Was this article helpful?

YesNo

The FTSE 100 had a respectable 2021 as it increased by over 14% to 7,385 points. However, this is still lower than where it was before Covid hit at the start of 2020. It’s important to have a view on the FTSE 100 if I’m going to use an index tracker in my portfolio like the iShares Core FTSE 100 ETF (LSE: ISF). It may also help me with my stock selection.

With this in mind, here’s my view on the FTSE 100 for 2022.

Top sectors in the FTSE 100

I like to break down a stock market index into its constituent sectors. This allows me to understand the growth prospects in a bit more detail. Understanding the sector composition also helps to explain why the FTSE 100 increased by 14% last year, but the US equivalent index, the S&P 500, surged by 27%.

The reason is that the FTSE 100 is dominated by ‘old economy’ sectors, such as financials, energy and basic materials. Companies such as BHP, HSBC and Royal Dutch Shell all achieved respectable double-digit share price returns in 2021. Such businesses generally grow in line with the wider economy. They have benefited from the rebound in economic growth after the pandemic-induced recession.

By comparison, the S&P 500 includes technology and consumer discretionary stocks such as Apple, Microsoft and Tesla. These companies are driven by technological innovation, and may therefore grow at a far higher rate than an underlying economy. For example, Tesla stock rallied a huge 50% last year, and the Microsoft share price surged 51%.

My bull thesis

With my knowledge of the sectors most represented in the FTSE 100, this is what I think will happen to them this year.

Regarding financial stocks, I think this sector will perform well in the year ahead. This is because of the prospect of rising interest rates that should increase profit margins. The Bank of England has already increased the base rate in December, and I see future rate hikes ahead to combat higher inflation.

And although energy and basic materials stocks may be seen  as ‘old economy’, these businesses are going to be crucial in decarbonisation and electrification efforts. For example, mining companies produce essential minerals that are needed in advanced electric vehicle batteries. Energy companies (such as Royal Dutch Shell) are collectively investing billions into renewable energy sources too.

Risks ahead

Where my bull thesis might fail is if we get another more deadly strain of Covid. Omicron is already causing disruption, with countries entering lockdown again. Sectors such as energy and basic materials really suffered during the initial pandemic, so there’s a risk of a repeat in 2022.

Furthermore, although the prospect of rising interest rates may increase banks’ profitability, it may slow overall economic growth.

My final assessment

Overall, I’m bullish on the FTSE 100 for 2022. I’m expecting another year of around a 10% return. This would mean the points value breaching 8,000 for the first time. In support of this, I think the UK economy will continue to expand and recover from the pandemic. I also have a favourable view on the ‘old economy’ sectors.

This is not without risk, but I’m going to carry on holding my FTSE 100 stocks into 2022.

Dan Appleby owns shares of BHP. Teresa Kersten, an employee of LinkedIn, a Microsoft subsidiary, is a member of The Motley Fool’s board of directors. The Motley Fool UK has recommended Apple, HSBC Holdings, and Microsoft. 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

Shares in UK-listed Bitcoin miner Argo Blockchain (LSE: ARB) have experienced a significant decline recently. Back in February 2021, the stock was trading above 300p. Today however, the share price is under 100p.

Has this share price fall created a buying opportunity for me as we start 2022? Let’s take a look.

Argo Blockchain shares: the bull case

There are certainly things to like about Argo Blockchain from an investment point of view. For starters, growth has been very strong in recent years. For 2021, analysts expect revenue of £81.1m. That’s a huge increase from the figure of £8.6m posted for 2019. Looking ahead, analysts expect revenue of £120m for 2022.

Secondly, unlike many other hyper-growth stocks, Argo is already profitable. For 2021, analysts expect the group to generate a net profit of £43.2m. That would represent a 25-fold increase on net profit in 2020.

Third, the stock’s valuation is not high. Currently, analysts expect Argo to post earnings per share of 10.8p for 2021. This means that, at the current share price, the trailing price-to-earnings (P/E) ratio is only about 9.1. That seems very low relative to the growth rate here.

The bear case

Having said all that, my focus is on high-quality growth stocks, and when I look at the quality of the business here, I have a few concerns.

