The Rolls-Royce (LSE: RR) share price has had a turbulent time during the pandemic. The shares are priced at 128p as I write. This means they’re still considerably lower than almost 240p before the sell-off in March 2020.

The share price weakness extends much further back than the pandemic though. In fact, the last all-time high was at the start of 2014 when the share price reached 444p.

Does this mean the shares are now good value for my portfolio? Let’s take a closer look.

The bull case

The December trading update was positive in my view. The company said: “The gradual recovery in international flying combined with market recovery in Power Systems and resilience in Defence are driving improvements in our trading performance.”

Rolls-Royce’s biggest division is Civil Aerospace which relies heavily on the aviation sector. Therefore, the gradual recovery in international flying is important for the business’s prospects. 

The company has also been restructuring of late. The trading update confirmed that this is being completed faster than expected, and there is now £1.3bn of cost savings anticipated for 2022. This is significant given that the market value of Rolls-Royce today is £10.7bn. I view this as a good sign, and it may mean the dividend will be reinstated soon.

City analysts are expecting earnings per share (EPS) to grow by a huge 97% in 2022, to 6.3p. This is impressive growth, but I do note that this is from a much lower base than years gone by. For example, EPS were over 22p the last time the Rolls-Royce share price was at its all-time high.

The bear case

The first major risk for Rolls-Royce is the ongoing pandemic. Countries are entering stricter lockdowns right now to curtail the spread of Omicron. This reduces demand for flying, and will therefore impact revenue generation from the key Civil Aerospace division. Any further strain of Covid may compound this risk further.

My main driver for buying a blue-chip stock like Rolls-Royce is the income generation. However, as it stands today, the company doesn’t pay a dividend due to its troubles in recent times. Highlighting the issues at the company, it generated a negative gross margin in 2020, which is highly unusual.

Should I buy at this price?

I view Rolls-Royce more favourably this year than I have previously. The company’s restructuring is running ahead of schedule, which should significantly help its cash flow. After the Civil Aerospace division was heavily disrupted due to the pandemic, there are now signs of improvement too.

But on balance, I’m going to wait a while longer before I buy the shares. There’s currently no dividend forecast for 2022. I also don’t expect enough increase in the share price for me to be interested as a growth investor. I expect the Rolls-Royce share price will tread water a little while longer until there’s more clarity on whether Covid will continue to disrupt the travel industry.

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

Was this article helpful?

YesNo

Was this article helpful?

YesNo

The Omicron variant has damaged the prospects of airline stocks. It doesn’t take a genius-level IQ to understand why but the sudden recovery of shares in International Airline Group (LSE: IAG) yesterday definitely calls for an investigation, as the reasons are not apparent on the face of it.

The IAG share price absolutely soared to the tune of 11% yesterday. It was unexpected. So unexpected that billionaire, Ken Griffin, reportedly lost millions shorting the stock. So what did the market know about this stock that a billionaire hedge fund manager didn’t? That is exactly what I will try to break down in this article.

A permanent return to the skies on the horizon?

Generally speaking, airlines got a huge boost yesterday after the World Health Organisation confirmed that the Omicron variant causes milder symptoms. Naturally, investors proceeded to ignore the fact that thousands of flights have been cancelled since Christmas. They then poured into airline stocks and the IAG share price was one of the beneficiaries.

IAG is the parent company of British Airways, Aer Lingus, LEVEL, and Iberia. Needless to say, it has been a very rocky past 24 months for all four providers. Therefore, the news about the mildness of the Omicron variant could not have come at a better time. Earlier this week Eurocontrol confirmed that air traffic in 2021 was at 44% of 2019 levels. The recovery towards the end of 2021 though, seems to indicate that 2022 could be the year that traffic returns to pre-pandemic levels.

This is still a gamble for investors though. No one can say for sure what the future will hold. Eurocentral also confirmed that Irish air travel was the worst affected in Europe last year – which naturally affected Aer Lingus. However, with the likelihood of new mutations lowering with every dose of the Covid-19 vaccines issued, 2022 could well be the year that airlines are back up and running again.

Time to buy?

