The Gym Group (LSE:GYM) could benefit from increased awareness around healthcare linked to the pandemic as well as the demand for its products and services. Is it a growth stock I should consider adding to my holdings? Let’s delve deeper.

Fitness on the up

Despite lockdown causing many gyms to close, a new emphasis was placed on health, healthy living, and working out due to the pandemic. Firms like Gym Group could benefit and recent results point towards increased demand in memberships at its gyms.

The Gym Group is the UK’s largest low-cost, value gym with over 200 locations currently open throughout the UK. Gym Group attracts its customers with no fixed contracts and a cheap monthly memberships starting from as little as £10.99. In addition to this, it offers its members flexibility to train around their lifestyles with lots of 24-hour locations.

As I write, Gym Group shares are trading for 257p per share. This time last year shares were trading for 217p, which is a 19% return. Is this new focus on health and gym-going a temporary fad or a new way of living?

For and against buying shares

FOR: Gym Group has reported that membership numbers are still on an upward trajectory. This is based on a latest trading report released in December last year. In February 2021, it had 547,000 members. By the end of November, this stood at 735,000. Gym Group reported its multi-site premium membership had increased by 27.1% at the end of November compared to increases of 24.1% in July and 22.5% in December 2020.

AGAINST: I believe the biggest threat to Gym Group is the continued pandemic. There is a real risk that a new variant, as strong or stronger than the original and one that could bypass vaccine, could arise. If this were to happen, restrictions could force gyms to close.

FOR: Gym Group has a good amount of liquidity which will support the growth stock to enhance its number of sites and its offering. It is aiming to open 22 new sites in the UK by the end of December 2022. In addition to this, it has a good track record of performance. I understand that past performance is not a guarantee of the future, however. I can see that revenue and operating profit increased for three years in a row before 2020 was impacted by Covid-19.

AGAINST: There is lots of competition in the gym market and some have a longer history, with larger brand recognition, and a more varied offering than Gym Group. Not everyone wants a cheaper, basic gym experience. Some want a state of the art experience with swimming pools and so on and are willing to pay a premium for it. The Gym Group’s business model is to cater for the basic gym goer, without these added extras.

Growth stock I’d buy

Right now I would add Gym Group shares to my portfolio at current levels. I believe the shares are cheap. Furthermore, these new gym goers and older members will continue to support its growth and profitability. Gym Group’s plans to expand seem to be on track and the next few years could be an exciting time. 

Jabran Khan has no position in any shares mentioned. The Motley Fool UK has recommended The Gym 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.

One of the world’s most successful investors, mega-billionaire Warren Buffett, once remarked, “If you don’t find a way to make money while you sleep, you will work until you die”. What the so-called Oracle of Omaha is promoting here is passive income. This is income earned without effort, without working, and even while sleeping.

Passive income comes from assets

Passive income is generated by assets. These include property/real estate (rental income), deposit accounts (savings interest), and government and corporate bonds (bond coupons). However, in our world of ultra-low or negative interest rates, it’s much harder nowadays to generate income from these three sources. The UK’s best easy-access savings accounts pay interest of roughly 0.7% a year (before tax). Likewise, ultra-safe 10-year Gilts (UK government bonds) offer a current coupon/yield of under 1.2% a year. Yikes.

I rely on UK shares for dividend income

That’s why my favourite asset for generating income year after year is equities (stocks and shares). Today, UK equities offer some of the highest income yields globally. This passive income comes from cash dividends paid by companies to shareholders. Typically, these payments are made half-yearly or quarterly. That said, company dividends are not guaranteed and can be cut or cancelled at any time. Indeed, during the depths of 2020’s Covid-19 crisis, dozens of major UK-listed firms slashed or suspended their pay-outs.

Furthermore, most UK-listed companies don’t pay dividends to shareholders. Instead, they prefer to reinvest their profits to boost future growth. But the vast majority of companies in the UK’s FTSE 100 index pay dividends. This index — which tracks the value of 100 of the UK’s biggest listed companies — currently offers a dividend yield of around 4% a year. For me as an income-seeking investor, this higher passive income is worth the extra risk of investing in shares.

