Yesterday, after weeks of negotiation, it was announced that National Express (LSE: NEX) has agreed a share-based takeover of Stagecoach. Here, Stagecoach shareholders will get 0.36 National Express shares for every one they own, meaning they will own around 25% of the combined company. This will bring together two of UK’s largest public transport operators, provided that the Competition and Markets Authority doesn’t have any objections. I feel that this acquisition makes perfect sense, and this is why I’d buy the FTSE 250 stock today.

Why am I so optimistic about the acquisition?

Firstly, the merger is likely to create significant synergies, which is expected to lead to cost savings of around £45m. This is higher than the original estimate of £35m. These costs savings will be achieved through sharing depots and around 4o job cuts from head offices and corporate departments. 

Further, the acquisition values Stagecoach at £470m, and I think that this undervalues the company. Indeed, even in the face of multiple lockdowns, Stagecoach still made revenues of £928m last financial year. Partially due to the government support that it received, it also made statutory pre-tax profits of £24.7m. Things have further improved in the first half of this financial year, with operating profits totalling £32.9m and revenues totalling nearly £600m. As such, with it valued at just £470m, I think the company seems like a bargain. This makes it a very shrewd acquisition for National Express.

By acquiring another FTSE 250 stock in the transport industry, I feel this is a sign of major optimism from National Express. This is because it shows a genuine belief that the transport industry can recover from the pandemic. I’m hoping that this optimism can pay off in the long term.

Risks for the FTSE 250 stock

Despite these signs of optimism, things still seem very uncertain in the travel industry at the moment. This is particularly true considering the rise of Omicron in recent days. There is a possibility that this could provoke a new lockdown, which would have devastating consequences for National Express, as travel would be halted.

While this seems like a worst-case scenario, the new variant is likely to cause more wariness among consumers. This may prevent many from travelling. As such, there is a risk that the recovery will be hindered. This must be taken into consideration.

My consensus

Despite these risks, I still feel that the strengths of this FTSE 250 stock are too strong to ignore. In fact, in addition to the company’s presence in the UK, which should be bolstered through the recent acquisition, National Express has a strong presence in both North America and Spain. Accordingly, I believe that the transport operator is well-positioned for the future. This will hopefully allow it to be at the forefront of the post-pandemic recovery. Therefore, I’m very tempted to add some more National Express shares to my portfolio.

Stuart Blair owns shares in National Express Group. 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 Avacta (LSE: AVCT) share price has been languishing for the past couple of months. Since the beginning of August, the stock has declined by around 13%. Over the past year, shares in the testing and diagnostics group have increased by just 1.6%. 

The stock has underperformed even though its published a robust set of results for the period ending 30 June at the end of September. The company reported an increase in revenues to £2.3m and a cash balance at the end of the period of £37m. 

The firm has also announced that its antigen lateral flow test has performed strongly when testing to identify SARS-CoV-2. 

First sales 

The first sales of its flagship AffiDX SARS-CoV-2 antigen lateral flow test occurred after Avacta’s first-half results were published. As such, it looks as if investors will have to wait and see what sort of an impact these deals will have on the group’s top and bottom lines. It will also be interesting to see how much of an impact these sales will have on cash flow. 

Running out of cash is usually the main reason why small businesses fail. Even though Avacta is not a small business by conventional standards, with a market capitalisation of £283m, the group is still tiny compared to its international testing and diagnostic peers. Some of these companies have multi-billion-pound market capitalisations. 

Avacta has enough cash to sustain its losses for around a year, so there is no immediate pressure on the balance sheet. Still, I am sure the company’s shareholders would rather see profits than losses. 

I think this is one of the main reasons why the Avacta share price has struggled over the past couple of months. It seems to me as if the market is waiting for the company to report on the sales of its flagship testing product. This testing product could produce a significant revenue stream for the group, which has been losing money consistently for years. 

Without a turnaround, the corporation may continue to report losses and, sooner or later, it will have to raise new funds. Some investors may not be willing to back the company with additional fundraising. They may be staying away from the business until there is more clarity. 

Avacta share price catalyst 

However, Avacta is far more than just a testing business. It recently began the first stage of testing for its AVA6000 drug. This is part of the company’s preCISION chemotherapies and Affimer immunotherapies slate of treatments, which have the potential to transform cancer therapy. 

These treatments may have potential, but it could be years before they reach commercialisation. In the meantime, the company will have to find funding from somewhere. Its testing division could provide this capital. 