Would I buy IAG stock right now? The value investing side of me screams “absolutely not” to this question. The reasons are clear. Even in the best of times, IAG (like many airlines) operates on the thinnest of margins. Free cash flows have been in negative territory for more than 10 years and Covid has simply made that much worse. The company’s latest earnings showed a £378m loss. It hasn’t been pretty but there is a bullish case here.

Late last year my colleague Manika Premsingh made the case for buying IAG shares. At the time, the IAG share price had rebounded 16% from 2021 lows to close out the year on a slight positive gain. This was even before any of the current optimism around airline stocks. With the IAG share price as it currently is, there could be some massive upside if 2022 turns out to be the year of the comeback for air travel. I will not be buying this stock right now, but I definitely will be keeping an eye on it.

Stephen Bhasera 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 past 13 years have been an unprecedented time to own stocks and shares. On 6 March 2009, the US S&P 500 index crashed to an intra-day low of 666 points before bouncing back. Since then, it has soared skywards at an unprecedented rate. As I write, the index stands at 4,785.90 points. That’s a gain of almost 4,120 points from the bottom of the bear (falling) market of 2007-09. Today, the S&P 500 is more than seven times (+618.6%) the level of its March 2009 low. But as stocks head to the moon, I become increasingly worried. When I fret about the next stock market crash, I seek the wisdom of mega-billionaire investment guru Warren Buffett. Here are five lessons I’ve absorbed from the ‘Oracle of Omaha’.

1. “Every decade or so, dark clouds will fill the economic skies, and they will briefly rain gold.”

In his 2016 letter to shareholders, Warren Buffett said this in reference to stock market crashes. He then added, “When downpours of that sort occur, it’s imperative that we rush outdoors carrying washtubs, not teaspoons. And that we will do.” When ‘Uncle Warren’ wrote this, US stocks had risen for seven years in a row. It took until March 2020 for the next crash to arrive — and then it was largely over a month later.

2. “A simple rule dictates my buying: Be fearful when others are greedy, and be greedy when others are fearful.”

On 16 October 2008, Buffett offered this profound advice. It came from this fantastic New York Times (NYT) article, written during the depths of the 2008 global financial crisis. In this piece, Buffett revealed that he was investing 100% of his personal wealth into US stocks. The stock market crash bottomed out five months later and no doubt Buffett went on to become even richer.

3. “Bad news is an investor’s best friend. It lets you buy a slice of America’s future at a marked-down price.”

In the very same NYT article, Buffett added these encouraging words. He did a great job of reassuring stressed-out investors that stock market crashes are a great time to buy beaten-down stocks. For me, when shares prices have slumped, it’s time to dig deep and buy big. 

4. “The best chance to deploy capital is when things are going down.”

Buffett made the above remark in a CNBC interview about share buybacks in February 2018. But this comment applies equally to investing in cheap stocks during stock market crashes. For me, there is no better time to buy than when market meltdowns drag the value of a great business into the bargain bin.

5. “Whether we’re talking about socks or stocks, I like buying quality merchandise when it is marked down.”

As a veteran value investor, I take this quote to heart. For me, what better time is there to buy shares when they are deeply discounted in a stock market crash? In 2003, 2009, and March 2020, I bought some fantastic stocks at knock-down prices. Just as Buffett said in 1991, I want to “Just buy something for less than it’s worth.”

Finally, I’ve taken Buffett’s excellent advice to heart. For months, my wife and I have been building a war chest to buy more cheap UK shares in the next stock market crash. Ideally, this cash pile will buy more bang for our buck when prices eventually reverse!

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.

Many stocks ended 2021 and entered 2022 performing well. In my own portfolio, several shares prices have been going up. And so have the FTSE 100, FTSE 250, and other indexes.

Fears about the Omicron variant of Covid-19 appeared to hit the markets in the autumn causing a braking action on stocks. But recent news suggests the disease caused by the variant may not be as severe as feared. And that’s even though the virus appears to be highly transmissible in its Omicron form.

That assessment of the situation could easily prove to be wrong. But I reckon the stock market is likely reacting to the news currently and investors could be judging the outlook to have improved for businesses.