The bonus ‘secret sauce’ of dividend investing

Today, my family portfolio owns no bonds and keeps a single-digit percentage in cash. Instead, I aim to buy into quality companies that pay attractive dividends and, ideally, those with potential for long-term dividend growth. And as dividends creep up over time, share prices often follow suit. Hence, dividend investing for passive income also comes with a bonus kicker. Over the years, investing in the right companies can produce significant capital gains (profits from selling shares).

Here’s an example of this ‘secret sauce’, loosely based on a real shareholding that my family owns today. Let’s say that I bought one share for £4 in 2002. Twenty years later, the share price has grown to, say, £20. Also, this share currently pays yearly dividends totalling £1. Thus, my stock’s current dividend yield is £1/£20 = 5% a year. But I bought this stock for £4, right? So my running dividend yield is £1/£4 = 25%. But not only am I earning 25% a year (before tax) on my £4 purchase price. My original investment has quintupled to be worth £20 — a capital gain of £16 a share. Whoa.

This ‘Holy Trinity’ of decent passive income, rising yearly dividends, and capital gains is my core investment strategy. In 35 years of investing, nothing has generated better returns for my family than this deceptively simple strategy. Hence, it’s the approach I most recommend to friends seeking to build wealth slowly (rather than trading, speculating, or gambling to get rich quick). Learn more about my dividends with growth system here!

The Omicron variant is widely believed to be less risky than some of the previous coronavirus variants. But that does not make life any better for air travel related companies. Omicron is said to be up to three times more transmissible than the Delta variant. And it has led to thousands of flight cancellations in the UK alone. This could continue in the foreseeable future, making it another potentially uncertain year for the likes of the FTSE 100 aero-engine manufacturer Rolls-Royce (LSE: RR).

The Rolls-Royce share price looks attractive

This is a pity, considering how attractive the Rolls-Royce share price looks right now. It is at around 125p as I write this Monday afternoon. This is a significant improvement from the penny stock status it crashed to in 2020 during the height of the pandemic. But it is still at almost half the levels seen before the coronavirus crisis started. Moreover, even in relative terms, it is a dirt-cheap stock. It has a price-to-earnings (P/E) ratio of a ridiculously low 3.2 times. Let me put this in perspective. The average FTSE 100 stock has a P/E of around 18 times.

Normally, I would think these two share price trends indicate potential for the stock to rise significantly. But these are not normal times, as I was saying earlier. The Rolls-Royce share price is as likely to tank fast from here if the situation takes turn for the worse, as it is to rise if we are able to put the coronavirus behind us. 

Improving fundamentals 

And indeed, things could in fact turn out quite well for it. The company reported profits in its last update. I think it has also done an impressive job of its restructuring. Selling its non-core assets has helped it become a more focused business and helped pay-off debt. Rating agency Moody’s downgraded the company’s investment-grade rating during the pandemic, something it probably intends to regain.

I do believe that there could be some upside to the stock in 2022 based on this. Moreover, I reckon the market mood could continue to be fairly bullish, going by the fact that the FTSE 100 index touched 7,500 recently. And it continues to remain buoyant. Just the momentum of the markets could play some role in driving up the share price too. And if Covid-19 subsides, it is a no-brainer that the stock could do quite well. 

My assessment

But there is no way of knowing if that would happen. I mean, we could see another variant creep up on us anytime. And going by the high volatility in the stock’s price seen recently, it is possible that it could fall sharply. Keeping this in mind, I would wait and watch how the situation unfolds and decide to buy the stock, or not, accordingly. 

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.

The Watches of Switzerland (LSE:WOSG) share price jumped 132% in 2021. The FTSE 250 incumbent’s rise surprised me, but what’s in store in 2022? Should I add the shares to my holdings? Let’s take a look.

Luxury watch purveyor

Watches of Switzerland is the UK’s largest luxury watch retailer. If you hadn’t already guessed, it specialises in Swiss timepieces. These are often seen as the best and priciest in wrist wear. The company has 16 branches throughout the UK.

As I write, WOSG shares are trading for 1,264p. A this time last year, the shares were trading for 650p, which is a 94% return over a 12-month period.

In times of economic uncertainty, the wealthy are usually the least affected. In addition, the number of newly wealthy people seems to be on the rise. This is partly linked to heavy investment in tech stocks since the pandemic began as well as tech-related investments such as cryptocurrencies, which are becoming more popular, even among traditional investors. Tech individuals are beginning to dominate rich lists such as the ones published by Forbes.