So overall, it looks to me as if the market is waiting for further news from the business before buying into the stock. I would use the same approach. I am not willing to buy the shares today but might reconsider my position if and when the company is starting to produce cash flow. 

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.

Investing basics may seem simple, but they are the foundation on which all successful investors base their decisions. Many of my best decisions were made when remembering these rules. And many of my biggest mistakes were made ignoring them.

No one’s making you swing

Warren Buffett once compared choosing investments to batting in a game of baseball, save for one key difference. There’s no rule that says you have to swing. This means I can take the time to really think over every opportunity that comes my way, and if I’m not 100% certain it’s a good bet, I don’t have to take it. This has meant I’ve missed some great investments, but there’s nothing wrong with that. There will always be more opportunities, more chances to swing. And when it comes to my hard-earned money, it’s better to play it safe.

Don’t be lazy. Do your research

It really doesn’t take much effort to learn a little about a company, and that research can be the difference between making a great investment and losing lots of money. Of course, I need to know what I’m looking for, so I ask myself:

• Does the company offer a product or a service?
• Is it expensive to run?
• Does it have a lot of competition and if so, does the company have an edge over similar companies?
• Does it have a lot of debt or large profit margins?

Most of these questions can be answered by looking at a company’s financial statements and by using a bit of common sense.

Don’t buy the news

It’s important to keep up with the news and know what’s going on in the wider world. The problem with following the news too closely is that it can cause us to invest reactively rather than proactively, leaving us always one step behind the market.

One of the biggest mistakes I ever made was buying shares in a company that had just made the news because the stock price had gone through the roof. Shortly after, the price crashed. Because I was a novice investor, I panicked and sold. The entire process just cost me money and caused me stress.

Now I do my research first and never buy a company I hear about in the news.

Investing is a marathon, not a sprint

Every single person on the planet is susceptible to the influence of two key emotions. Fear and greed.

It’s fear that makes us sell our shares when the market goes down, and greed that pushes us to buy when prices are at all-time highs. If I don’t keep these emotions in check, I might as well just burn my money.

The trick is to remember that investing is not about making money today. It’s about building wealth over the long term.

The best thing I ever did was buy shares and forget about them. Prices will fluctuate up and down in completely unpredictable ways for years, and I realised that if I spent my days watching them, I would only lose the strength of my convictions.

All investing brings with it risks but our job as investors is to manage those risks and try to stack the odds in our favour.

James Reynolds 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.

Back in August, I questioned whether the Darktrace (LSE: DARK) share price was a ticking time bomb. Despite concluding that it probably wasn’t, I did suggest that it might let off some steam at some point. 

In retrospect, it turns out that the former may have actually have been appropriate. The cybersecurity firm’s value has tumbled 30% in the last month alone.

Is it time for me to scratch that contrarian itch (as others seem to be doing today) or could there be more bad news to come? Let’s begin with a quick recap.

The Darktrace share price: what gives?

It was all going so well. Priced 250p a pop at its IPO, Darktrace stock went as high as 1,003p per share earlier this year. Towards the end of October, however, it all began to unravel.

The first capitulation occurred when analysts at Peel Hunt questioned whether the company was really worth its multi-billion pound valuation. Citing growing competition and Darktrace’s low R&D spend, their target price was just 473p. 

The downward pressure then continued as the post-IPO lock-up period came to an end and original investors jettisoned their holdings. Board members were also active sellers. Records show non-executive director Vanessa Colomar pocketed over £8m in November. That’s hardly encouraging.

From hitting that 52-week high, the Darktrace share price has now fallen 60%. So, where does it go from here?

Where next?

As always, no one knows for sure. So, let’s focus on a few positives first.

There’s little point arguing against the idea that cybersecurity will remain a major investment theme going forward. Assuming nothing truly awful happens, it seems likely that Darktrace’s self-learning AI will likely mop up a decent proportion of this business from multiple industries looking to protect themselves from bad actors operating online.

Regardless of share price antics, it’s also clear the firm is growing well. October’s Q1 trading update revealed a 50.8% increase in revenue (to $93.1m) compared to the previous year. FY22 growth of between 37% and 39% is now expected. Broker Berenberg remains a fan too, recently stating that “any share price capitulation is a result of fear not fact“.

On the flip side, one can argue that the valuation is still too high at a price-to-sales ratio of 13. While seemingly unrelated, the rise of Omicron could also push investors to sell what they can and batten down the hatches. Even if the general market sell-off doesn’t continue, Darktrace should be demoted from the FTSE 100 on December 20. 