However, I’d invest £25 a week into shares or share funds regardless of whether the market is up, down, or moving sideways. To me, regular investing is a worthwhile method of aiming to handle the volatility that stock markets tend to deliver.

Targeting rising dividends

If it isn’t Covid-19 affecting the markets, it’s something else. There’s always something to worry about. And that’s why people often say stock markets tend to climb a wall of worry.

But, for me, volatility is not a good reason for avoiding stocks. Over the long term, stocks and shares as an asset class have outperformed all other major assets, such as property, bonds, and cash savings. And I want to align myself with that trend even though there’s no certainty stocks will continue to outperform.

And when it comes to generating passive income, the dividends paid by many companies are hard to beat. One of the great things about dividends is they tend to rise as an underlying business prospers. But that doesn’t always happen. Company directors can raise, lower, or cut dividends as they choose. So, if a business underperforms, dividends could fall.

But I’m keen on owning a passive income stream from dividends because it has the potential to grow without further effort from me. However, with £25 a week to invest, I’d aim to reinvest my dividend income rather than siphoning it off straight away.

Compounding gains

The aim would be to build my investments up over years. And by compounding gains in that way I’d likely be able to draw a larger passive income from dividends in the future — perhaps when I’m ready to retire.

I’m using various stock investments with the aim of building up passive income. For example, I put money into Smithson Investment Trust, Finsbury Growth and Income Trust, and several low-cost index tracker funds. On top of that, I invest regularly in the shares of individual companies after careful research and consideration.

There’s no guarantee of a positive long-term outcome. All stocks carry risks. But I’m optimistic my regular investment regime will help to smooth out some of the volatility in my portfolio. And I’m putting my faith in the power of the long-term compounding process.

Kevin Godbold owns Finsbury Growth & Income Trust and Smithson Investment Trust PLC. The Motley Fool UK has recommended Finsbury Growth & Income Trust. Views expressed on the companies mentioned in this article are those of the writer and therefore may differ from the official recommendations we make in our subscription services such as Share Advisor, Hidden Winners and Pro. Here at The Motley Fool we believe that considering a diverse range of insights makes us better investors.

Warren Buffett’s negative stance on gold is pretty well known within the investing community. But as fears of inflation continue to rise, the precious metal is once again becoming a popular refuge for those looking to protect their wealth. So should I be ignoring the Oracle of Omaha’s views? Well, for my portfolio, I don’t think so.

The recent volatility in the market is certainly unpleasant, making the relative stability of gold far more enticing. However, thanks to the price drops of many fantastic stocks, buying opportunities have likely emerged. So, how do I find them? Let’s explore.

The not-so-secret recipe of building wealth

In my experience, buying and holding shares in high-quality businesses that have a profound impact on improving the world is a recipe for sustainable wealth generation over the long term. This isn’t exactly a secret, and it’s something Warren Buffett has been saying for decades.

But simply identifying these companies is not enough. The price of the stock also needs to be taken into account, and the importance of valuation is something most investors tend to forget. All too often, a ground-breaking discovery or disruptive start-up makes headlines sending its share price surging. The prospect of a revolutionary product or service generates a lot of excitement. And that can push share prices to lofty levels. What’s more, investor growth expectations tend to grow even bigger as the share price climbs, especially if the company has a history of beating analysts’ forecasts.

But eventually, the price can become divorced from the underlying fundamentals. And when that happens, buying shares of even the most well-run enterprise can be a disastrous mistake. Why? Because all it takes is one sign of trouble or slowing growth to trigger massive downward momentum.

Investors of DocuSign know this all too well. The electronic signature solutions business saw its share price nearly halve in a single day last month after management issued guidance that was lower than analysts’ forecasts. I like to describe these situations as Fantastic Business, Terrible Stock.

Uncovering buying opportunities, Warren Buffett-style

Fortunately, such volatility can create buying opportunities. When any business releases an underwhelming earnings report or is at the centre of a negative news story, the share price has a habit of falling. And this happens regardless of whether the underlying value of the company is affected.

It’s not uncommon for a company to miss earnings expectations due to a temporary problem. In fact, the last two years have seen plenty of this as Covid-19 continues to disrupt entire industries. But the question to ask is, what caused the drop in performance?

