2021 was not kind to the shares of ITM Power (LSE:ITM). And so far, 2022 hasn’t been much of an improvement. Over the last 12 months, the penny stock has tumbled by nearly 50%. What’s going on? And why am I steering clear of this business? Let’s explore.

Encouraging progress versus disappointing returns

As a quick reminder, ITM Power is a designer and manufacturer of electrolyser machines. These pieces of equipment can extract hydrogen from water without creating emissions. It’s a significantly greener approach to acquiring the element versus the traditional route of using fossil fuels.

Given the demand for hydrogen is expected to grow 10 times by 2050, the company certainly sounds like an excellent place to invest for explosive long-term gains. And it may not even take that long for bets to play out. While revenue for 2021 came in at a relatively tiny £4.3m, analyst forecasts for 2022 and 2023 are £22.8m and £65m, respectively.

Looking at the group’s contracted backlog, these estimates certainly sound plausible to me. And this explosive growth potential is primarily what pushed ITM Power shares to a new all-time high of 724p in January last year. But today, the stock is trading around 349p. So, what happened?

Taking a closer look at the numbers

As encouraging as the order backlog seems, I have some reservations. Firstly, a growing backlog is only a positive sign that the company can fulfil the orders. Let’s assume that’s the case with ITM Power. Looking at the latest figures published in December, the company has £591m worth of orders. However, £557m of that isn’t set in stone as these contracts are still being negotiated with only £198m in late stages talks.

That’s certainly nothing to scoff at. But it seems some investors may have been getting ahead of themselves. At its peak, shares of ITM Power had a market capitalisation of around £4.4bn. Today it’s closer to £2.2bn, but that still places the current price-to-sales (P/S) ratio at 511 times!

Assuming the 2023 revenue forecast is accurate, the forward P/S ratio comes in at a more reasonable 33 times. And to me, that suggests investors are pricing ITM Power shares on expectations rather than fundamentals.

So, what happens if the company fails to live up to these expectations? Well, we already know because that’s what happened in 2021. Full-year revenue missed analyst forecasts by a tiny £700k, but it still sent its share price plummeting.

Final thoughts on ITM Power shares

Seeing this level of volatility in a company with an exceptionally lofty valuation is hardly surprising. And I wouldn’t be surprised to see shares of ITM Power continue to fall if further targets are missed even by a relatively insignificant amount.

Personally, that’s not the sort of risk I’m interested in adding to my portfolio. Yes, there is a lot of growth potential here. But I believe other, less risky, investment opportunities could be far more lucrative.

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.

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One of the best-known investors of modern times is Warren Buffett. He is not famous without reason – he has an outstanding investment record. But what’s most interesting about him from my perspective as a private investor is how willing he is to share his approach.

Were I investing today for the first time, before I put any money into the stock market, I would get into one of Buffett’s habits.

How Buffett spends his day

That habit is reading. I do not mean reading a document or skimming something in the newspaper. I mean serious, concentrated reading of hundreds of pages each day.

In fact, here is how Buffett describes his working day: “I just sit in my office and read all day.” That may be a slight exaggeration – but I only think it is a slight one. After all, in another context Buffett told his audience: “Read 500 pages like this every day. That’s how knowledge works. It builds up, like compound interest.” People who have travelled with Buffett tell of him sitting down on a plane, getting stuck into a pile of newspapers then reading for hour after hour.

How can reading help investment?

So, why does Buffett do all this reading? How does it help him when it comes to finding attractive shares to buy?

I think the answer involves at least three elements. First, I reckon Buffett is reading to get a general sense of how the economy is performing. By knowing what is happening in different parts of the economy at a high level, Buffett can spot emerging trends and possible investment themes.

Secondly, I think Buffett reads widely to improve the conceptual models he uses when investing. He does not just put money into what he thinks are attractive companies at random. Over decades, he has established his own model to identify companies in which he may invest. He has done this through learning from the writings of an investor such as Benjamin Graham and combining it with his own experience. Even in his 90s, Buffett seems still to be refining his investing model. Reading widely – especially contrary views – can be a good way to test one’s investment approach and improve it.