The first is that Argo ultimately has very little control over its revenues and profits. That’s because these are dependent on the price of Bitcoin. If Bitcoin falls in value, as it has recently, Argo’s financial performance is likely to suffer. Given that Bitcoin can be very volatile at times, Argo is very much a speculative investment, in my view.

Another concern is in relation to the company’s competitive advantage. Is there anything to stop another company launching a similar Bitcoin mining business and capturing market share? There doesn’t appear to be.

It’s worth pointing out that this lack of quality is reflected in the valuation. Typically, high-quality growth stocks tend to have higher valuations. That’s because valuation is a function of supply and demand. If a stock is high quality, lots of big investors want to own it, which pushes its valuation up. The low P/E ratio here is a bit of a red flag, in my view.

The lack of quality is also reflected in the investor base. If this was a high-quality stock, I’d expect to see several institutional investors with large holdings. However, looking at ownership of the stock, there’s only one institutional investor with a holding greater than 1%, and that’s a rather obscure ETF provider.

Finally, it’s worth pointing out that Argo has been attracting some interest from short sellers (investors who expect the share price to go down) recently. Last month, for example, it was targeted by Boatman Capital. This is another red flag, to my mind.

Should I buy Argo Blockchain stock now?

Weighing everything up, I’m happy to leave Argo Blockchain shares on my watchlist for now. All things considered, I think there are much better growth stocks to buy for 2022.

Edward Sheldon 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 content in this article is provided for information purposes only. It is not intended to be, neither does it constitute, any form of investment advice. 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.

Undervalued stocks can be a great source of potential profits for an investor. If I can buy the shares when the company has a beaten down share price, in the long term, the price should rise back to its fair level. For example, FTSE 250 stock CMC Markets (LSE:CMCX) dropped 35% last year. Here’s why I think it’s an undervalued stock to buy.

Growth during the pandemic

CMC is one of the top players in the UK in the retail trading space. The online platform allows users to buy and sell a variety of financial instruments, including stocks, currencies and commodities. This can be done in several different ways, including contracts-for-difference (CFDs). These allow me to speculate on whether a stock or currency will do up or down. It involves leverage, meaning I could invest more money than I have in my account by borrowing the rest. This means that my gains or losses are increased.

The business has been around for several decades, but went public in 2016. It really started to gain traction in early 2020, when retail trading exploded. The volatility that was thrown up by the pandemic meant that there was more potential to make money from leveraged trading. This wasn’t just on stocks, but on assets such as gold and the US dollar.

This led to higher revenues and ultimately higher profits for 2020. The FTSE 250 stock saw share price gains during this period. Over a two-year period, CMC shares are up 73%.

Stalling during 2021

Coming into 2021, things looked great. However, the issue CMC found was that as markets quietened down, so did revenue. This was highlighted in the half-year results. Year-on-year, net operating income dropped by 45%. The bulk of this hit came from the risky-but-profitable leveraged trading, which was down by 50%. The more conventional non-leveraged division only had an 8% fall in income. 

The business commented that this fall was “a result of a decrease in market volatility resulting in lower client trading activity and client income retention reverting towards guided levels”.

So it’s no surprise that the FTSE 250 stock saw its share price fall by the amount that it did over the course of the year.

A good value FTSE 250 stock

Personally, I think that CMC is a good buy at the moment. Firstly, I expect the next quarter to offer higher levels of volatility in financial markets. We’ve already started to note this in December. Interest rate hikes and the rise of Omicron saw stock markets get very jittery. I don’t think this is the end of the volatility by any means, especially if we get further restrictions in the UK that impact the economic outlook.

Secondly, I think the share has been oversold, as investors expected too much growth. 2020 was an outlier year. But when I look at the half-year results for 2021 compared to 2019, the business is still ahead. For example, net operating income is up 24% versus 2019. I think that the current share price doesn’t fully acknowledge this. 

Clearly, there are still risks here. A lack of volatility is a concern I have. Further, regulators are protective of retail investors, so any tightening of rules in the future could restrict the CMC product offering.

Yet even with the risks, I’m considering buying CMC shares now as a top FTSE 250 stock for 2022.