Suppose it’s only a temporary problem, and the business itself is a well-run organisation with a strong balance sheet and fat cash flows? In that case, a buying opportunity for me may have just emerged thanks to investors falling prey to their emotions. Or, as Warren Buffett put it: “Be fearful when others are greedy, and greedy when others are fearful”.

Zaven Boyrazian has no position in any of the shares mentioned. The Motley Fool UK has recommended DocuSign. 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.

Royal Mail (LSE:RMG) shares have had a pretty impressive run over the last 12 months. In fact, the stock is up nearly 50%. And since January 2019, it’s basically doubled!

That’s some pretty impressive growth for a company founded in the 16th century, especially given the world fell into a pandemic during the period. So what’s behind this sudden growth spike? And can the stock double again in 2022? Let’s explore.

The momentum behind Royal Mail shares

The upward trajectory of Royal Mail shares started in 2020. While the group undoubtedly suffered significant disruption from the pandemic, it also enjoyed notable tailwinds. More specifically, the accelerated adoption of e-commerce.

With the demand skyrocketing for online shopping delivery solutions, the last three months of 2020 were “unprecedented”, according to management. And looking at the figures, I have to agree. During the quarter, the company delivered 496m parcels – the highest amount in the business’s 500-year history.

Consequently, the group’s 2021 fiscal year, spanning from March to March, saw a 16.6% jump in revenue – the highest it’s been in over five years. While the double-digit growth is impressive, it doesn’t hold a candle to what happened to the bottom line.

Combining this feat with some clever corporate restructuring, operating profits went from £141m in March 2020 to £728m the following year. That’s a 416% jump within 12 months!

Management is using the proceeds to improve the balance sheet by wiping out a good chunk of debt. At the same time, it’s expanding investments into improving delivery infrastructure, as well as international operations.

With that in mind, seeing Royal Mail shares jump 100% is hardly surprising. And if the company’s latest ventures are successful in creating long-term value, I think the stock can double once again – maybe even in 2022.

Taking a step back

I can’t deny that this business’s recent performance and renewed growth capacity is exciting. But, like any company, Royal Mail has its fair share of challenges to overcome. Most notably, competition.

The surging demand for parcel delivery solutions hasn’t gone unnoticed by other logistics firms. Plenty of competing delivery companies are ramping up operations and spending to capitalise on the opportunity. What’s more, many of these businesses aren’t riddled with interest-bearing debt chipping away at free cash flow.

Suppose management isn’t able to keep up with its more agile competitors? In that case, Royal Mail shares could start heading in the wrong direction as the company loses market share.

Time to buy?

All things considered, I think 2022 could be yet another ground-breaking year for Royal Mail shares. Looking at the most recent results, revenue is still climbing along with profits and margins.

Having said that, I’m personally not tempted to add this business to my portfolio. Why? Because I think there are even more lucrative opportunities to be found elsewhere.

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.

Buying shares of BT Group (LSE:BT-A) is a popular move by many UK investors. Even financial institutions like BlackRock and Vanguard are some of the most prominent shareholders. Seeing a herd mentality in the stock market is not uncommon, but is it warranted in the case of this business? Let’s take a closer look at how the stock has performed over the years and whether I should join the herd.

BT shares’ performance

Despite having a high standing among professional and individual investors alike, BT stock hasn’t been a great performer over the last half-decade. In fact, over the five-year period, it has fallen by a staggering 47%. That means a £1,000 investment in January 2017 would now be worth around £530.

By comparison, the FTSE 100 index has delivered returns of around 3.3% over the same period. That’s not exactly an exciting performance either, as it fails to beat current inflation. But it’s a drastic improvement compared to losing half of the capital invested in BT shares. What happened?

Investigating the problem

This company is big, very big, with a lot of moving parts. As such, there are several contributing factors behind the stock’s disappointing performance. However, one of the most important issues, in my mind, is the management team.

For years, competing telecommunications and internet providers have been chipping away at BT’s market share. And with insufficient defences being deployed by leadership, revenue and profits have been steadily falling along with dividends.