Finally, reading lets Buffett identify companies in which he wants to invest. When he finally invested in IBM, for example, it was after reading the company’s annual report regularly for half a century. The IBM stock purchase did not turn out to be one of Buffett’s better buys – but that certainly was not because he had not done his homework.

Applying this Warren Buffett habit

The thing I like about this habit is how easily I can apply it to my own investing choices. Reading up on shares has never been cheaper or easier, with most companies publishing all sorts of information freely on their websites.

Spending more time reading, absorbing and reflecting on what I have read could yield rewards. Setting aside more time to read regularly, the way Warren Buffett does, could help me improve my investment knowledge. That would hopefully boost my returns over time.

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.

Shareholders in banking group Lloyds (LSE: LLOY) have enjoyed a good run lately. Over the past year, the shares have surged 49%, based on the price at the time of writing this article earlier today. Indeed, today the stock price hit a new 12-month high.

As a Lloyds shareholder, should I take advantage of this surge to lock in some profits? Or could it be a signal that I ought to buy more shares for my portfolio while they have positive momentum?

Why is the Lloyds share price booming?

There are several reasons behind the increase in the price. Top tier British banking stocks in general have had a good run lately. Over the past year, NatWest is up 55% and Barclays is up 43%, for example. So in a sense, there is nothing special about what has happened to Lloyds shares in the same period. A stronger economic recovery than expected and sustained consumer demand help explain the bounce-back of many leading banking shares.

Lloyds has also benefited from a good business performance improving its financial firepower. The bank has restored its dividend, which was suspended in 2020. But it has not yet started to pay out at anything like pre-pandemic levels. Yet it has been highly profitable lately. That has allowed Lloyds to build up excess capital. Some investors like myself are hopeful that it may use those funds to pay bigger dividends in future.

Are Lloyds shares overvalued?

With such a strong performance over the past 12 months, I wonder whether the shares are fairly valued.

Based on the profits for the first nine months of this year, the prospective price-to-earnings ratio for the year is likely to be around six or seven. I think that is still low for a bank with the size and customer base of Lloyds. On top of that, future business could remain buoyant. The housing market has been resilient, which helps Lloyds as it is the country’s biggest mortgage lender.

There are risks though. For example, as interest rates rise, mortgage defaults could increase. That might hurt profits at the bank. The company’s venture into being a landlord looks like a distraction to me, and could land it with a lot of bad debt if property prices fall.

But overall I think the outlook remains positive, so at the current valuation, I see no reason to sell my Lloyds holding.

Future momentum

Should I, in fact, add to my position? Even after the performance over the past year, Lloyds shares still look cheap to me.

In short, I am tempted to buy more shares at the moment as I see further possible share price upside. A possible trigger for the shares to move up would be an announcement that the company plans to pay out higher dividends. Investor sentiment towards Lloyds seems positive, which is why it hit its highest price in a year today. I share that enthusiasm and am considering buying more Lloyds shares for my portfolio.

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

Shares in the FTSE 250 retailer Watches of Switzerland (LSE: WOSG) jumped 132% in 2021. Following this performance, the stock is trading at some of its highest ever levels. 

Indeed, as the coronavirus pandemic spread worldwide in 2020 and retailers were forced to shut their doors to control the spread, the stock slumped to 179p, from 390p, at the beginning of 2020. 

However, after hitting this all-time low, shares in the retailer have rallied a staggering 670% since the beginning of April 2020. 

FTSE 250 retailer profits 

Since the beginning of the pandemic, the retailer’s profits have jumped higher. Early in August 2020, the organisation published its numbers for the financial year ending 26 April 2020. The company posted sales of £798m for the 46 weeks to 15 March 2020. Sales then plunged to just £12.8m in the six weeks to 26 April. Overall, sales during the first six weeks of the world’s fight against the virus slumped 85%. 

As the world started to open up, the company’s sales also began to recover. Revenues surpassed management expectations for the first quarter of its 2021 financial year. Total group sales were down just 28% year-on-year. That was a notable improvement on the trading performance reported at the beginning of the pandemic. 

