Over the course of this year, Alibaba (NYSE:BABA) has been in the news a lot. Unfortunately, it has mostly been for the wrong reasons. This has been partly reflected in BABA shares moving lower since the start of 2021. From a level this time last year of $250, the stock currently trades at less than half that value at $120. But for a well established and fast growing business, is this a bargain buy?

Friction with local authorities

Firstly, it’s important to understand why the shares have fallen so much this year. They trade in the US but are also listed in Hong Kong. 

The business has come under scrutiny recently due to tensions rising between China and the global companies that hail from the country. For example, in recent weeks a Chinese company named Didi has decided to delist from the US and will list in Hong Kong instead. Many see this as a reaction to pressure from the Chinese Government.

The shares have fallen showing that even the shining star of Chinese e-commerce isn’t immune to the pressure. Co-founder Jack Ma even dropped out of sight for a couple of months at the turn of this year. This didn’t do the public image of the company any good. As for the business, it was fined $2.8bn by the Chinese market regulator for monopolistic abuse in Q1. This was quite a large amount, 4% of the company’s 2019 domestic revenue. 

The bottom line here is that investors are clearly nervous about the relationship between Alibaba and the Chinese Government, as well as the influence being exerted.

Strong financials for the shares

If I strip out the noise around the authorities, there are many reasons to like the shares based on financial performance. Last month, quarterly results showed a revenue increase of 29% year-on-year. Although adjusted EBITA actually fell by 32%, this was largely due to investments made in key businesses within the group. Therefore, I’m not too concerned about this. If anything, the investments should help to grow overall profitability in years to come.

Alibaba is also growing the active customer base. This is key as the ecosystem that the business is trying to push needs a high volume of clients to make it successful. In the results, it noted an annual active customer base of 1.24bn, an increase of 62m from the previous quarter. The overall figure is impressive and will help to drive the business forward in 2022.

Overall, it’s a difficult call as to whether I should buy the shares now. They do look cheap, and I think the strong growth shown by the latest results isn’t reflected in the current share price. However, I’m very conscious of the influence that the Chinese Government has over the actions of the firm. If further measures are taken, such as restricting operations abroad, then I could easily see the share price slump further.

Therefore, as much as I like the business, I think it’s too much of a risk to buy shares at the moment.

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.

The uncomfortable reality about Lloyds Banking Group (LSE: LLOY) is I was right to be cautious about the stock in an article almost five years ago.

Nothing’s changed

That old scribbling had the headline, The uncomfortable truth about Lloyds Banking Group plc. And that’s similar to this article’s headline. But there’s a reason for that — nothing’s changed. I still think of Lloyds as an investor trap. It always seems to look attractive. But it can clamp shut and lock investors into a losing position like a Venus flytrap catches a bluebottle.

In the old article I said: “As Lloyds moves towards what looks like a ‘normal’ existence after the ructions of the financial crisis, investors seem attracted to the firm for its cheap-looking valuation.”

Lloyds continues to look cheap today. And the stock is still underperforming for its long-term shareholders. As far as I can see, the words ‘underperform’ and ‘Lloyds’ go together like a hand in a glove for the stock. And that’s why I’ve been banging on about it in multiple articles over several years. One day, I hope to be wrong, for the sake of all those holding Lloyds shares for the long term.

However, it hasn’t all been bad. Lloyds regularly moves up higher from its lows. So there have been some decent shorter-term investment opportunities. And I’m sure some nimble investors will have done well from those moves. But as a long-term stock commitment, I’m not impressed.

Why Lloyds probably isn’t as cheap as it looks

Today’s share price near 45p throws up a forward price-to-earnings (P/E) ratio just over seven for 2022. And the anticipated dividend yield is above 5%. Meanwhile, the price-to-tangible book value is about 0.8. So, on traditional valuation indicators, it’s hard to suggest that Lloyds looks expensive.

But what if earnings plunge in the years ahead? Banks like Lloyds have businesses that are about as cyclical as cyclical businesses can be. And that means plunging profits are a regular feature of the firm’s trading and financial record.

But the share price and shareholder dividend payments tend to cycle up and down as well. And that’s why I reckon the market rarely assigns Lloyds a high-looking valuation — the next profit plunge could always be just around the corner. So, a lower valuation helps to accommodate that possibility.

Right now, for example, City analysts have a consensus for earnings to decline by just over 20% in 2022. So, Lloyds deserves its low valuation because of the huge potential for volatility in the business model. And I’d restate my conclusion of nearly five years ago, “the only thing going for the stock right now is fragile share-price momentum and a fat, but in my view precarious, dividend.”

Of course, I could be wrong and Lloyds may soar off to new heights in the years ahead. The business tends to do well when the general economy is thriving. And there’s potential for the world and the UK to continue its recovery from the pandemic if the Omicron variant is conquered by vaccines and other treatments. On top of that, banking businesses can prosper in higher interest rate environments. And the base interest rate could begin creeping up soon. 