The situation isn’t helped by the Cambridge-based business having a very small free float (the number of shares available to buy and sell on the market). This could make any falls all the more dramatic because it takes less to budge the needle. Of course, big moves in the opposite direction can also occur, as evidenced by today’s 6% rise.

Better opportunities

Darktrace is in something of a dark place right now. While more positive on this company compared to fellow 2021 IPO stock Deliveroo, I can’t help but think that its similarly unprofitable status could haunt it going into 2022, especially in a market where traders are already nervous about the pandemic and the threat of rising interest rates. 

In looking for compelling growth plays, the £2.6bn cap doesn’t make my shortlist just yet. 

Paul Summers has no position in any of the shares mentioned. The Motley Fool UK has recommended Deliveroo Holdings Plc. 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 Cineworld (LSE: CINE) share price fell by more than 25% on Wednesday morning after the FTSE 250 cinema operator said it may have to pay C$1.23 billion in legal damages. The court ruling adds to pressure on the company from the impact of Omicron restrictions.

A big setback

Today’s legal news relates to a court case brought against Cineworld by Canadian cinema group Cineplex. Cineworld agreed to pay C$2.8bn to acquire Cineplex in 2019, but abandoned the deal when the pandemic struck last year.

Cineplex is suing Cineworld for up to C$2.2bn in damages, claiming the FTSE 250 company has breached its obligations and duty of good faith. An Ontario court has found in favour of Cineplex and has dismissed Cineworld’s counter claim. The court awarded damages of C$1.23 billion to Cineplex for “lost synergies” — cost savings and profit gains that were expected to come from the acquisition.

Unsurprisingly, Cineworld says that it “disagrees with this judgement and will appeal the decision”. The company does not expect to have to pay the damages while the appeal is ongoing.

Is this the end for Cineworld?

An appeal should provide some breathing room — but Cineworld may have to find more than C$1bn. To put this in context, Cineworld’s market-cap today is just £465m (C$788m). Based on my reading of the company’s accounts, finding that much cash is likely to be very difficult.

As a result, I think Cineworld will be in a very serious position if it loses the Cineplex appeal. Cineworld already has net debt of $8.4bn and does not have many assets it can borrow against. For example, the group’s land and buildings were valued at just $395m at the end of June.

To find cash for the damages, I think that Cineworld CEO Mooky Greidinger would probably have to carry out a big rights issue. He might also need to find new equity investors to take a majority stake in the business. Existing shareholders could face heavy dilution.

A buying opportunity?

What I’ve discussed above is the worst-case scenario. I can see several more positive ways of looking at this situation. Today’s crash might even be a buying opportunity.

The best outcome would be if Cineworld wins its appeal and no longer has to pay damages.

Even if the company loses its appeal, the time it will take for this legal process to complete could be very helpful. Broker forecasts suggest that Cineworld’s trading will return to near-normal levels in 2022. If this is correct, the business should start to generate surplus cash again. This might help to fund the cost of any damages that become payable.

Finally, I think it’s worth remembering that Greidinger and his brother Israel are Cineworld’s largest shareholders, with a 20% stake. They have a very strong incentive to rescue this business without wiping out existing shareholders.

Would I buy Cineworld shares? No. This situation is too speculative for me. But I’m not ruling out Cineworld just yet.

Roland Head 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.

Shares in Watches of Switzerland (LSE: WOSG), the luxury watch retailer, have gone up just a little under 150% this year. It appears to be the best performing FTSE 350 share at the time of writing over a one-year period. Looking further back since it joined the stock exchange in 2019, the share price is up 360%.

With such a rapid rise recently, could the form continue into 2022 or has the share had a good run and is due a correction? Is it a growth share worth me backing? 

The valuation? 

Automatically as a value-focused and often contrarian investor, this share makes me nervous. The rapid share price growth over a short period of time could be a sign of investors getting ahead of themselves. The forward P/E is now 31. The EV-to-EBITDA — which compares the enterprise value to earnings before interest, tax, depreciation and amortisation — is another important valuation metric and it’s 26.1, which is quite high, especially versus other retailers.

Ultimately Watches of Switzerland doesn’t have high barriers to entry as it’s a retailer. Consequently, it needs to spend on marketing and maintaining very strong relationships with its luxury, exclusive suppliers. Potentially this provides some barrier to entry. But not a high enough one for me. 

Reasons WoS is a growth share

Despite my reservations, there’s obviously a lot that investors like about this company. The share price is indicative of that. First, there’s strong revenue growth. From 2016 to 2020, revenue went from £410m to £811m and operating profit from £13.1m to £19.8m.