2021 success and looking ahead

The WOSG share price increased nicely due to positive growth and better than expected performance. A H1 report released in December proved this. The FTSE 250 incumbent reported that revenue increased over 40% compared to the same period last year and net operating profit increased by over 50%. Crucially, a debt position of £22m last year turned into a net cash balance of £30m this year.

So what’s next? Watches of Switzerland announced a growth plan last summer for the next five years. This could boost the shares to never before seen levels and provide generous returns to investors. Part of this plan includes increasing its position in the UK market. In addition to this, it wants to increase its presence in the key US and EU markets. Both of these markets are bigger than the UK and could be more lucrative. A vital part of this growth initiative is to enhance its e-commerce offering. The rise in the e-commerce shopping experience has been accelerated by the pandemic.

FTSE stocks have risks

Despite a successful 2021, Watches of Switzerland could face roadblocks in its growth plans. Growth is not easy and many issues can occur. Despite bucking economic trends, the post-pandemic global economic recovery is still uncertain and, after all, watches are a luxury item. In addition to this, the rise of new wealthy individuals means there are lots of firms vying for their business so competitors in the market could affect growth in 2022 and beyond. Finally, the shares do look a bit expensive with a price-to-earnings ratio of 41 as I write. There is the risk the growth could already be priced in.

Overall I believe Watches of Switzerland could be a great FTSE stock to add to my holdings. I would buy at current levels and I am excited about its journey ahead. It has a clear plan in mind, a healthy balance sheet to support growth and a track record of consistent growth. I do understand past performance is not a guarantee of any future performance, however. 2022 could be another fruitful year for Watches of Switzerland if 2021 is anything to go by.

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.

Things have been looking up lately for shareholders in British American Tobacco (LSE: BATS). The BATS share price has jumped 21% since the start of last month, at the time of writing this article earlier today. Over the past year, though, the gain has been a more modest 13%.

After shares in the company moved up sharply in a matter of weeks, am I now too late to buy more for my portfolio?

Price increase drivers

A number of factors help explain the recent upward movement. In October, the US regulator the Food and Drug Administration (FDA) cleared BATS to market a line of e-cigarettes. That was the first time the FDA had given clearance to a vaping product. BATS has pinned a lot of hope on growing sales of non-cigarette products such as its vaping line. So the FDA approval was seen as positive for future revenues.

There has also recently been a move by many investors into more defensive stocks, such as tobacco. Indeed, the London company’s performance in the past year has been less impressive than that of US rival Philip Morris International. Its New York-listed shares have added 26% in the same period, twice the gain seen at BATS.

Is the BATS share price still cheap?

Even after the upward move, I still reckon BATS could climb higher. Compared to its historical price, it looks cheap to me. The shares are 34% below where they stood five years ago. The price-to-earnings ratio is around nine, which seems cheap. The dividend yield is 6.9%. Although that is lower than a few months ago due to the increased share price, it is still well above that of most FTSE 100 shares.

Last week, Barclays raised its target price on BATS. The bank said that the share looks cheap relative to its future earning potential. The bank also highlighted the fact that BATS reckons it can break even on its next generation products in 2025. If the company manages to hit that target, it would end the initial stage of developing a next gen portfolio. So far, the company has focused on growing revenues not aiming for profits. Moving into profit on sizeable, growing next gen revenues could help the company’s economics even in the face of declining cigarette demand in many markets. That could support a higher share price in future.

So far, though, it is not clear if next gen products will ever match the profit margins offered by cigarettes. So there is a risk that, even if the company can sustain its revenues over the long-term, profitability may fall. That could lead to a falling share price down the line as cigarette revenues and profits decline.

My next move

I already hold a sizeable BATS position. But despite that I would consider buying more of the company’s shares. Even though the share price increase means buying now offers me a lower yield than a few months ago, I still regard the company as attractive for its passive income potential.

On top of that, if the shares keep moving up, I may also be able to benefit from capital gains. I see that as plausible given the company’s relatively cheap valuation in recent years. Even after recent gains, I continue to see strong arguments to add more BATS shares to my portfolio.

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

For some UK stocks, 2022 has been a fairly decent year so far. Looking at just the FTSE 100, the index is up nearly 150 points as businesses continue to return to normality after the disruptions of the pandemic.