Jon Smith and The Motley Fool UK have 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.

Airline Easyjet (LSE: EZJ) is known for its no-frills service. But there also haven’t been any frills (or thrills) about its performance on the stock exchange lately. Over the past year, the Easyjet share price has tumbled 23%, at the time of writing this article last week.

After this fall, could bargain hunters push up the price in the first month of 2022 and beyond? Or will the share price keep losing altitude?

Challenges for the share price

The share price fall reflects investor concerns about the outlook for the airline’s business performance. Coming into 2021, the rollout of vaccines had created a wave of optimism about a surge in demand for travel. That boosted shares in firms such as Easyjet. Its share price more than doubled between the end of October 2020 and May last year.

Since then, I think some of that optimism has waned. Vaccines are now seen as one part of a pandemic-management approach that has involved stops and starts when it comes to travel. Mounting challenges to travellers — such as costly testing, complex paperwork and sudden policy shifts — have made many former fliers reassess their travel plans. Sudden border closures and rule changes have piled new costs onto airlines as well.

That has all weighed on the firm. Formerly known for its strong balance sheet, it raised extra funds last year. Although prudent, that looks to me like a sign of weakness not strength. It’s now only planning to get back to its pre-pandemic capacity by 2023 – and even that could turn out to be optimistic.

Reasons to be optimistic

In November, Easyjet reported a pre-tax annual loss of £1.1bn. Despite that, I do see some grounds for optimism around the outlook for the company.

It is planning on flying at almost two-thirds of its pre-pandemic capacity in the current quarter. While that is much reduced, it is still far ahead of what we saw in the quietest months of 2020. The company’s strong liquidity gives it some financial headroom while waiting for a fuller recovery of passenger demand. It has plans for substantial extra Summer capacity to capitalise on renewed holiday demand too. Meanwhile, the company’s cost-cutting could help it improve profit margins if a full demand recovery does happen.

Where next for the Easyjet share price?

Last month, the company’s chairman bought 27,000 shares and the finance chief purchased 15,000. That suggests they feel bullish about the company’s prospects.

January understandably focuses investors’ attention on the coming year, not the past one. With a much reduced share price and plans for a strong Summer 2022, I definitely see reasons that could support a January rally in Easyjet shares. On top of that, mounting evidence that the latest pandemic variant is less dangerous than feared could boost hopes for an increase in travel demand. So I reckon the Easyjet share price could increase in January.

I won’t be buying it for my portfolio though. There are simply too many uncertain variables for my risk tolerance. From the risk of further travel restrictions to limited forward visibility on bookings, it’s hard to feel confident about Easyjet’s performance even a couple of months from now, let alone a year from today. That is an issue that risks pushing the share price even lower. 

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.

The BP (LSE: BP) share price had a good run in 2021, rising over 30%. This was mainly because the price of oil recovered, and as a consequence, so did BP’s profits. But the shares remain far below pre-pandemic levels. So, is BP a great long-term buy or will it never reach its pre-pandemic levels again?

Results last year

Due to the rising oil prices, BP was able to report consistently strong results in 2021. Indeed, in the first nine months of the year, it reported an underlying profit of $8.75bn. In the same period of 2020, when oil prices were significantly depressed, it reported a loss of $5.8bn.

There have been other positive signs, such as the reduction of net debt from over $40bn last year, to under $32bn most recently. This has placed the company in a far better financial position.

The higher profits have also allowed greater shareholder returns. The quarterly dividend most recently totalled 5.46 cents per share, a 4% increase on the year. At the current BP share price, this also equates to a healthy yield of nearly 5%. Further, it has continued to announce share repurchase programmes, and in the latest programme it’s aiming to buy back $1.25bn worth of shares. If the price of oil can remain at over $60 per barrel, it also expects to repurchase $1bn of shares for the foreseeable future. Hopefully, this will have a positive effect on the BP share price.

What are the risks?

With all these positives, it may seem slightly odd that BP’s price is still far below pre-pandemic levels. This is mainly due to the uncertainty that faces the company. For example, as seen last year, the price of oil can crash instantly. With the added worries around Omicron, this is certainly something to consider.