Nevertheless, I’ll be watching from the sidelines rather than owning Lloyds stock now.

Kevin Godbold has no position in any of the shares mentioned. The Motley Fool UK has recommended 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.

For a FTSE 100 stock, the Rolls-Royce (LSE: RR) share price has been very volatile. Since the start of the pandemic, it has become a bit of a Marmite share – investors either love it or hate it. With the emergence of the Omicron variant of the coronavirus, could the bears (that is, the pessimists who don’t like the company) once again get on top?

What’s happened to the share price?

Before we dig deeper, let’s first look back. The Rolls-Royce share price through much of 2018 was fluctuating around 300p. Looking further back, at the end of 2013, the shares hit an all time high of around 436p. Where are the shares trading at, at the time of writing? A lowly 116p.

In the time since the share price was above 300p, Rolls-Royce shares have been hit by issues with its Trent engines, and by the pandemic, plus as a result of both of these major issues, missed targets for cash flow in particular. The Trent engine problem is now solved, but its longer-term impact on relationships with customers is unclear. Put another way, has it tarnished the Rolls-Royce brand?

The emergence and rapid spread of Omicron once again poses a real risk to Rolls-Royce in my opinion.

But how about looking forward?

That’s all well and good, but what happens in the future is more important than the past. While that’s true, to have any chance of correctly guessing what might happen in the future and understanding if Rolls-Royce might be a good investment, it’s important for me to understand how the market treats this share.

Even if I were to take the view that Omicron won’t lead to significant travel restrictions, just the fear of it might be enough to send the share price down in the short term.

Add on top of that how much weaker the balance sheet is as a result of the pandemic and I don’t see a case for me to invest. I really do think Omicron is bad news for the Rolls-Royce share price.

The potential green shoots of a recovery, which in turn could lead to the share price rising, could come from Omicron not being as serious as previous variants of the virus, or from Rolls-Royce diversifying its earnings. However, the latter will likely take years and the value of its modular nuclear reactors and non-aerospace work will only slowly feed into the share price.

When all is said and done, I’ll be avoiding the Rolls-Royce share price. When it comes to industrial companies, I much prefer Melrose. As such, I will be focusing my research on it and digging more into that company. 

The bottom line is, I feel, that the Rolls-Royce share price will keep falling. I think the bears are in the driving seat. 

Andy Ross owns no share mentioned. The Motley Fool UK has recommended Melrose. 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.

Tesla (NASDAQ: TSLA) stock has been falling recently, and since the end of November, the share price has sunk 18%. After its 50% rise over the past year, this fall could be due to many investors banking profits. This has included Elon Musk, who is currently in the process of selling 10% of his Tesla stock. While this is partly due to tax reasons, he has also stated in the past that he feels the shares are too expensive. But as the Tesla share price has fallen below $1,000, is now the ideal time to buy?

High potential

There is no doubt that Tesla has a huge amount of potential. Indeed, even despite the challenges posed by the pandemic and the recent semiconductor shortage, car deliveries are still on track to rise by almost 70% year-on-year in 2021. It is also in the process of expanding vehicle production facilities, which should help continue this rapid growth. The introduction of new models will certainly help with this.

And growth in the past has also been tremendous. Indeed, in the third-quarter trading update, revenues totalled nearly $14bn, a 57% rise year-on-year. After managing to reach profitability in 2020, profits also keep on growing. In fact, in the third quarter they totalled over $1.6bn, a 389% rise from last year. This gives me hope that profits can continue to grow, and Tesla stock will hopefully rise as a response to this.  

As such, especially due to the accelerated shift towards more green energy, Tesla is certainly full of potential.

The risks

Despite this excellent potential, there are valid reasons why Tesla stock has dipped recently. For one, it is still valued extremely highly, with a market cap near to $1trn. This means that Tesla is valued at higher than the next 10 largest automotive companies combined.

I worry that this valuation may be over-optimistic. For example, competition in the EV sphere is certain to increase. This includes Toyota, which recently announced that it would be investing $35bn in an electric push to take on Tesla. Further, Tesla also faces competition from other pure EV companies such as Lucid Motors and Rivian, both of which have completed IPOs recently. These are likely to take market share away from Tesla, and may slow growth.

From a valuation perspective, Tesla also trades at a forward price-to-earnings ratio of 120 and a current price-to-sales ratio of around 20. These are both very high and may indicate that the shares are still too pricey, despite the recent dip.

What am I doing with Tesla stock?

While I am very impressed with Tesla’s business, I still believe that it is overvalued. In many ways, I think this partially explains Elon Musk’s recent selling spree. As such, I won’t be buying Tesla stock just yet, as I feel that there is further to fall.