But not all stocks have had a great run recently. One in my portfolio has been hit particularly hard since the start of the new year. Yet despite this recent downward trajectory, I believe the company could be set for an explosive future over the long term. Let’s explore.

A rising star in the biotech sector

The biotechnology industry is renowned for its high-risk profile. Yet Oxford BioMedica (LSE:OXB) continues to impress me. At the core of this business lies the LentiVector drug development platform. Simply put, it enables large pharmaceutical companies like Novartis and Bristol Myers Squibb to develop new treatments at a lower cost.

The company generates income in the short-term through platform fees based on production milestones. But over the long term, if a drug developed on this platform makes it to market, Oxford BioMedica will receive royalties on each sale.

Only two drugs have made it to market so far, Kymriah, a treatment for blood cancer, and AstraZeneca‘s Covid-19 vaccine. But with 24 other drugs in development, the long-term potential for this biotech stock is enormous, in my opinion.

Over the last five years, revenue has grown by an average of 36% annually. And as forecasts for the gene therapy industry continue to rise, the stock of this UK biotech business has surged over 400% since 2017.

With a brand-new production-ready facility completed in 2020, the group’s capacity to take on new projects has drastically increased. And since management has already built a list of nine top-tier clients, finding these new projects should be relatively easy, in my opinion.

Taking a step back

As exciting as the growth prospects of this business may be, there are some notable risks to consider. The most prominent is the regulatory environment. Drug development is a long and arduous journey that often ends in failure. Even if a drug can make it past the regulators, its financial viability is not necessarily guaranteed.

To some extent, Oxford BioMedica is protected from this risk. After all, the company generates revenue throughout development even if a treatment eventually fails. However, if a drug doesn’t make it to market, the potential royalty income is lost, and that could cause long-term growth to stagnate.

Needless to say, a UK growth stock with wobbly growth prospects is prone to substantial volatility.

Can this UK stock double my money?

Looking at the latest half-year results, revenue for the first six months of 2021 grew by 139%, thanks to the high demand for AstraZeneca’s Covid-19 vaccine. When the pandemic ends, income from the vaccine will undoubtedly fall. But improved profit margins and newly enlisted clients, like Arcellx and Cabaletta Bio, could fill this future income void.

It seems other analysts agree with my bullish stance, with price forecasts for this UK stock at 2,400p. Compared to today’s price of 1,000p, that’s a potential gain of 140%. This is by no means guaranteed. But it does support my belief that the Oxford BioMedica share price can double in 2022. Therefore, despite the risks, I am considering adding more shares to my portfolio this year.

Zaven Boyrazian owns Oxford Biomedica. 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 the oil price soaring globally, oil stocks are becoming increasingly popular. Formed in 2004, Canadian Overseas Petroleum (LSE: COPL) is a Canadian company concerned with the exploration, development, and production of oil and gas. Headquartered in Calgary, the company has operations in the state of Wyoming and Sub-Saharan Africa. Recent buying of this stock is intriguing – let’s take a closer look.  

Recent discoveries and increased production

With a market capitalisation of £60.5m, Canadian Overseas Petroleum stock is one of the smaller oil and gas companies currently on the market. Since 11 January 2022, the share price is up 43%. What is the reason for such stunning growth? In an announcement from 22 November 2021, the company stated that production from its Barron Flats Shannon Unit in Wyoming was 35% ahead of expectations. This resulted in a 14% increase in the share price at that time, but was not responsible for the recent gains.

Furthermore, in the Q3 update for the three months to 30 September 2021, the company announced the discovery of light oil at its Barron Flats Deep Unit, also located in Wyoming. The official results of the discovery are still private, but the company is currently working on a development strategy and hope to update the market in the near future.

In the same announcement, Canadian Overseas Petroleum stated its business was suffering from tighter supplies of natural gas liquids (NGLs). These are necessary for the development of oil exploration. Throughout 2021, NGLs were in short supply across North America. With this shortage in mind, it is possible that the company’s ability to explore will be impacted. Yet, the management is satisfied that the company has sufficient NGLs to make it through the winter into 2022.

On the other hand, the company has made consistent losses for the calendar years 2016 to 2020. While this is not unusual for a small oil exploration company, it is worth noting so that I can better understand the wider financial position.

