to me to be some of the top recovery plays on the market. IAG (LSE: IAG) and Rolls-Royce (LSE: RR) both present different ways to invest in the recovery of the global aviation sector. 

However, I think one of these businesses has more potential as a recovery investment than the other. 

IAG share price plunge 

When the coronavirus pandemic began, the travel industry was one of the first sectors to go into lockdown. Two years on, the industry is still a shell of its former self. Even the most optimistic analysts do not believe that sales will return to 2019 levels until the middle of the next decade across the industry. 

As the travel industry ground to a halt, both IAG and Rolls had to pull out all of the stops to try and survive. At the height of the crisis, some analysts speculated that these businesses would never make it out alive. 

The industry has now passed the worst of the crisis, although there will always be the chance that a more deadly variant will emerge. Over the past two years, these two companies have been busy raising money and slashing costs to keep the lights on. Now they are out of intensive care, they can focus on the recovery. 

Rolls-Royce share price recovery 

IAG has seen a significant improvement in sales over the past six months. Consumers seem happy to travel again, and the removal of travel restrictions makes it easier to move around the world. The owner of British Airways is trying to capitalise on this rising demand for travel with sales and more seats on the most popular routes. 

A growing order backlog for new aircraft is a strong sign that the aviation industry is recovering.

It is also a strong sign that the outlook for Rolls, one of the leading manufacturers of engines for the civil aviation industry, is improving. Most of the company’s income is derived from service contracts attached to the engines it sells to aircraft manufacturers, and these contracts are linked to the number of flying hours each machine completes.

So, with more aircraft back in the sky, and more planes on delivery, it seems as if the group is well on the way to recovery. However, challenges such as rising costs and a lack of skilled engineers could hurt the organisation’s growth. 

Still, considering the fact that the firm is a supplier to the whole industry and owns a lot of valuable technology, I would rather buy Rolls than IAG. The latter has to compete with other companies which are all competing for travellers’ business. The engineer has its own niche in the market. As long as the aviation industry recovers, its top and bottom lines should as well.

Rolls-Royce also supplies valuable nuclear technology to the Royal Navy. This provides a defensive, fixed revenue stream for the group. 

As such, I believe the Rolls-Royce share price has a much better outlook than the IAG share price over the next five to 10 years. 

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

Persimmon’s (LSE: PSN) share price has fallen sharply since the beginning of the year. Confidence in the FTSE 100 housebuilder has sunk amid signs of a cooling UK homes market. On top of this, concerns over severe interest rate rises have grown as inflation readings have sailed above expectations.

So any action by the Bank of England could have large consequences on homebuyer affordability.

These threats need to be taken seriously. But I think it could be argued that these risks are reflected in Persimmon’s share price. As I write, the firm trades at £25.75 per share, resulting in a forward P/E ratio of 9.9 times.

What really grabs my attention though is the 9.4% dividend yield currently available to investors.

UK share investors like me need to think about more than just yield when looking for dividend stocks to buy. A high yield is sometimes the clearest sign that a company is a dividend trap. Other considerations include poor liquidity, high debt levels and a patchy profits outlook.

I don’t think any of these dangers apply in the case of Persimmon. I think it’s one of the best FTSE 100 dividend stocks to buy right now.

Another strong trading update

Last week, Persimmon told the market that it faces “some nearer term uncertainties remain” as the pandemic rolls on. But on the whole, its mid-January trading update reinforced my belief that the builder can meet the City’s dividend expectations. A 241p per share payout is currently anticipated for 2022, up from the 235p reward shelled out last year.

Persimmon said forward sales as of 31 December were up 20% from 2019 levels, at £1.62bn. They were also roughly in line with those recorded at the end of 2020. The builder also made encouraging comments regarding the state of its balance sheet.

It had £1.25bn worth of cash on the books at the turn of 2022, up fractionally from a year earlier. Persimmon also had a £300m undrawn credit facility going into the new year. I’m confident the company has the liquidity to continue paying big dividends, even if the market experiences some near-term softening.