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.

Vertu Motors (LSE: VTU) has had a strong 12 months with the stock up 122% as I write. It’s still a penny stock though, as the share price is 65p.

The company is an automotive retailer in the UK, which includes selling used and new vehicles, and offering an after-sales service. There has been high demand in the vehicle market this year, and this elevated volume has benefited Vertu Motors.

Can this continue? And should I buy this penny stock now? Let’s take a look at the investment case.

The bull case

In Vertu Motors’ interim results to 31 August, the company said the volume of vehicle sales was ahead of market trends in all areas when compared to the same period in 2020. This is a bullish sign for the business as it relies heavily on a high volume sales to generate profits.

I see the vehicle market as remaining buoyant for the time being, so there could still be further upside in the share price. Indeed, Vertu Motors recently upgraded its full-year expectations as new vehicle supply to the company was better than expected in October and November. This will help maintain sales volumes, and is a sign that supply chain constraints may be easing.

What’s more, Vertu Motors sold the additional vehicles at enhanced margins, indicating that demand remains high.

Another point to consider is the strength of the balance sheet. In fact, the current market value of the company is less than the tangible asset value, which itself is underpinned by a property portfolio. This offers significant downside protection for a potential investor like myself. One way of looking at this is by the price-to-net-asset-value ratio, which is a cheap 0.8 as I write.

The bear case

As mentioned, Vertu Motors has to sell a high volume of cars to generate its profit. For example, in the last full-year results, the company generated £2.5bn in revenue, but only £32m in operating profit. This is a wafer-thin operating margin of about 1.3%.

Therefore, demand for vehicles in the UK has to remain high for it to make significant profits. Any continued supply chain disruption may reduce the company’s ability to keep the volume of vehicle sales high.

City analysts are also forecasting profit to decline by 58% in its fiscal year 2023 (the 12 months to 28 February 2023), which would be a significant fall. This does suggest that the company has benefited from a purple patch this year from the booming automotive market.

Is this penny stock a buy?

Taking everything into account, I view the investment case favourably here. Vertu Motors has been able to navigate the difficult trading conditions over the pandemic, and its share price has responded accordingly. The margin of safety provided by its robust balance sheet also mitigates some of the risk of investing in this penny stock.

I do have to keep in mind the prospect of reducing profit in the next fiscal year, and the potential for further supply chain disruption. Nevertheless, I’m considering buying this stock for my portfolio.

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

A little over a week ago, I wrote an article on the Cineworld (LSE: CINE) share price, exploring the outlook for the stock in 2022. 

In it, I concluded I was cautiously optimistic for the year ahead, based on recent consumer spending data. I speculated that if consumer spending continues to grow, the company could start to make a dent in its debt pile and move on from the pandemic. 

Since then, a lot has changed. New pandemic restrictions have dented consumer confidence, and a court ruling in the US has put the company’s very future at stake. 

The Cineworld share price slumps

Yesterday, the company revealed in a stock exchange announcement that the Ontario Superior Court of Justice had awarded substantial damages to the Cineplex chain of cinemas regarding the merger agreement between the two entities, which fell apart in June of last year. 

Cineworld initially terminated the merger agreement as the transaction no longer made sense during the pandemic. That seemed to be the right decision at the time. With the company fighting for its life, the last thing Cineworld needed was more debt and more screens to manage. 

However, Cineplex has argued that Cineworld breached the terms of its agreement by withdrawing. The two parties have levied several accusations against each other, resulting in a court battle. 

The court has now found in favour of Cineplex. It has awarded the company damages of C$1.2bn for lost synergies to Cineplex and C$5.5m for lost transaction costs. At current exchange rates, this judgement could cost Cineworld £700m. The firm’s current market capitalisation is just £623m. 

Cineworld has said it will appeal the judgement. In the meantime, it will not be paying any settlement. 

A threat to survival

I think this judgement could threaten the company’s survival. Not only could the business be on the hook for more than £700m in legal penalties, but it is also responsible for £3.5bn of other debts. 

Even though it is appealing the judgement, Cineworld’s legal battles may make it harder for the corporation to find new financing and sustain its current obligations.

Creditors may baulk at the idea of providing the company with more funding if it is at risk of having to pay what can only be described as a vast sum to Cineplex. It could be the end of the road for the Cineworld share price if it pulls the plug. 

Having said all of the above, in the background, it is clear that the company’s trading outlook is improving. Although recent restrictions will impact consumer confidence, it seems likely Cineworld will be able to capitalise on the economic recovery over the next 12 months. This will provide the establishment with much-needed cash flow to service its debts.

If the recovery is more robust than expected, it may also convince creditors to provide the business with more capital. So there is a chance the company could escape from its current predicaments. 

