At the end of the year, I am making a list of UK stocks to buy next year. One of the ways I do so, is by going over the recent performance of companies. While many struggled in the last couple of years because of Covid-19, numbers are beginning to show improvements now. One of them is the AIM-listed infrastructure services provider Nexus Infrastructure (LSE: NEXS). 

Nexus Infrastructure reports strong results

In its recent full-year results for the year ending 30 September 2021, the company showed an increase in revenue from last year. Also, it recorded a net profit, after falling into a loss last year. And it has resumed its dividends. It also appears optimistic for the next year on account of expected growth across its segments. 

The company has three business segments. The biggest in terms of revenue generation is its civil engineering business. It provides a range of services like drainage systems and high-rise construction for segments like housebuilding. Next is the segment providing a range of utility services. These include installation of gas, electricity, water, fibre network, and electric vehicle (EV) charging infrastructure. And finally there is its energy transition business, which provides infrastructure for public charging of EVs. It also provides smart energy infrastructure.

Future positive

I think the fact that it caters to EVs is a big positive for the future, as the country and indeed the world transitions towards clean energy sources. Even though it is still quite a small part of its total revenue, the energy transition business has seen a big increase in the past year. And I reckon that could be a sign of things to come, considering that there is expected to be a significant increase in EV ownership during this decade.

However, for the near future, I think the possibility of another financial wobble exists. In 2020 and until earlier this year, the housebuilding sector got a boost because of the stamp duty holiday. However, its rollback means that the housing market might not boom quite like it has in recent times. In fact, the latest print on the UK economy shows that construction activity actually declined in October compared to the previous month. Considering that two of Nexus Infrastructure’s biggest segments address the residential housing, I would not rule out a slowdown there. 

This is especially so since we might just be headed for another lockdown, which would have negative repercussions for the economy. If the housing market does not quite receive the same boost as it did last year, than Nexus Infrastructure could be impacted as well. 

What I’d do about the UK stock

Keeping this in mind, I would keep the stock on my investing watchlist for 2022 for now. I want to see how the Omicron variant situation develops and also how the company’s next update looks. If the situation improves fast, I could buy this UK stock because it could make a great investment. Until then, I will focus on safer stocks. 

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.

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Domino’s Pizza Group (LSE:DOM) is one of my best stocks to buy now. Today’s announcement has the seen the shares jump over 20%. At current levels is it worth adding the shares to my holdings?

Takeaways on the rise

Domino’s is currently the UK’s leading pizza brand and has a strong presence in the Republic of Ireland too. Since arriving on these shores back in 1985 from the US, Domino’s has amassed over 1,200 stores throughout the UK and Ireland.

As I write, Domino’s shares are trading for 429p, whereas at this time last year they were trading for 333p. This is a 28% return over a 12-month period.

Shares are up today by over 20% after the company announced a resolution with many of its franchisees that will see Domino’s work closer with them to increase performance and enhance operations, but most importantly, share more profit.

Why I like Domino’s

Most of my best stocks to buy now have similar characteristics. One of these is the fact that performance recently and historically has been good. I understand that past performance is by no means a guarantee of the future but I use it as a gauge to review investment viability. I can see that Domino’s revenue increased year-on-year for three years between 2017 and 2019. 2020 levels fell slightly short, most likely due to the pandemic. Gross profit has increased for four years in a row year-on-year.

Coming up to date, a Q3 update released in October showed that total sales were up nearly 10% compared to the same period last year. Domino’s also opened five new stores in the quarter and its momentum towards digital platforms continues with new app sign-ups growing.

Today’s announcement by Domino’s is positive. Franchisees have long disputed the old model of profit sharing as well as operational issues. The breakthrough in talks and subsequent agreement will only make Domino’s a better company in my eyes. The directly run stores and franchised operations will work in tandem and all pull in the same direction towards better performance and increased profitability. This should also boost investor returns.

Domino’s shares look cheap right now too. At current levels, Domino’s has a price-to-earnings ratio of just 17. In addition to this, it has a dividend yield nearly double the FTSE 250 (the index in which it resides) average of 1.9%. The shares could help my portfolio make a passive income.

The best stocks to buy now have risks too

Current macroeconomic issues could hamper Domino’s progress. Rising inflation and costs could eat away at margins and any potential returns. If these costs are passed to the customer, these customers may be lost to the competition. In addition to this, the current supply chain crisis and shortage of HGV drivers could also disrupt operations throughout the UK and beyond.