Hiking construction rates to boost shareholder returns

Persimmon is taking steps to keep delivering big cash rewards to shareholders by hiking production rates too. The FTSE 100 business grew completions by 7% year-on-year in 2021 and has targeted further growth in the years ahead. Indeed, it shelled out £460m last year to add an extra 20,500 plots to its land bank to make its plans a reality.

I’m personally backing Persimmon to continue growing earnings and dividends long after 2022. The supply of new property in the UK looks set to continue lagging demand by a long chalk, a combination of faltering government plans to build its way out of the crisis and the probability that interest rates will remain way below their historical norms. This means the prices that Persimmon and its peers can ask for its properties should continue climbing.

Royston Wild 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.

Whenever I have covered the Scottish Mortgage Investment Trust (LSE: SMT), I have consistently concluded I would be happy to add the stock to my portfolio.

But have I made a huge mistake? Is buying this trust for my portfolio one of the worst financial decisions I could make?

Analysing the potential

Shares in the trust have been under pressure recently. The stock is falling as the value of its underlying holdings is also sliding.

Investors are reducing their exposure to high-growth stocks this year. There is no clear reason why investors are moving away from growth stocks and buying value. Although it is generally accepted that rising interest rates are to blame, there is also a strong argument to be made that many of the companies under pressure had stretched valuations. 

The Scottish Mortgage Investment Trust has benefited significantly over the past couple of years from its exposure to high-growth equities, such as Tesla. However, as the rotation away from these companies continues, I do not think it is unreasonable to suggest shares in the investment trust could continue to decline. 

The question is, has the establishment picked good companies? Or has it just picked firms that looked good because the shares were going up?

Warren Buffett once said that it is only when markets decline that we find out who has been “swimming naked“. We will only find out if a great team really manages the Scottish Mortgage Investment Trust over the next couple of years. If the organisation has selected the right companies, the value of its portfolio should expand as these businesses grow. 

If it has not, the portfolio’s value could continue to decline. 

SMT outlook 

Trusting managers to pick the right stocks is the most considerable risk of using trusts to invest. Still, while past performance should never be used to guide you to potential, I think the trust’s track record does indicate that it has the skills required to find the market’s best businesses. 

Indeed, over the past decade or so, the trust, which Baillie Gifford manages, has curated a strong pipeline of new ideas and information. It can use these resources to find new investments and test old ideas. 

Thanks to this experience and skill set, I think it is unlikely the enterprise will have been buying stocks just because everyone else has. It is more likely the business has taken a slow and steady approach in finding the best companies. 

As such, I am still happy to buy the stock for my portfolio today. The shares may remain under pressure in the short term. Nevertheless, I think some of the investments in the portfolio should start to yield results over the next decade. 

Rupert Hargreaves 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.

So far in 2022, a number of UK shares have been performing strongly. But there has not been consistent progress across the market. This week I added a well-known FTSE 100 share into my S&S ISA because I think recent price weakness offered me an attractive entry point.

FTSE 100 blue chip

The UK share in question is Unilever (LSE: ULVR), the maker of products such as Dove and Surf. It has been a tumultuous week for the company. It was already dealing with comments by well-known fund manager Terry Smith suggesting its ESG focus could hurt financial performance. It then emerged that the company had made an unsuccessful bid for the consumer goods unit of GlaxoSmithKline. That fizzled out. Mr. Smith stuck the boot in, describing the failed offer as a “near death experience”.

What is going on at Unilever? The GSK bid seems to have been poorly managed. It also feels like the company was trying to buy growth rather than working to improve growth prospects in its own sizeable portfolio of businesses. The GlaxoSmithKline bid has made me further question the quality of Unilever’s current management.

UK share on sale

Despite that, I think the company’s great collection of brands will be able to drive long-term shareholder value. They help give the company premium pricing power, which can support profit margins even in inflationary times.