Shares in the FTSE 250 corporation started to head higher as it reported successive positive updates. In its half-year results for the 2021 financial year, the firm reported revenues of £414m, down just 2.6%.

Adjusted earnings before interest, tax, depreciation and amortisation (EBITDA) rose 27% compared to the prior-year period. Even though sporadic store closures beset the group during the period, EBITDA profits still rose, thanks to higher online sales and sales of higher-margin items. 

For 2021, the company reported overall revenue growth of 13.3% and EBITDA growth of 35%. Luxury watch sales were a significant driver for the business. Sales of high-value watches jumped 16% for the year. 

Growth plan

After these numbers were published, the company introduced its long-term growth plan for the next five years. Management wants to develop and reinforce the group’s sector-leading position in the UK luxury watch market. It also wants to become the “clear leader” in the US market, alongside building a strong presence in Europe. 

The group anticipates its US revenue will grow at a compound annual rate of 25-30% over the next five years. Meanwhile, in its home market, the FTSE 250 retailer thinks the jewellery and luxury watches market will expand at a compound annual rate of 8-10% over the next five years. 

The enterprise hopes to be able to capitalise on this expansion by investing in and expanding its existing footprint in these markets. The company will also develop its e-commerce offer to reach more consumers and provide a better online experience. 

This growth potential seems to be one of the main drivers behind the recent share price performance. 

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.

Key Points

• Acquiring passive income stocks can be a great way to build wealth 
• There are plenty of opportunities for income in the FTSE 100 
• This Fool thinks these two companies have unique qualities as income investments

I am always looking for passive income stocks to add to my portfolio. Income stocks can be a great way to build wealth and generate higher returns in the long term. 

However, not all income stocks are created equal. Some companies have better prospects than others. 

These are my two favourite income stocks in the FTSE 100 right now, considering their income and dividend growth potential. 

Passive income stocks to buy 

The first enterprise on my list is the defence contractor BAE Systems (LSE: BA). What I like about this company is the fact its contracts are usually multi-year agreements with major governments. This provides a high level of visibility and predictability for the group. 

It also suggests that the firm’s dividend to investors is more secure than most. With its long, secure contracts, BAE can plan out its cash commitment years in advance and set the dividend at an appropriate level. 

At the time of writing, the stock supports a dividend yield of 3.7%. This might not be the highest yield on the market, but I think its security more than makes up for the lack of income. 

As BAE operates in a highly regulated industry, it does face some unique risks. These include lawsuits related to its products, which could force some hefty legal fees and challenges on the business. There are also some ESG considerations, such as the risks of investing in the defence industry. 

FTSE 100 leader 

As the e-commerce market has boomed, demand for paper and packaging products has also rocketed. Companies that service this market have been reporting explosive growth, including FTSE 100 corporation DS Smith (LSE: SMDS). 

This is one of the largest sustainable paper-based packaging companies in the world. It even has its own forests to produce the pulp needed to manufacture paper products. 

This vertical integration, coupled with growth in the broader packing market, has helped the business increase sales by nearly 70% over the past six years. According to City analysts, profits could hit £412m this year, compared to £167m in 2016. 

With profits set to expand further in the years ahead, the company will have more headroom to increase its distribution to investors. According to analysts, the dividend payout could increase by 20% in the current financial year and a further 13% in fiscal 2023. This would leave the stock yielding 3.7%. 

Based on this growth and the outlook for the global e-commerce market, I think the stock would make a fantastic addition to my passive income portfolio. 

Challenges the company could face include rising labour and materials costs, which may hit profit margins. The group could also face pressure to improve the sustainability of its products as part of the global EGS movement. 

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

If 2021 was a good year for FTSE 100 dividend yields, 2022 is expected to be even better. From their current levels of 3.4%, they are expected to rise to 4.1% this year according to AJ Bell research. But what is true for the whole index might not be so for every single stock. That’s the case even for those that have impressive yields right now, like the housebuilder Persimmon (LSE: PSN), which has a yield of 9%. 