Overall Domino’s is a cheap share with the ability to help my portfolio to make a passive income and has a favourable track record. I believe today’s announcement only makes it a more enticing prospect. I would add Domino’s shares to my portfolio at current levels. FY results are due early next year and I wouldn’t be surprised to see them to surpass pre-pandemic levels.

Jabran Khan has no position in any shares mentioned. The Motley Fool UK has recommended Dominos Pizza. 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 Bank of England delivered a shocker today. It increased interest rates to 0.25%, delivering a hike of 0.15 percentage points from the 0.1% level earlier. It was clear for a while that the UK’s central bank would have to raise interest rates sooner rather than later. I have talked about it more than once myself in reflecting on the  FTSE 100 stocks I’d like to buy.

Why has Bank of England raised interest rates?

But I doubt that it would have happened so swiftly if we had not received an inflation shock yesterday. Annual inflation based on the Consumer Prices Index (CPI) jumped to 5.1% in November, the highest in more than 10 years. The pressure on prices has been building up for much of the year now. Higher fuel prices, supply chain issues, and demand-supply mismatch in the immediate post-lockdown period have contributed to this. 

The Office of Budget Responsibility (OBR) has forecast the number to average at 4% for 2022 anyway, but that was going to be next year. The Bank of England was not expecting this high an inflation number until next year either and the latest print is higher than economists’ expectations of 4.8% as well. This is likely to have prompted the bank to respond sooner than expected on interest rates. 

FTSE 100 banks rally

Expectedly, FTSE 100 banking stocks have rallied on the news. Lloyds Bank is the third biggest gainer in today’s trading so far, up by 4.3% as I write. Barclays, Standard Chartered, HSBC, and Natwest are also among the top 10 gainers, showing increases of 4%, 3.7%, 3.6%, and 3.2%. When a central bank raises interest rates, commercial banks are more likely to do so as well. And if their interest rate increases are substantial enough, their financials can look a whole lot better. Going by this logic, I have argued for some time that banking stocks could be the best ones for me to buy at this time. 

Are we looking at stagflation, though? 

I would do it with some caution now, though. Inflation has been a challenge for many FTSE 100 companies for a while now. At the same time, growth has remained quite muted. In October, the UK economy barely grew from the month before. And with the Omicron variant creating havoc now, growth could be even more uncertain. This is exactly the fear I had earlier in the year, when I had said that we might just be looking at stagflation going forward. And not just in the UK but elsewhere as well. At the very least, we cannot rule it out now. And poor recovery  is not good for any sector, and especially not banks, which are cyclical in nature. 

My assessment

I would keep the big potential downside in mind before buying banking stocks. At the same time, I am hopeful that the Omicron virus situation could resolve itself soon enough. This would put the recovery back on track and interest rate interventions should impact inflation too. But for now I am waiting and watching what happens next, not buying anything. If things do get back on track quickly however, I’d buy banking stocks. 

Manika Premsingh has no position in any of the shares mentioned. The Motley Fool UK has recommended Barclays, HSBC Holdings, Lloyds Banking Group, and Standard Chartered. 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 attractions of holding high yielders in my ISA is that they can help me earn passive income for years to come. Certain industries tend to have a number of high yield shares for various reasons. These include tobacco, mining, and insurance.

Here I want to look at some examples of insurance shares I would consider for my ISA. I will discuss whether they are the best high yield shares for my objectives.

Insurance names among UK high yield shares

Looking across the yields offered by various UK shares, a number of insurance companies are notable for the size of their dividends. For example, Direct Line is yielding 8.2%, Legal and General 6.1%, Aviva 5.0%, and Admiral 4.9%.

All four of those shares are members of the FTSE 100 index, but their yields are above the average offered by FTSE 100 shares. Nor is that a recent phenomenon: it’s often been the case that insurance companies offer higher yields than the market average. Why is that?

The economics of insurance

I see a couple of main reasons.

First, insurance can be a very lucrative business. Insurers are able to collect premiums and invest them to generate returns for themselves. They can also profit through careful underwriting – charging customers more in total than they expect to end up paying out. There’s a reason so many customers think insurance companies are greedy.

