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Best shares to buy: 4 top stocks to snap up for 2022

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Shares have produced excellent returns for investors in recent years. Last year, the MSCI World Index – which measures the performance of large- and mid-cap stocks in 23 developed countries – generated double-digit returns for the third year in a row.

Looking at stock market forecasts for 2022, the majority of analysts expect shares to keep rising this year. That said, the general consensus is that stock selection will be important if investors want to generate strong gains. Most experts do not expect the market, as a whole, to post the kind of gains it has produced in recent years.

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Here, I’m going to highlight four shares I like for 2022. If I was looking to put new capital to work today, I’d be buying these four stocks for my portfolio.

‘Britain’s Warren Buffett’ just bought this stock

First up, Amazon (NASDAQ: AMZN), which is a major player in both e-commerce and cloud computing. It underperformed the other Big Tech stocks in 2021 and I think the share price weakness has created a buying opportunity. Sooner or later, I expect AMZN to play catch up.

There are a couple of reasons I’m bullish here. The first is that I expect Amazon to generate strong growth in its cloud computing division in the years ahead. The cloud market is forecast to grow at nearly 20% per year between now and 2028. This market growth should provide huge tailwinds for the company.

The second is that the valuation is now far more attractive than it used to be. Go back three or four years and Amazon had a price-to-earnings (P/E) ratio in the 200s. Today however, the forward-looking P/E ratio is about 65. Given Amazon’s dominance, I think that’s a reasonable valuation.

It’s worth noting that top portfolio manager Terry Smith (aka ‘Britain’s Warren Buffett’) just bought Amazon for Fundsmith Equity, so he clearly sees value in the stock.

But Amazon faced some challenges in 2021, including higher costs and supply chain issues. These issues could persist in the near term. However, eventually, I think they’re likely to go away as imbalances brought on by Covid-19 moderate. When they do, I expect Amazon’s share price to move higher.

A leader in digital payments 

Another stock I like for 2022 is PayPal (NASDAQ: PYPL). It’s one of the world’s leading ‘digital wallet’ companies. Currently, the company has over 400m users on its payments platform.

PayPal shares took a big hit in the final quarter of 2021. One reason for this was that 2022 revenue guidance was a little lower than the market had been expecting. I believe the share price weakness here has created a great buying opportunity. After the pullback, the P/E ratio is in the mid-30s, which seems very reasonable to me given the growth potential here as the world moves away from cash.

It looks set to be a major beneficiary of the continued growth of online shopping in the years ahead. Research shows that when merchants offer PayPal as a checkout option, consumers are around three times more likely to complete their sale. With e-commerce set to grow by around 10% per year over the next decade, PayPal looks set to get much bigger. 

Of course, PayPal does face plenty of competition. Not only from traditional rivals, such as the credit card companies, but it also faces competition from new payments technologies such as crypto. So there’s no guarantee it will do well.

With 400m+ users however, I think it’s well-positioned for the future.

Low valuation 

In the FTSE 100, I like Sage (LSE: SGE). It’s a leading provider of cloud-based accounting and payroll solutions that’s benefitting as businesses undergo digital transformation.

In recent years, Sage has been transitioning to a subscription-based business model and this now appears to be paying off. Recently, the company advised that for the year ending 30 September 2022, it expects recurring revenue growth in the region of 8-9%. It added that organic operating margin is expected to “trend upwards” in FY2022 and beyond.

The Group enters FY22 in a strong position and with momentum,” said chair Andrew Duff.

I’m not convinced this shift to a software-as-a-service (Saas) business model is fully reflected in the valuation however. Currently, Sage shares have a P/E ratio in the low 30s. By contrast, US rival Intuit has a P/E ratio in the mid-50s. I think we could see the valuation gap here close in 2022. It’s worth noting that Sage has been buying back shares recently, so this should boost earnings per share.

One risk to consider here is competition from newer players, such as Xero. These kinds of companies could steal market share. But I think this risk is baked into the valuation.

Important technology 

Finally, I like Lam Research (NASDAQ: LRCX). It’s a maker of semiconductor manufacturing equipment. Over the last few decades, these have become a very important part of the global economy. Today, they essentially power all electronic products, including computers, smartphones, kitchen appliances, and electric vehicles.

The reason I’m bullish on Lam is that I expect to see countries all over the world build domestic semiconductor plants in the years ahead in an effort to minimise supply chain disruption. This should benefit Lam and other makers, such as ASML.

Lam strikes me as a high-quality company. Over the last five years, revenue has climbed from $5.9bn to $14.6bn. Meanwhile, over this period, return on capital employed (ROCE) has averaged 28%, which shows the company is very profitable. I don’t think the quality here is reflected in the valuation however. Currently, Lam trades at just 20 times expected FY2022 earnings. That seems very cheap to me.

A risk to be aware of is that semiconductor spending tends to be cyclical. So the company could face a downturn at some stage. I’m comfortable with this risk however. I don’t expect a downturn in the near term, simply because, with the world increasingly becoming more digital, demand for semiconductors is very high at the moment.

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John Mackey, CEO of Whole Foods Market, an Amazon subsidiary, is a member of The Motley Fool’s board of directors. Edward Sheldon owns ASML Holding, Amazon, Lam Research, PayPal Holdings, and Sage Group and has a position in Fundsmith Equity. The Motley Fool UK has recommended ASML Holding, Amazon, Lam Research, PayPal Holdings, and Sage 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.

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