I think what’s really driving the investment case is the growth opportunity in the US. There it has been acquiring complementary businesses to speed up its expansion, while also opening new stores and refurbishing its estate to keep its competitive advantage.

In its 2021 annual report Watches of Switzerland said that it will keep making acquisitions. This should boost earnings and, if done well, can add value. But large acquisitions, as investors will have seen at other companies, can also destroy value. Acquisitions are a double-edged sword. They should be watched carefully.

E-commerce is also a growing part of the business, as it is with almost all retailers. This cheaper method of reaching more customers should improve margins, so I think online expansion has also helped pump up the share price. In 2021, the e-commerce business was up a strong 120.5%, which reflected a more than doubling in the UK and a successful launch in the US.

Stick or twist?

Ultimately I think investing in Watches of Switzerland comes down to whether the US expansion opportunity is big enough to justify the current valuation. US revenue increased by 32.7% (38.5% on a constant currency basis) and the US business made up 33% of the group’s revenue in FY21 (FY20: 27.8%).

For me, this is pretty impressive, but not high enough growth to make me think the shares will keep flying next year. For that reason, I won’t be looking to add the shares to my portfolio. I’d think there are better valued UK retail shares that also have US overseas expansion opportunities.

Watches of Switzerland seems like a good company, so if the valuation came down significantly and US growth rockets, I may be tempted. But I don’t expect the share price to crash any time soon.

Andy Ross owns no share 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 penny stock I’ve been researching lately is Heiq (LSE: HEIQ). It’s a developer of material technology that adds functionality, hygiene properties and other enhancements to a wide range of textiles. The company says it has developed over 200 technologies, many in partnership with major brands, and has seven manufacturing sites around the world.

Heiq listed on the London Stock Exchange by way of a reverse takeover in December 2020 and raised over £60m. The share price began trading at close to 120p and rallied to a high of almost 250p by January. However, the share price has fallen to 89.5p as I write, meaning it’s now in penny stock territory.

So, has this over 50% plunge this year made Heiq stock a buy for me? Let’s take a look.

The bull case

The first thing that attracted me to this penny stock is its history of innovation. For a start, the company has 10 patent families and 180 trademarks that protects its intellectual property. This would make it more difficult for a competitor to take market share from Heiq.

The company showed its ability to innovate during the pandemic by developing Heiq Viroblock. It’s an antiviral and antibacterial agent that can be added to fabric during the final stage of manufacturing. In doing so, it protects the fabric against viruses and bacteria, including Covid-19. The technology has a patent pending, and helped revenue grow by an impressive 80% in 2020.

The markets that Heiq operate in are also large. The company says it’s a global leader in the $24bn textile chemicals market, and the $10bn antimicrobial fabrics market. The development of Heiq Viroblock also widens the company’s addressable market. This should mean there are plenty of growth opportunities available to Heiq, in my view.

The bear case

In the most recent interim results for the six months to 30 June, revenue actually declined by 14% over the same period in 2020. What’s more, adjusted EBITDA (earnings before interest, tax, depreciation and amortisation) fell to $4.8m, from a prior $12m. The company said the decline was due to an exceptionally strong period during the pandemic in 2020.

However, the gross margin declined from 57% to 50% due to supply chain disruptions and raw materials cost inflation. Operating costs also rose 48% as the company continued to invest for its future growth.

This isn’t a good combination of declining sales and gross margin, plus rising operating costs. Heiq also said the rest of 2021 will be unpredictable due to the supply chain issues and cost inflation pressures.

The valuation seems too high to me, taking into account these risks today. The forward price-to-earnings ratio is 29, which is steep when pre-tax profit is forecast to decline by 32%.

Is this penny stock a buy?

On balance, I don’t view the risk/reward for my portfolio as favourable today. The valuation is high when sales and the gross margin are declining. And Heiq says things will stay unpredictable.

So, for now, it’s staying on my watchlist as I view the potential for growth here as exciting. There are better stocks for me to buy right now, though.

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.

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Wow, 2021 has not been a fun year for investors in THG (LSE: THG), formerly called The Hut Group. The THG share price has tumbled by over three-quarters. At its much lower price, is more bad news going to keep coming and will it fall further, or is it a potentially profitable contrarian investment for me?

A saving grace? 

The one main thing that I think could turn around the firm’s fortunes and boost its share price is its tech platform called Ingenuity. In its ‘Ingenuity Commerce Q3 2021 Update’ report, THG said the operation has high recurring revenue, which is increasing every quarter. That’s the good news. 