On top of that, I actually reckon Unilever’s ESG focus could help it. There is a risk it could add on costs without helping sales. But many of the company’s brands target ethically conscious consumers. I see a business case underpinning the company’s green moves.

The Unilever share price has been pummelled. It now sits 16% lower than it did a year ago.

But I do not think the outlook for Unilever is 16% worse than a year ago. I see value in the company. That is why I bought it in my ISA this week.

Growth drivers for the Unilever share price

The failed bid is just one part of the overall mergers and acquisitions picture at Unilever. In November, it agreed to sell its large tea business. The strategy seems to be to refocus its portfolio on higher margin consumer goods businesses. I think that makes sense from a business perspective.

The company’s global footprint means it is well placed to benefit from growing demand in emerging markets. Underlying sales in the first nine months of Unilever’s current financial year grew 4.4%.

In the recent third quarter, volume actually declined by 1.5% but a 4.1% pricing increase meant that total sales grew in value. That is exactly the sort of pricing power I mentioned above. I think it is especially useful right now as one of the key risks I see to Unilever is cost price inflation. That could hurt profits. But if the company passes cost increases on to consumers in the form of higher prices, that could help reduce the risk.

Meanwhile, after the recent price fall, the shares now yield 4%. I regard that as attractive for a FTSE 100 consumer goods company of this size.

I am looking forward to the prospect of future passive income from Unilever. But I am also hopeful that the Unilever share price could increase if the business performs well and sales keep growing.

Christopher Ruane owns shares in Unilever. The Motley Fool UK has recommended GlaxoSmithKline and Unilever. 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.

No one offers sage wisdom like Warren Buffett now, do they? The Oracle of Omaha has not just been a hugely successful investor but has also shared great insights on money over the years. Like this one: “If you don’t find a way to make money while you sleep, you will work until you die.” It hits home for me particularly when I think in terms of retirement planning. If I do not plan for it, I would have to work far longer than I wish to in order to keep my income going. 

Making money through stock market investments

Keeping this in mind, I am now finding ways to make money while I sleep, to say it in Buffett’s words. Investing is one of the key ways of doing so. Whether it is investing in real estate or bonds or stocks, my goal is to make money from money. For me, stock-market investing has long been a profitable way of investing. So I am sticking with it. 

Growth stocks to grow my capital

There are essentially two ways of making money through investing in the stock markets. One of them is through growth in my capital. I have to choose stocks carefully, though. There are plenty of stocks that have languished for years and could do so in the future as well.

So, I like to buy FTSE 100 and FTSE 250 stocks. Many of them have given solid returns over the years and could continue to do so in the future as well. I have made an odd investment or two in speculative stocks, but typically these are small investments. And I am certainly not depending on them to provide security of any kind now or in the future. I am, however, looking forward to growing my capital through the other stocks I hold, which have been far more predictable in the past. 

Passive income is another option

Many of these FTSE 100 and FTSE 250 stocks also double up as lucrative passive income stocks. This means I get an opportunity not just to grow my capital but also dividends from them. If I can plough back these dividends back into my investments, it is even better. It makes for a virtuous cycle. I first invest my initial capital, which earns me a return, and it then gets reinvested to potentially earn me even bigger returns. 

Parting Warren Buffett quote

Needless to say, there is always a risk that my investments could occasionally look like bad decisions. Like, for instance, during the stock market crash of 2020. For some time, the value of my investments was much lower than my initial invested capital. But such phases typically do not last, as we have seen. So, if anything, these are often times to make more investments, not shy away from them. To end with another of Warren Buffett’s quotes “Opportunities come infrequently. When it rains gold, put out the bucket, not the thimble”. 

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.

After the bull market of 2020-21, the top for tech stocks may already have been and gone. The S&P 500 just had its worst week in a year, losing 8.7% since its 4 January peak. Meanwhile, the Nasdaq has dived 15.1% since its record high on 22 November. Thus, it’s been a bad start to 2022 for US stocks in general and tech stocks in particular. But a few stocks have taken a truly savage beating since October. One of these ‘post-Halloween horrors’ has been Netflix (NASDAQ: NFLX) stock, which has plunged spectacularly since November.