Why the massive increase in share price?

On 10 January 2022, the company made a significant discovery of light oil, again in Wyoming. This discovery is estimated to be 1.5bn to 1.9bn barrels of oil. This discovery has excited the market and directly resulted in the 43% weekly increase in the share price. The CEO, Arthur Millholland, stated that the amount of oil found is “many multiples greater than our original expectation”. Indeed, some extraction and production of oil from this discovery has begun. In the lowest field zone, the company is already producing around 100 to 120 barrels of oil per day. The discoveries are exciting news and will be compounded by the high oil price.

Canadian Overseas Petroleum has made a number of encouraging discoveries of light oil in recent times. While this stock is still small, I think the rewards far outweigh the risks. I will be adding this stock to my portfolio as a speculative buy.

Andrew Woods has no position in Canadian Overseas Petroleum. 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.

2022 is off to a chaotic start with the new Covid variant wreaking havoc globally. But markets around the world look strong and I think it is the perfect time to look at some companies on my list of UK shares to buy. One common investing rule is to invest in undervalued shares of stable businesses.

Although it is not an easy task, I tend to look at the sector a business operates in, competition, and recent financials when I am trying to pick cheap UK shares to invest in. And right now, Vertu Motors (LSE:VTU) and Big Yellow Group (LSE:BYG) look like bargains for my portfolio. Both companies operate in untapped niches within booming sectors, and I think they have massive potential.

Automobile stock that grew 126% last year

The pandemic forced many households to cut down on extra expenses, and global used car sales saw a huge boost in 2020. I think this represents a broader need in the market. A brand new car is an expensive purchase for most, given rising prices, taxes, and running costs. I think the used car market will grow in tandem with the automobile industry over the next decade.

And the Vertu Motors stock is on a great run. Its share price is up 81% in the last six months and a whopping 126% in the last 12 months. And despite this incredible run, it is trading at a forward price-to-earnings (P/E) ratio of 5.5 times, which tells me that there is still a lot of room for growth.

But analysts expect Vertu Motor’s revenue to drop after consumer habits normalise in 2022. And the car dealership operates on a razor-thin margin of about 1.5%. Coupled with expansion efforts, this could wreak havoc on its share price if sales drop in the coming months. But I still remain optimistic about the potential of the industry, which is why I am watching this UK share closely to capitalise on any price drop.

Passive income real estate stock

Big Yellow Group offers self-storage solutions in the UK, a business that has seen a growth in popularity thanks to the e-commerce boom. BYG offers online vendors a cheap space to store and ship products from, as well as a personal space to store goods for people moving house. Storage spaces are very popular in the US and are seeing wider adoption in the UK as well.

At its current share price of 1,556p, the Big Yellow Group share price is up a healthy 39.8% in the last 12 months. It is trading at a forward P/E ratio of six times, making it very undervalued right now. Its 2.3% dividend yield is backed up by a year-on-year increase in revenue for the last four years. 

But there have been reports of prominent board members selling holdings in the last 12 months. Chairman Nicholas Vetch’s wife recently sold £2.9m worth of BYG stock at a price of 1,670p per share and CEO James Gibson sold £5.2m of his holdings at a price of 1,487p per share. The share price has fallen nearly 10% since the start of 2022.

But, this could just be investors taking profits after a solid run last year. And I am optimistic that the company can deliver strong financials this year. Given its passive income potential, Big Yellow Group is on top of my list of UK shares to buy right now.

Suraj Radhakrishnan has no position in any of the shares mentioned. The Motley Fool UK has recommended Vertu Motors. 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.

As one of the most recognisable footwear brands, Dr Martens (LSE: DOCS) was a new addition to the London Stock Exchange in 2021. While results are impressive, recent selling leaves me curious. For the week commencing 10 January 2021, the share price is down nearly 13%. Let’s take a closer look.

Encouraging results

Since its IPO in January 2021, Dr Martens stock has been volatile. From a yearly high of 521p, the share price currently sits around 365p. Not long after the IPO, the company released quarterly figures for the year ending March 2021. This was to provide greater clarity on where the share price might go in the future. The results showed year-on-year changes of -14% (Q1), 42% (Q2), 9% (Q3), and 19% (Q4). These positive results continued with a 64% increase in revenue in a trading statement in June 2021.