On top of that, insurance companies often don’t have the same reinvestment needs in their own business as other companies do. They don’t need to build factories or spend money on costly research and development. Of course, insurers do incur some costs in the course of their business. But overall the business model often throws off significant cash flows, which can be paid out to shareholders in the form of dividends.

Income or share price growth?

Sometimes when a share offers attractive dividends, it can come at the cost of capital growth. If a company is paying out surplus funds as dividends, that means it is not investing much to grow its business for the future.

If we look at the share price performance of the four insurers mentioned above over the past five years, some possible evidence for this can be seen. Aviva has fallen 15% and Direct Line has dropped 24%. On the other hand, Legal & General is up 21% and the Admiral share price has grown by 75%. So it may be that, rather than insurance companies offering limited capital growth opportunities, the story is similar to many other business sectors. Over the long run, within a sector some companies will see their share prices grow while others will drop.

That said, I do think it’s worth thinking about capital growth prospects when considering whether to add insurers to my ISA. If a company pays out juicy dividends but the share price drops, I could end up losing money. Looking at dividend yields in isolation therefore isn’t enough when deciding whether insurers are the right high yield shares for me to own. Instead, I ought to do what I would do when considering potential share purchases from any other sector. That involves me looking at a company’s finances, assets, and business strategy to decide whether I think it can produce substantial free cash flows over the long term. Such free cash flows could help support dividends. But they could also boost the case for the insurer’s business model. Over time hopefully that might translate into share price growth.

Insurers and risk

If any sector ought to be good at assessing and managing risk, one might think that it ought to be insurers. After all, that’s how they earn a living.

In reality, just like any other business, insurers face risks. These include increasing competition from fintechs, which threatens to reduce profit margins across the industry as a whole. Another risk for specific insurers is bad underwriting decisions. In a bid to boost revenues, an insurer might be tempted to lower their underwriting criteria. But such criteria are there for a reason. Offering policies to riskier customers can hurt the financial returns on an insurance book.

One thing I like about companies such as Direct Line and Admiral is that they tend to focus on fairly straightforward lines of business, such as home and car policies. Those areas of business can move about somewhat – Direct Line has warned that increasing second hand car prices could hurt its profit margins this year, for example. But broadly speaking, they tend to be fairly consistent businesses. Insurers and actuaries can use a lot of data to estimate the percentage of drivers who might be involved in an accident in any given year, for example.

That is why I like so-called general insurers more than specialist underwriters such as Beazley. Those types of insurers underwrite events which are rare but can be very costly, such as environmental liability. The nature of such business means that it can be hard for me as an investor to assess how a firm is doing. It may take in large premiums for decades without having to pay out. But that can come to a sudden end. So while these can be great businesses, they don’t offer the relative predictability I would look for when choosing high yield shares for my ISA.

Insurers as an ISA pick

Insurers spread their risk by writing policies for large numbers of customers. While some will be costly, hopefully that will be more than covered by other customers who do not make any claims.

I apply the same risk management principle to my ISA. By diversifying across different sectors and companies, I spread my risk. So I would only ever have insurance as one of the sectors in which I invest. I do think some of the sector’s high yield shares offer me attractive passive income potential and would happily own them in my ISA.

They might not be the best high yield shares in terms of absolute return, as higher yields are available in other sectors such as tobacco and the capital price growth opportunities offered by insurers seem to be mixed. But as part of a balanced portfolio, I see a role for them in my portfolio. 

Christopher Ruane has no position in any of the shares mentioned. 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.

The FTSE 100 index is up by 1% as I write today. This is encouraging after some weakness seen recently. However, I find myself wondering if this latest market buoyancy can continue. There is a whole lot going on with the UK’s macro-economy, not to mention with regards to the pandemic. These could be creating a perfect storm leading to a total market meltdown very soon. 

Covid-19 situation worsens

Consider this. News flow on the Covid-19 situation is only getting worse. We always knew that winters were going to be bad, as the virus tends to spread faster during this time. But now we also have the Omicron variant in the mix. In the past month we have seen travel restrictions, calls for caution during our festive celebrations, and even speculation of another lockdown as coronavirus cases rise. I think this in itself is a recipe for a potential market meltdown of the kind we saw in March 2020, when the FTSE 100 index fell by more than 10% in a single day. 