Further, many worry that the long-term future of BP is unstable due to climate change issues. This is because, as more people switch to products like electric vehicles, demand for oil may fall. This would have a severely negative effect on BP, despite its heavy investment in greener energy.

There are also fears that the renewable energy sector of the company will not be able to replicate the profits made in the oil division. This may restrict its ability to return a large amount of money to shareholders.

Can the BP share price rise further?

In the short term, I can see the share price rising due to that combination of high oil prices and share repurchase programmes. But I’m more dubious about its long-term future. Issues of climate change may see demand for oil drop, and while BP are investing into greener energy, I don’t believe this investment is sufficient yet. This is because it’s still prioritising shareholder returns, rather than long-term investment into the company. For this reason, I can’t see the share price returning to its former levels, and will be leaving the shares on the sideline.

Stuart Blair 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.

A main objective of mine is to grow my passive income stream. I think dividend stocks are a great way to do this because the income I receive is truly passive. It requires little effort from me after I buy the shares, as long as I monitor how the businesses are performing.

It’s important for me to pick the right dividend stocks for my portfolio so my passive income stream is reliable. With this in mind, here’s how I select dividend stocks to grow my passive income.

Stocks with high yields

The first thing I look for when selecting dividend stocks is the yield. This determines how much I need to invest when I buy shares in order to earn some passive income. Therefore, the higher the dividend yield, the more income I will earn from my portfolio.

The UK market is a great place to search for stocks with high dividend yields. The FTSE 100 index has generated a 12-month dividend yield of 3.7%. I could buy the iShares Core FTSE 100 ETF (LSE: ISF) — or a variety of other Footsie trackers — to gain exposure to this large-cap index, which would mean I’d be diversified across 100 stocks.

There are many companies in the UK with higher dividend yields though, so I can aim higher than 3.7%.

Rio Tinto and BHP are mining companies that boast dividend yields far higher than the FTSE 100 index. Rio Tinto in particular has a forecast yield in the double-digits right now. I also like the look of insurance groups Direct Line and Admiral, two companies with dividend yields over 8%. Legal & General is another insurance company but with an asset management business too. It has a current forecast dividend yield of 6.2%, which is attractive for my portfolio.

Growing my passive income

It’s not all about high dividend yields though. Yields can be high for a number of reasons, but they can often be ‘too high’ after the share price of a company has fallen in anticipation of a potential dividend cut. This happens when the underlying business is struggling and profits have fallen. So I always dig a bit deeper to see if the high dividend is likely to be paid in the future.

One way I do this is by looking at dividend growth forecasts. Sometimes it’s better to buy shares of a company that’s rapidly growing its dividend payments, rather than looking for the highest yield today. I invest for the long term, so a company that has many years of growth ahead is favourable for my portfolio.

Royal Mail is a company with a huge expected growth rate in its dividend payment. The company has performed well recently, which has meant it can up its dividend. The forward dividend yield is now a respectable 4.7%. Liontrust Asset Management is another growth share that’s planning on increasing its dividend payment (by an impressive 38%). This would mean the yield is 3.1%, and up from the current 2.2%.

I always build my portfolio with a mix of high dividend yields and companies that are growing their dividend payments. This helps to diversify my investments, as there’s always a risk of dividends being cut, or worse, stopped altogether. However, I still view dividend stocks as a great way to generate passive income.

Dan Appleby owns shares of Rio Tinto, BHP and Legal & General. The Motley Fool UK has recommended Admiral 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.

Dividends can be a solid source of income, and there are many UK shares that have large, sustainable yields. Here are two FTSE 100 dividend stocks that I believe are very undervalued and would buy in 2022.

A diversified miner

Due to the rising price of commodities, Anglo American (LSE: AAL) had an excellent 2021. Indeed, in the first half of the year, revenues rose 114% year-on-year to $2.8bn. Underlying EBITDA was also able to increase 262% to reach over $12.1bn. This was only possible due to the extremely high price of the commodities that Anglo sells. For example, in the first half, its average iron ore price rose from $90 to $210 per tonne; the price of copper rose from $2.50 to $4.60 per pound; and rhodium rose from $9,254 to $24,662 per ounce. 