The main reason for these impressive recent results was the reopening of Dr Martens stores around the world. This is especially true in the US and Europe, with Japan still lagging. The US has been the most lucrative market for this stock, registering 106% growth in sales. Indeed, Barclays upgraded the company in December 2021 because of its ability to continue to grow revenue through its recognisable products. The first-half results in 2021, for the six months up to 30 September, gave me a lot of confidence as a potential investor, because global profit expanded by 65%. In addition, interim earnings-per-share increased 60%. With a dividend of £0.012 per share, I am pleased that most of the profits attributable to shareholders are being kept within the company. This enables further growth.

Why the drop in share price?

In spite of good results, the share price tumbled 11% in one day in early January 2022. This was solely due to the sale of 65m shares by private equity firm Permira. This company was in fact responsible for the listing of Dr Martens in January 2021. On closer inspection, the sale amounted to about one-seventh of Permira’s original holding. The private equity firm now owns 36% instead of the original 42%. This is hardly something I’m worried about.

While sales in the US are growing at a phenomenal rate, supply chain issues are starting to eat into the operation. This is likely due to the hangover from the Covid-19 pandemic and should subside in the near term. Nonetheless, the management has decided to add £10 to the price of boots to offset this problem. This price rise will also go some way to alleviating cost increases in raw materials and shipping. Furthermore, Dr Martens’ price-to-earnings (P/E) ratio of 68 is only slightly above the industry average of 64. Barclays has, however, hinted that given the company’s short track record it is difficult to currently value this stock.

I like this product and the recent growth of the company around the world is a very good sign. It seems that more results are required to achieve an accurate company valuation. While I won’t be buying these shares just now, I will not be ruling them out in the future.    

Andrew Woods 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.

Key points

• Darktrace isn’t currently profitable.
• Wise is moving in the right direction.
• Idox Group could have some serious growth potential.

The Darktrace (LSE: DARK) share price has fallen 55% from its peak of 985p in September 2021. Investors clearly grew overexcited after its blockbuster IPO in April. While the company’s revenue and earnings outlook are improving, I think they still don’t yet justify the share price. I like to invest in tech stocks because of their scalability and critical role in the modern economy. But I think there are a couple of other options that would be better for my portfolio.

Cybersecurity

I still think that Darktrace has the chance to do well in the future. The company is in excellent financial health, has no debt and all its assets easily cover its few liabilities. Its AI driven, machine learning approach to cybersecurity could be nothing short of revolutionary, and its subscription business model could lead to a massive user base over the coming years. The problem simply is that Darktrace isn’t profitable yet and hasn’t been for some time. Revenues have increased by $80m in 2021, but earnings fell to -$149m.

Online payments

Wise (LSE: WISE) is an online payment and cash transfer company based in the UK. It too went public in early 2021 and it too saw its share price soar to 1,140p before slowly crashing back down to 649p at time of writing. A big difference between Wise and Darktrace however, is that Wise is profitable. Its margins are small, but 2021 has been a period of incredible growth for the company. Customers increased by more than 50% from 6m to 10m. Revenue jumped too from £302m to £421m. Again, only £39m of that was profit, but Wise has also been expanding into new territories and developing new products that could pay serious dividends in the future. These small profit margins could cause problems if the company runs into some unexpected issues, but for now all of the numbers are moving in the right direction. I’d be excited to add it to my portfolio.

Public sector software

Idox group (LSE: IDOX) is a software development company I’ve talked about a few times now. Currently trading for a mere 67.75p, it suffers even more acutely than Wise from small profit margins. It is profitable, but had a spotty couple of years in 2018 and 2019.

Earnings reports for the whole of 2021 have not been published yet, but for the financial year ending 31 October 2021, Idox reported revenue increased by 8% to £62.0m, and recurring revenue grew a further 2%.

If it can continue this growth over the coming years, I think we could see the share price rise significantly. It’s a bit of a gamble, but I’d happily add it to my portfolio.

What I’ve taken away from this research is that just because something is in the headlines doesn’t mean it’s a good investment. In fact, it could even mean the opposite. I’ll definitely keep my eye on Darktrace over the coming years, but for now there just seem to be other, better options for my portfolio.

James Reynolds 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.