NFLX exploded from 2012-2021

Go-go growth stock Netflix has generated outstanding gains over a decade. Ten years ago, shares in the video-streaming provider closed at $14.32 on 20 January 2012. Five years later, NFLX had surged to close at $138.60 on 20 January 2017. That’s a mammoth gain of 867.9% in 60 months. Yet Netflix stock kept soaring, hitting an all-time high of $700.99 on 17 November 2021. That’s almost 50 times the closing price on 20 January 2012, under 10 years earlier. Indeed, had I bought $1,000 of Netflix shares at $14.32 on 20 January 2012 and sold at 2021’s peak, I’d have over $48,950. Wow.

Netflix stock gets a nasty knock

However, Netflix stock has been knocked back since November. This followed news that the Federal Reserve — the US central bank — will tighten monetary policy more rapidly than previously indicated. The Fed also expects to raise interest rates three or four times in 2022. With liquidity set to fall and interest rates set to rise, this spooked tech investors. Hence, a wave of selling in the past three months has driven down tech stocks. At the end of 2021, Netflix closed at $602.44, down almost $100 from its November peak.

On Thursday evening, Netflix unveiled its fourth-quarter earnings report. This revealed slowing subscriber growth. The group added 8.3m net subscribers in Q4, versus a forecast 8.5m. What’s more, Netflix expects to recruit only 2.5m paid net subscribers in Q1 2022 — well short of the 4m recruited in Q1 2021. As a highly rated growth stock, Netflix has to keep its engine running hot. And signs of slowing down has smashed its shares before. Hence, on Friday, the stock closed at $397.50 — crashing $110.75 (-21.8%) overnight. Ouch.

Would I buy NFLX today?

From its all-time high of $700.99 to Friday’s close of $397.50, Netflix stock has lost $303.49. That’s a collapse of almost half (-43.3%) in just over two months — a punishing blow for Netflix shareholders. But having dived so hard, surely the stock will bounce back, right? Not necessarily.

Netflix pivoted to become a streaming service in January 2007. Over two decades, it has gone from a scrappy start-up (listed on 23 May 2002) to a massive global business. At the current stock price, Netflix is valued at over $176bn. Today, it’s a tech Titan, but for it to remain so, Netflix has to keep growing subscribers, revenues, profits, earnings and cash flow. But woe betide the streaming giant if growth stagnates or turns negative. Because if Netflix goes ex-growth, so too may its shares. And all the while, deep-pocketed competitors are investing heavily to steal its lunch.

Right now, Netflix stock trades on 35.8 times earnings, while offering an earnings yield of 2.8% and no dividend. As an old-school value investor, these fundamentals aren’t attractive to me. I can see this stock’s attractions to risk-taking growth/tech investors but I don’t own NFLX today and I wouldn’t buy, even at Friday’s deeply discounted price. 

Cliffdarcy 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.

FTSE 100 stalwart DS Smith (LSE:SMDS) has seen its shares fall recently. Despite this, I would still add the shares to my holdings. Here’s why.

Macroeconomic pressures

DS Smith is recognised as one of the world’s leading packaging, recycling and promotional items solutions providers. Its operations span over 34 countries supported by approximately 30,000 employees. Some of its customer base include giants like Amazon and fellow FTSE 100 powerhouse Unilever.

So what’s happening with the DS Smith share price? Well, as I write, the shares are trading for 390p. In September 2021, shares reached 461p. I believe the 15% drop in share price can be attributed towards macroeconomic pressures out of DS Smith’s control. Rising costs, including that of raw materials, coupled with supply chain issues and a shortage of HGV drivers here in the UK market have hampered the shares in recent months.