These large profits have resulted in very large dividend payments, a reason why Anglo is one of my favourite dividend stocks. Indeed, last year, the group paid an interim dividend of $1.71 per share and a special dividend of $0.80 per share. For the next 12 months, it has a prospective yield of around 6%, far higher than other FTSE 100 stocks. The policy of paying out 40% of profits also seems very sustainable.

Nonetheless, while I would buy due to this dividend, there is the risk that profits will decrease. This is because the high price of commodities may not be sustainable. For instance, the price or iron ore has already fallen to $116 per tonne due to plummeting Chinese demand. This is Anglo’s most profitable segment, so it may lead to declining profits, and a smaller dividend next year. But it has a very diversified portfolio, and this helps it stand out from other mining stocks. This is what tempts me to buy for my portfolio.

An insurance dividend stock

Aviva (LSE: AV) is the other dividend stock I think could perform well in 2022. Indeed, after selling several non-core divisions over the past year in an attempt to focus its business on both the UK and Canada, the insurance company has a ton of cash. This means that at least £4bn is expected to be returned to shareholders. This is likely to include a special dividend, which will be announced at the full-year results in March. Even without this special dividend, which has not actually been confirmed, Aviva shares still yield nearly 6%.

The dividend also looks very sustainable. Indeed, at the company’s half-year results, it reported that debt had been reduced by £1.9bn. Following this debt reduction, more excess cash can be returned to shareholders. This cements Aviva as one of my current favourite dividend stocks, being both high-yielding and sustainable.

There is, unfortunately, the risk that the UK’s economic recovery takes a downturn due to Omicron. Indeed, Aviva is fairly reliant on a strong economy. But due to the many strengths of the company, I remain confident and may add more of the shares to my portfolio. 

Stuart Blair owns shares in Aviva. 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.

In my earlier years, throughout school and then university, I didn’t know much about buying stocks. I then stumbled across The Motley Fool one day, which started my investing journey. I was also lucky enough to find out about the book The Intelligent Investor soon after. And it was the author who wrote the preface in this book, Warren Buffett, who had a large influence on my investing style today.

After reading many more books since The Intelligent Investor, it’s Warren Buffett’s annual shareholder letters that I’ve probably had most value from. Here are three investing rules I’ve taken from these letters, and how I’m going to use them in 2022.

Warren Buffett on selling

The first quote is from the 2018 letter. “Truly good businesses are exceptionally hard to find. Selling any you are lucky enough to own makes no sense at all.”

This was particularly relevant for me in 2021. A large holding of mine, Games Workshop, underperformed through the year, which impacted my portfolio return. However, I monitored how the business was performing and saw enough to keep holding. It didn’t matter so much that the share price didn’t agree over one year. I remain of the view that this is a truly good business, and agree that such firms are hard to find. I’m going to continue monitoring the business through 2022, but will not be selling based on share price movements alone.

Avoiding home bias

In the 2020 shareholder letter, Warren Buffett said this about the US: “Never bet against America.” This was in reference to the country’s economic progress, despite some severe interruptions along the way. It was a pertinent point given that this was the year Covid shut down global economies. So how does this translate into my portfolio? It’s easy for a UK-based investor like myself to only focus on British stocks. However, I should look further afield, to countries like the US, to diversify my portfolio. The US is the largest economy globally after all, and there are plentiful opportunities for me as an investor to benefit from America’s progress.

Buffett’s book recommendation

In the 2016 letter, Warren Buffett said: “The best book I read last year was Shoe Dog, by Nike’s Phil Knight. Phil is a very wise, intelligent and competitive fellow who is also a gifted storyteller.”

This isn’t about investing per se, but I also read Shoe Dog and it’s a great read. What I also take from this, though, is to find passionate leaders at companies that are driven to make them a success. If I invest in these stocks, there’s a high chance that my portfolio will do well. Nike has been an astounding company over the years, and this is in no small part to co-founder Phil Knight, as he describes in Shoe Dog.

Dan Appleby owns shares of Games Workshop. The Motley Fool UK has recommended Games Workshop and Nike. 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.