However, considering the scale of the company’s challenges, I am no longer interested in buying the stock. I think the potential risks of owning the shares are now are higher than the potential rewards. And there are plenty of other attractive investments for me to buy. 

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.

I have been interested in the Rentokil (LSE: RTO) share price for some time. And my interest in the company has only grown over the past 24 months. 

There are two significant themes driving growth at the pest control specialist. And it is highly unlikely these will come to an end anytime soon, suggesting the outlook for the group is only going to improve. 

Three tailwinds 

The first theme is global warming. According to various studies, rodent populations are growing as the world heats up. Scientists believe they are thriving and breeding more in warmer environments. 

As well as this trend, in densely populated centres such as London, rodents are thriving on human leftovers. Neither of these trends has an immediate solution, suggesting their populations worldwide will only grow as we advance. 

For companies like Rentokil, this presents a tremendous opportunity. The business has the edge over competitors in the sector because it is one of the world’s largest and most recognised pest control businesses. And its recently-announced deal to acquire US peer Terminix for £5.1bn will only reinforce this advantage. 

This is one of the most significant acquisitions in the company’s history, but we can assume it will not be the last. The global pest control market is incredibly fragmented. Thousands of smaller operators, typically owned by a family-run business or small independant operator, dominate the sector. 

This fragmentation provides scope for further consolidation in the years ahead. In fact, I think this is a third tailwind that can help drive the company’s growth over the next five to 10 years. 

So, overall, all these tailwinds will support Rentokil’s medium-term growth. As earnings and revenues expand, I think the stock will follow suit as more investors buy into the company’s growth story. 

Rentokil share price risks

Of course, the company’s growth is not guaranteed. The main risks it faces right now are rising prices and competition. Although a fragmented market presents opportunities for consolidation, it also means additional competition. Rentokil’s size and economies of scale have helped the group fend off the competition up until this point.

However, investors should never use past performance to guide future potential. There will always be the risk that the business could lose market share to a smaller competitor if it takes its position in the market for granted. This is especially true in an inflationary environment. If the company hikes prices too far too fast, it could send consumers elsewhere.

However, even after considering these risks and challenges, I would be happy to buy the stock for my portfolio today. I think the pest control market will likely see substantial growth over the next few years, and the Rentokil share price may reflect this trend.

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.

Soaring inflation means UK share investors like me need to make a positive return in 2022. Latest Office for National Statistics data showed consumer price inflation (CPI) hit 5.2% in November. Many analysts think it’ll go even higher in the spring too. Deutsche Bank expects CPI to rise as high as 6% by next April.

This poses a challenge for me if I’m looking to make a positive return with dividend stocks next year. But locating shares that could make me a decent pot of cash next year isn’t an impossible task. Here are five stocks whose yields for 2022 sit above current levels of inflation.

#1: Bank of Georgia

Banking shares are good options for me as central banks could move to curb inflation by hiking interest rates. Financial firms like Bank of Georgia benefit under this scenario as rate increases widen the difference between what they offer borrowers and savers, giving profits a nice boost. This particular bank offer a chunky 7.7% dividend yield for next year. I’d snap it up even though worsening Covid-19 infection rates in Georgia could hamper the economic recovery there.

#2: Triple Point Social Housing REIT

Property stocks are also a good way to make solid real-term returns even when inflation is rising. This is because rental income and property prices usually increase when inflationary pressures worsen. I’d buy Triple Point Social Housing REIT, a company which provides accommodation for individuals who have special needs, to capitalise on this phenomenon. The yield here sits at 5.2% for next year. I’d buy it even though adverse changes to social housing regulations could hit profits.

#3: Polymetal International

Gold mining stock Polymetal International could also see revenues jump in 2022 as rising inflation tends to boost precious metal prices. Despite the threat posed by a rising US dollar I think this makes the FTSE 100 digger a top buy right now. Furthermore, I’d stock up on Polymetal because of its CPI-mashing 10.1% dividend yield for next year.

#4: Tharisa

Platinum group metals (PGMs) are among those safe-haven metals that often soar in price when inflation increases. This makes Tharisa an attractive stock to buy, in my book, but it’s not the only reason I’m bullish on it for 2022. Modern environmental regulations mean PGMs are needed in increasing quantities for the manufacture of catalytic converters in cars. I’d buy Tharisa despite the ever-present threat of metal production issues that could smack revenues. Tharisa carries a 9.8% dividend yield for fiscal 2022.

#5: SSE

The 5.3% dividend yield over at SSE also makes it an attractive dividend stock, in my eyes. That’s even though rising inflation poses a significant indirect risk to utilities like this. The cost of servicing its high levels of debt could soar if central banks start hiking rates to slow price rises. But, all things considered, I think this FTSE 100 shares a great buy in this climate. The essential nature of its services means the electricity generator can expect earnings to remain stable, whatever happens in 2022.

Royston Wild 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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