FTSE 100 stocks have risks

I must note two risks of investing in DS Smith. Firstly, the macroeconomic issues noted above may continue long enough to have a real effect on performance, financials and shareholder returns. It is worth mentioning other FTSE 100 stocks have suffered due to the issues mentioned. Second, DS Smith’s debt levels could be considered a bit high. They don’t concern me longer term as the business is performing well enough to pay these debts down.

Why I’d buy the shares

Despite DS Smith’s recent share price dip and risks mentioned, I’d still add the shares to my portfolio.

Firstly, recent and historic performance has been excellent. I do understand past performance is not a guarantee of any future earnings. A half year report released in December for the six months to 31 October 2021 made for excellent reading. Revenue and profit were both up compared to the same period last year. The balance sheet was healthy and DS Smith also performed well enough to declare a dividend of 4.8p per share. This is a 20% increase from last year’s interim dividend.

Next, DS Smith’s position as a leader in its respective market gives me confidence I would see a positive return on my investment. As one of the bigger players, it also has good pricing power. This was another point mentioned in its recent report. This power was able to help it offset some worries of rising costs, also mentioned earlier. In turn, the results posted were positive including excellent profit after tax levels. In addition to this, DS Smith has made a recent commitment to cut its carbon footprint. This will go down well with ethical investing enthusiasts and help investor sentiment over the longer term.

DS Smith is a good dividend payer. Dividends help me make a passive income for my portfolio. As I write, DS Smith’s dividend yield stands at 3.5%. The FTSE 100 consensus average is approximately between 3%-4%. The yield may be average but it is paid consistently, not all firms on the index can attest to this feat. Dividends can be cancelled, of course.

Overall I think DS Smith shares would be a good addition to my portfolio. The falling share price has made them a cheaper buy for my holdings at current levels. Recent macroeconomic challenges won’t be a longstanding issue in my opinion and the shares should climb upwards once more.

Jabran Khan has no position in any shares mentioned. The Motley Fool UK has recommended DS Smith and Unilever. 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.

In 35 years of investing, I’ve hardly ever seen US stocks perform as they did in 2019-21. Despite the worst global pandemic in a century, the S&P 500 has climbed three years in a row. The index soared by 28.9% in 2019, jumped by 16.3% in 2020 and surged by 26.9% last year. And these gains exclude cash dividends. Furthermore, in the past 10 years, the S&P 500 has recorded only two losing years: -0.73% in 2015 and -6.24% in 2018. Hence, after a decade of near-unstoppable gains, I’m increasingly worried about the next stock market crash.

Stock market crash: when bubbles burst

The last time I remember stock markets being this exuberant — even feverish — was in 1995-99. During this half-decade, the S&P 500 index rose every year for five years. These returns (excluding dividends) ranged from a high of 34.1% in 1995 to a low of 19.5% in 1999. These were the so-called ‘dotcom boom’ years, when investors were seemingly willing to pay any price to buy into technology, media and telecoms (TMT) stocks. Alas, just as night follows day, the dotcom boom turned into the TMT bust. During the 2000-03 stock market crash, the S&P 500 lost 10.1% in 2000, 13% in 2001 and then crashed by 23.4% in 2002. From peak to trough, the S&P 500 lost more than half of its value (-57%), while the tech-heavy Nasdaq index crashed by 78%. Yikes.

Some bubbles are already bursting

Since November, warning signs are showing that the ‘bubble of everything’ is starting to burst in certain assets. With US inflation running at a 40-year high, interest rates are set to rise in 2022-23 to curtail rising consumer prices. This is already having a negative effect on asset prices, especially those of the riskiest of risk assets. And although there is little firm evidence that rising rates actually trigger stock market crashes, investors are clearly more worried now than they were last autumn.

Since peaking at a record intra-day high of 4,818.62 points on 4 January, the S&P 500 closed at 4,397.94 on Friday. That’s a loss of 420.68 points (-8.7%) in 17 days. Another fall of 1.3 percentage points would take the main US market index into correction territory. A further fall of 10 percentage points would take the index into a bear market and thus a fully fledged stock market crash. Meanwhile, the pumped-up Nasdaq index peaked at 16,212.23 points on 22 November 2021. On Friday, it closed at 13,768.92, having lost 2443.31 points (-15.1%) from its high. Another 4.9 percentage-point fall and the tech index would also be in bear territory — unless investors ‘buy the dip’, of course.