Weak economic recovery

But there is more as well. The recovery is quite weak. On a monthly basis, the UK economy barely grew in October. This only adds another data point to the fact that it has already been relatively lacklustre after the lockdown was lifted. I reckon that this was at least partly due to the fact that some of the government support measures are being withdrawn. 

For instance, I do not think that it is a coincidence that the stamp duty holiday is being rolled back and the construction output fell in October compared to the month before. The segment can be seen as a loose proxy for housing development, and the housing market benefited hugely from government support starting last year and up to recently this year. While some segments of the economy are still doing quite well, I think this does not bode well for FTSE 100 property developers. And in general a weak recovery bodes poorly for companies, and the stock markets as well.

Inflation is heating up

Next, inflation continues to be a big challenge across companies. Yesterday’s print came in at an awful 5.1% for November on an annual basis, prompting the Bank of England to hike interest rates to 0.25% today. While inflation was widely expected to remain elevated, I doubt if anyone saw such a big increase coming so soon. The fact that the number is at an over 10-year high puts it into perspective. 

Rising inflation means that either companies absorb costs and shrink their margins or they pass on the costs to end consumers and risk losing some revenues. Either way, it is not a positive situation. And it could impact FTSE 100 stocks pretty much across the board. If it starts showing up in weaker results, the stock markets could conceivably crash. 

What I’d do in a stock market crash

I am quite optimistic still, though. The situation might just be contained soon. And a stock market crash, if it happens, could be a great buying opportunity as many of us discovered last year. And if one happens again, I am ready to invest my money in high quality FTSE 100 stocks then. 

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.

With inflation on the rise, investors are on the prowl for ways to beat it and protect their wealth. After all, if everyday prices start climbing, the value of nest eggs becomes that much smaller. A common go-to strategy in the fight against inflation is to simply buy gold. Yet, Warren Buffett, one of the world’s most successful investors, believes there is a much better way to protect and grow capital during times of higher inflation. Let’s explore the Oracle of Omaha’s approach.

Beating inflation with stocks

Being a stock market investor, it should come as no surprise that Warren Buffett’s inflation-beating strategy revolves around buying shares. Specifically, he’s looking for companies with two primary traits. The first and most obvious is, of course, to only buy shares in high-quality enterprises. This is a rule that all long-term investors should be following since mediocre or average businesses eventually crumble or simply stagnate versus the market. At least, that’s what I’ve seen.

But when it comes to beating inflation, a high-quality business may not be enough. Having low capital expenditures is also vital. Let me explain. A company that is heavily reliant on third-party suppliers for raw materials or services could struggle. That’s because these firms often have next to no control over such expenses. And with inflation pushing up prices, profit margins start feeling the pressure. 

That’s why companies with high gross margins and a strong level of control over operating expenses are more likely to thrive during inflationary periods. But even if a firm has virtually no control over its costs, it’s still possible to beat inflation if it has another crucial quality.

Warren Buffett’s #2 inflation-beating trait: pricing power

As previously stated, the problem with rising raw material costs is that margins get squeezed. But that’s only true for the companies that can’t raise prices without losing customers to a competitor. A firm with pricing power can offset inflationary pressures by simply passing on the additional cost to customers.

Needless to say, this can mitigate or outright cancel the value-destroying effects of inflation for a business and its shareholders. So, it should come as no surprise that Warren Buffett has described pricing power as “the single most important decision in evaluating a business”.

So, why not gold?

Despite Warren Buffett’s negative stance on the precious metal, many institutional and individual investors continue to use gold to hedge against inflation. Why? Because it works.

However, personally, I believe stocks are still the better strategy of the two. After all, gold may help protect wealth, but it’s not very good at growing it, as the metal doesn’t generate cash flows, nor does it produce any goods or services. Only businesses do that. And by buying shares in high-quality firms that have control over expenses along with pricing power, I can beat inflation as well as grow my portfolio at the same time.

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.

Christmas is a time for family, good food, goodwill, and good gifts. On the subject of gifts, what gift could be better than the gift of wealth creation? The average Brit will spend about £390 on presents this festive season and that’s fair enough since we all like to spoil the ones we love. However, £390  could get me at least 390 shares in some of my favourite penny stocks right now. With any luck by the time Santa comes around next year, my £390 investment in these three penny stocks will be worth a fair bit more.