According to that report, after the first three quarters of 2021, Ingenuity has made revenues of £137m. However, Next’s LABEL platform makes £464m in sales annually, so the questions I ask myself are: is Ingenuity that brilliant? And will it scale globally and really boost the THG share price? I’m unconvinced about that. THG may have technology, and technology may often excite investors, but is it really best in class tech that will attract lots of customers? So far the evidence on that seems unclear.

On the positive side, half-year results showed revenue up 41.9%. The gross margin rose 1.3% to 46.5%, which is very high, even by the standards of a technology and e-commerce company.

There’s undoubtedly a UK (and indeed a global) trend towards online shopping, which could benefit THG generally and the THG share price. That’s because investors like to buy into a growing trend. 

The company is also acquisitive, which could be both a positive and a negative. It helps it grow quickly and develop its own brands, but introduces the risk that the balance sheet becomes stretched and in the context of a falling share price, management may become desperate and overpay for acquisitions. This is usually bad for shareholders.

Potential share price downsides

Further governance issues could see the shares fall further. It’s also known that THG paid rent to properties controlled by the founder. Does that mean incentives are aligned and the best interests of shareholders are being looked after? Personally, I think there are more transparently run companies out there I could invest in.

Also, management presentations this year haven’t exactly won over analysts and investors. In October, the shares fell over a third after the founder, chairman and CEO, as well as the CFO, fronted a capital markets day for investors.

I’m also not clear on the rationale behind spinning out the beauty part of the business given its phenomenal growth. It’s bigger and fast growing than nutrition – the other main part of THG’s e-commerce empire – so why lose it? It feels a bit short term, especially given all the acquisitions THG has made in recent years.

Now it says “Clearly, the THG share price has become much cheaper over a short period of time. The company’s seemingly very strong growth makes the price look tempting in some ways. Yet I feel uneasy about buying the shares. At its cheaper valuation, I may be missing out, but it may also be that the shares keep falling. I’ll avoid them for now until the value of the Ingenuity division and the strategic direction of the company becomes clearer.

Andy Ross owns no share 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 bought BT (LSE: BT-A) stock in early 2020. This is before we knew the pandemic would happen. Even at that time, it was not exactly the best performing stock around. Its share price had been dropping for years. But I still saw a case for buying it. 

The first reason was its double-digit dividend yield. My calculations show that even if the BT share price continued to decline a bit in the future, the yield was big enough to more than make up for it. In other words, net positive returns on the stock looked all but assured at the time. Also, after years of Brexit-related limbo, it appeared like the UK was finally ready to grow fast. The anticipation was already evident in the FTSE 100’s gains in December 2019. This could have spilled over into BT’s growth too. Its biggest money spinner is the crucial fibre-optic broadband network for the UK, which could thrive during a boom. 

BT shares’ pandemic crash

However, soon we found ourselves in a pandemic slump. Not only did BT roll back its dividends, the stock crashed. And by October 2020, it was trading at penny stock levels. I continued to hold the stock during this time, and was soon rewarded for it. Come November 2020, and like many other recovery stocks, it started rallying. By June this year, it was back to its pre-pandemic highs. 

But it has not gone anywhere since. It has slumped and recovered, but is still trading lower than its June 2021 levels. My BT investment is running into losses right now. Since I have been holding the stock for almost two years now, during which I have earned no dividends, it is a good time for me to assess if I should continue to hang on to this investment. 

Dividends come back for the FTSE 100 stock

First, let me consider dividends. It is true that BT has not paid any dividends  for some time, but it is going to start paying them soon. Its interim dividend payout is scheduled for February 2022, for the financial year 2021-22. I am guessing that the final one for the year should be paid by next September, which is normally its schedule. It plans to pay 7.7p for the year, which brings its forward dividend yield to 4.4%. 

To be fair, this is not bad at all. It is higher than the average FTSE 100 yield of 3.5%. And it even just beats inflation, which is forecast to be at 4% in 2022. In the past year, the stock has also risen some 30%, so there is also hope of capital gains. 

What I’d do now

Based on this, I think that I should wait a while before selling my BT stock. The company has strong credentials, and now when online spending has become so much more ubiquitous, its services’ significance have only grown. It is facing rising competition, but I would like to wait and watch how that plays out. As such, I would hold the stock right now, but not buy more of it. 

Manika Premsingh owns BT GROUP PLC ORD 5P. 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.