Also, the biggest bubbles have burst the hardest. Take, for example, ‘digital gold’ Bitcoin — which its supporters say is a hedge against inflation. Having peaked at nearly $69,000 in early November, Bitcoin currently trades at $35,432, falling to a six-month low on Saturday. That’s a collapse of almost half (-48.7%). Likewise, Tesla stock has crashed from its record high of $1,243.49 on 4 November to close at $943.90 on Friday. That’s a collapse of nearly $300 (-24%) in under three months. Tesla has also crashed by more than a fifth (-21.3%) since 3 January. Ouch.

I’m avoiding speculative assets

Just like Warren Buffett, I’m not as afraid of stock market crashes as once I was. Currently, my family portfolio has no speculative assets in it, only US/global index trackers and ‘boring’ FTSE 100 shares. No over-priced bonds, no volatile cryptocurrencies, no electric-vehicle stocks and nothing overly risky. For now, my value strategy remains exactly the same: to keep on buying cheap, lowly rated UK shares paying high dividends!

Cliffdarcy 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.

Bitcoin and other cryptocurrencies are highly speculative and volatile assets, which carry several risks, including the total loss of any monies invested. Readers are responsible for carrying out their own due diligence and for obtaining professional advice before making any investment decisions.

For most of my investing career I’ve owned shares in BP (LSE: BP) or Royal Dutch Shell (LSE: RDSB). Right now, I don’t own either, but I’m encouraged by the way both companies are performing. I’m also tempted by the dividend income that’s on offer from these shares.

Today I want to take a look at Shell and BP shares and explain which one I would buy today — and why.

Is the price right?

Shell and BP are both mature, cyclical businesses. Their profits are closely linked to oil and gas prices, which are high at the moment. Right away, that’s a potential warning for me. When cyclical stocks are enjoying bumper profits, they often look cheap.

For example, Shell shares currently trade on just eight times 2022 forecast earnings and offer a useful 3.8% dividend yield. BP trades on seven times 2022 forecast earnings and yields 4.2%.

Both valuations seem cheap at face value. But oil prices are currently at a seven-year high of around $88 per barrel. As we all know, gas prices are high too.

Experience tells me that if oil and gas prices stay high for any length of time, global supply will start to increase until demand is satisfied. If oil and gas then start falling, BP and Shell’s profits are likely to fall too.

In my view, BP and Shell are both fairly valued at the moment. I don’t think they’re cheap.

What about growth?

It’s widely expected that oil and gas demand will fall over the coming decades. BP and Shell both plan to cut production by 2030, while increasing their investments in low-carbon energy. Both companies are also beefing up their operations in areas such as retail (filling stations) and energy trading, including electricity.

I’m pretty sure that these businesses will survive the energy transition. But I don’t see much growth potential in either business for the foreseeable future. In my view, that’s why both are spending billions each year on share buybacks at the moment. By cutting the number of shares in circulation, they can slow any future decline in earnings per share.

Profits are rising at the moment due to high oil and gas prices. But I don’t see much real growth happening here.

Shell vs BP shares: my decision

In all honesty, I don’t see much to choose between BP and Shell at the moment. But there are a couple of differences.

Shell has made more progress at cutting debt than BP since energy markets turned up. As a result, Shell’s gearing is now lower than BP’s.

I’m also wary about BP’s continued exposure to Russia. I estimate that as much as 25% of its profits could come from its stake in Russian giant Rosneft this year. I’m not wild about this, given the extra risks involved in investing in Russia.

For these reasons, I’d choose to buy Shell rather than BP shares if I was investing today. But I’m not going to rush to buy anything right now — I’d rather wait for a market correction to try and secure a more attractive price.

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.