Why I’m unsure of Persimmon’s dividend yield 

Is the yield sustainable? I am not convinced it is, due to the outlook for the housing market. As we know well, the housing market got a temporary boost during the pandemic from supportive government policies. However, the fiscal bonanza was never expected to last, and it is now in the process of being withdrawn. Moreover, interest rates are also on the rise, which could slow down demand for housing loans. Rising inflation could also leave people feeling worse-off with more likely to postpone a house purchase. 

The future of the housing market appears to be uncertain as a result. And there has even been speculation of a housing market crash. Of late though, the forecasts have started looking less dire. I have seen a number of reports that indicate that the market will cool down, but not crash. This is a more encouraging prediction, for sure. It is even more so when coupled with Persimmon’s own outlook. 

Positive trading update for the FTSE 100 stock

The housebuilder recently released trading update ahead of final results for the year ending 31 December 2021. In that, it appeared positive with regards to 2022. It has a stronger forward sales position for the year than it did in 2019. The comparison would be odd at any other point in time, but it makes sense now. In 2020 and 2021, the housing market was artificially elevated to help it ride out of the pandemic. And 2019 is the last pre-pandemic reference point. Also, the company is positive on the longer-term fundamentals of the housing market. 

What happens to its dividends?

However, when trying to assess whether or not it will be able to sustain it dividend yield, I do need to consider how it will perform in 2022 compared to last year as well. Here the news looks a bit disappointing. Its forward sales this year are slightly lower than that during 2020. So, I expect that some correction could happen, since this could reflect in its revenues and profits. 

The yield could also decline because there is more upside to its share price, in my view. Its price-to-earnings (P/E) ratio is at a relatively muted 10.5 times. Even with all the support for the real estate sector, its share price never went back to its pre-pandemic highs. And in recent months, it has fallen a fair bit from even the levels that it touched during the pandemic. 

What I’d do

In sum, I do not think that its 9% yield is sustainable in 2022. But I think it could still continue to pay decent dividends. And besides that, I believe its share price could also rise. That means on 2022, it may be a stock for both growth and dividend investors. I have bought the stock already for the long term, and I might buy more of it during the year. 

Manika Premsingh owns Persimmon. 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.

Investors are beginning to take talk of inflation very seriously now, it seems. Just yesterday, the greetings card retailer and penny stock Card Factory (LSE: CARD) saw a 15%+ drop in price after its trading update. From what I could see, the update had a number of positives. However, it did raise one issue: inflation, and particularly how this could impact its margins. 

Profit warning drags down the share price

A predicted hit to profits is always an indicator that the price could fall. And when it is coupled with all the ways in which price rises can impact business, I think the potential problem appears bigger. The company talked about increasing freight cost, the impact of inflation on costs of staff and utilities, as well as bigger investments as the reasons why profits could fall. To counter this, it plans to increase prices and focus on business efficiencies, which could reduce some of the impact of inflation, but not entirely. 

The headline inflation numbers have been starting to look like a bigger issue of late before this update. The UK’s inflation rate came in at 5% on a year-on-year basis for November 2021. The next number due soon is slated to be even higher. A number of companies have talked about inflation in their trading updates. But none I have come across have talked either in as much detail or have expected such a significant reduction in profits because of it. 

Has the market overreacted?

While I do not want to take away from how seriously Card Factory will be affected, I believe that there might have been a bit of a market overreaction to the update. There were some positives to it too. Sales for the 11 months ending 31 December 2021 were ahead of its expectations. While they were still lagging behind pre-Covid 19 numbers because of store closures earlier in the year, its retail footfall numbers were also ahead of that for the country as a whole. And its online revenues have improved as well. 

What’s next for the penny stock?

This suggest to me that all if far from lost for the stock. In 2022, I think it is fair to expect the Covid-19 situation to come even more under control. Also, with the economic recovery under way, demand for non-essential consumer products could continue to improve. The Card Factory share price is still way below its pre-pandemic levels. In fact, at the start of the pandemic it dropped to penny stock level. Even though it has made significant gains since the worst of the pandemic, it is still priced at sub-£1. 

Of course because of an increase risk of inflation, I think a full recovery in its financials could be delayed. But I think it is only a matter of time before it does happen. I would still buy Card Factory stock.

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