An award-winning penny stock

If there was a naughty and nice list for stocks over the past year, Zephyr Energy  (LSE: ZPHR) would be right at the top of that nice list. At this time last year, a share in this company was trading at 0.82p. Today it is worth 6.85p – representing an award-winning 755% appreciation in share price. Not bad for a penny stock. The winner of the Best Performing Share Award at the prestigious AIM Awards this year is a growing oil company with operations in the US Rocky Mountains. The longer-term risk for Zephyr is the obvious push to phase out fossil fuels, but for the moment, demand remains high. The combination of high demand, recent successes in drilling activities, a very competent and experienced management team, and  the 6p price tag on this stock make it a no-brainer for me.

A potential dark horse going into 2022

Travel and lifestyle bookings company Ten Lifestyle Group  (LSE: TENG) is next on my list. In the wake of the Covid-19 pandemic, the company has naturally taken quite the beating. Losses have been the order of the day over the past two years but the stock price is yet to reflect this. In fact, this penny stock is up 16% year to date. Now, am I expecting this stock to make me wealthy? Certainly not. But what I’m willing to gamble on is a return to some semblance of normalcy in 2022. Already in September of this year, the company announced that bookings were back to pre-pandemic levels. Provided restrictions continue to get lifted, there could be nice returns here in 2022.

Cheap tech 

Idox (LSE: IDOX) is probably my favourite addition to this list. You simply don’t get tech companies that cost 69p. My colleague James Reynolds, recently wrote about how this penny stock is rise roughly 20% in the past year. Idox sells software solutions, mainly to governments but also in the private sector. With a growing base of recurring and non-recurring customers, Idox is likely to continue on its upward trajectory in the future. What I would like to see from Idox in the coming year is growth of its markets at home and abroad. Right now Idox has some presence in Egypt, the Bahamas, and Saudi Arabia. Razer thin margins threaten to impair the growth outlook of the business, but if it can continue to grow in 2022, there sky is the limit for the price of this stock.

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 crypto mining centre operator, Argo Blockchain (LSE: ARB), has had a wild ride on the stock market this year. At the time of writing today, it’s up 700% over the past 12 months. But it has seen a lot of downward movement in the past few months. Today it’s been testing the £1 level. At some points during the day’s trading, the Argo Blockchain share price was in the pence not pounds. So, could now be the time for me to add such a penny share to my portfolio?

Why Argo Blockchain became a penny share

First it’s helpful to clarify that just because a share dips below a pound, it doesn’t mean it will always be a penny share. Share prices are dynamic, so Argo could move and out of penny share status repeatedly in a short period of time.

It’s still a long fall for the company, however, given that the Argo Blockchain share price touched £3.39 earlier this year. I actually think the Argo business has shown significant signs of improvement over the course of 2021. Last month the chief executive spent money buying shares in the company. So why has the price continued to slide to penny share territory?

I think the explanation lies in recent falls in crypto pricing. Many investors perceive Argo as a proxy for the worth of leading cryptocurrencies such as Bitcoin. So as they have slide over the past few weeks, so has the Argo Blockchain share price.

Possible buying opportunity

The move into penny share status could present a buying opportunity for my portfolio if I felt confident about the future prospects for Argo.

In fact I do see increasing reasons for optimism on the company’s performance. It is scaling up its business considerably, both through acquisition and building a massive new site of its own in Texas. It has also evolved its strategy this year, opportunistically selling some of its crypto instead of hoarding it. That could help it convert paper profits into substantial free cash flow over time.

Its market capitalisation is around £460m, but I expect profits to boom. Last year it reported a £1.4m post-tax profit, which looks tiny relative to the market cap. For the first three-quarters of this year, its net income is approximately £20m. Net income is not quite the same as post-tax profit, but I think the booming net income suggests post-tax profits could also rise strongly. On that basis, the current Argo Blockchain share price looks more attractive to me for my portfolio than it did earlier this year.

My next move

But although I see potential in Argo, I won’t be making a move on this penny share just yet.

I continue to see risks in the shares, which I think the dramatic price movement this year has illustrated. Speculative activity continues to affect the share price. Swings in crypto pricing can also affect the Argo Blockchain share price dramatically. The company has borrowed money to fund its expansion. That adds to the balance sheet risk and interest payments could eat into profits. I’ll keep watching this penny share from the sidelines.

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.