Meanwhile, the business continues to have many high fixed costs related to developing and maintaining its infrastructure. And with profit margins disappearing, its reliance on debt financing has been climbing.

Needless to say, this is not what a thriving business looks like. At least, I don’t think so. But despite the issues of the past five years, over the past 12 months, shares of BT have actually started rising by double-digits. So much so that a £1,000 investment in January 2021 would now be worth around £1,280. Is this just because of the pandemic recovery? Or is there something more happening under the surface?

A glimmer of hope for BT

The first step in solving a problem is recognising that there is one. And that’s precisely what BT’s management has done. After admitting its complacency to shareholders, the group has unveiled a £15bn comeback investment programme.

The goal is to drastically expand its fibre optic infrastructure to cover 25m homes by 2026. Given that there are currently around 30m homes in the UK today, the company may recapture its lost market share if the plan succeeds.

On the telecommunications front, its 5G network rollout is progressing rapidly. According to its latest earnings report, BT has already acquired more than 5.2m 5G customers. And with legacy products being phased out, the growth capabilities of BT shares are improving, I feel.

Time to buy?

Shares of BT may have been underachievers these past few years. But those days might now be behind the stock. So will I buy? Not for now. I’ll wait to see how the progress continues over the next few months before deciding whether to invest. If the company can reverse the downward trajectory of profits, and shrink its pile of debt, then perhaps I’ll decide its popularity is warranted.

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.

I think a shift in investor mentality towards companies working with common Environmental, Social and Governance (ESG) goals will become vital in the next decade. Businesses embracing sustainability and working in areas that promote green initiatives are multiplying as we move towards a greener supply chain. And an important concern raised at last year’s COP 26 event is switching to more renewable power sources and phasing out coal power.

I feel UK renewable energy companies can benefit tremendously given recent trends. Here are three shares I’m looking at in this space that could explode in 2022.

EVs take off

If I had to pick one industry that grew enormously in 2021, it has to be electric vehicles (EVs). Car giants are increasing their EV offerings and global markets are opening up infrastructure possibilities that could enable the long-needed switch. And this is where firms like Nexus Infrastructure (LSE: NEX) stand to benefit.

The company’s primary focus is civil engineering and outfitting new homes with utilities. But it also specialises in installing EV charging ports in homes. Last year, the government passed legislation that made EV ports mandatory in all new homes in the country from 2022. This is great news for Nexus because it already works with established builders like Persimmon and Taylor Wimpey. EV ports can be an auxiliary service the company provides, which already gives it a large market share in an emerging space.

It should be noted that a lockdown remains possible given the Omicron spread. And Nexus’s primary business, civil engineering, could be affected given rising construction material shortages and inflation. This could eat into revenue and cause its share price to fall. And Nexus shares already look slightly expensive at 222p, at a forward price-to-earnings ratio of 34 times. But I’m watching this renewable energy stock closely to try and find the optimal entry point for 2022 and beyond.

Future power?

Eqtec (LSE:EQT) is a waste-to-energy company that has patented gasification tech to solve two separate environmental issues. The company uses waste to produce gas fuel to power industries. But this innovative tech is a risky pick that has high potential. And a lot of its future revenue rides on massive adoption.

Its share price has remained dormant for nearly a decade now, falling below 10p in 2015 and never recovering. But a new three-year deal with Toyota Motors and two new power plants could breathe life into this renewable energy stock. The company could build recent developments and work towards wider adoption, which is why it is on my watchlist. However, this remains a speculative pick for my portfolio. 

The next company on my list is ITM Power (LSE:ITM). The hydrogen electrolysis machines the company makes separate hydrogen from water and use clean hydrogen as fuel. This process has zero carbon by-products, which is vital. Hydrogen as a fuel source is still in its infancy, in terms of adoption. This makes me optimistic about ITM’s future potential.

Despite impressive tech, the energy firm was plagued by a massive debt pile in 2021, which led to a poor showing last year. The loss-making company expects a 31% increase in projected revenue which could plug the £250m debt hole. And right now, the company is at a crucial point in the market and could take off in 2022, which is why it is on my watchlist.

Suraj Radhakrishnan 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.