When looking ahead to 2023, I am keen to look for new companies to add to my portfolio. I often look at more obscure stocks, hoping to identify opportunities other investors have missed. Yet, this focus on unknown companies may need to be revised. A number of the most popular FTSE 100 staples have fallen considerably over the last year. This means that multiple high-profile companies could have entered value territory and may be ripe for my new portfolio.

This is especially the case with Tesco (LSE: TSCO). As one of the world’s largest supermarkets, so it is hardly a hidden opportunity. Yet the share price has fallen considerably over 2022, down almost 23%. Furthermore, it is down just under 28% from pre-pandemic levels, indicating that the market has begun to neglect the share. I am keen to explore this company in more detail. Analysing companies that sell goods or services I have purchased allows me to understand the business model far quicker than a company whose products I’m unfamiliar with.

Positive highlights

On the surface, there are elements about the share that are appealing. It now has a price-to-earnings (P/E) ratio of just 10.2, far below its three-year average of almost 17. Additionally, this level is forecast to remain relatively stable, rising to 10.6 next year. This is below the FTSE 100 median of over 15.

There are also a few core positives in the company’s underlying fundamentals. The current dividend is nearly 5% and can be comfortably paid using earnings per share (EPS). This is illustrated by a dividend cover ratio of 2. The elevated dividend appears fairly stable, as it is forecast to fall only slightly to 4.8% in 2023. Additionally the dividend cover remains the same.

Another surprisingly positive metric is free cash flow generation. The company is generating the equivalent of 120% of EPS per share as cash, which is significantly above its three-year average. Furthermore, the efficiency with which earnings are generated on invested capital is also reasonable, with a return on capital employed (ROCE) ratio of nearly 8%. This metric is also comfortably above its three-year average.

Core challenges

However, the negative share price performance for Tesco is motivated by the company’s challenging outlook. This stems from the fact that Tesco has very high debt levels at almost 94% of market capitalisation. Combined with slim profit margins, this could put pressure on the company in tough times. This explains why the share suffered during the pandemic years and why the current macroeconomic threats to the UK are likely to cause more damage.

A balance sheet already weakened by the pandemic is undoubtedly vulnerable to the combined risks of elevated inflation and reduced consumer demand following the cost-of-living crisis. This is likely why investors are not hugely keen to buy Tesco shares at this stage. If these factors continue, the damage will only increase. The dividend is likely the first area to go, and if EPS experiences the expected 4.5% decline, more is needed.

Therefore despite the reduced share price, I would not be keen to add Tesco to my portfolio at this stage. However, this view may change if broader economic threats begin to subside and core fundamentals strengthen over the year.

The post After a tough few years, is now the time to buy Tesco shares? appeared first on The Motley Fool UK.

More reading

• Prediction: by December, £5,000 invested in UK shares will be worth…
• Amid geopolitical and AI risks, here’s how I’m positioning my ISA and SIPP in 2026
• My game plan for the next stock market crash
• Up just 1%: what’s going on with Tesco shares now?
• Under £5 now! Here’s why I think Tesco’s share price should be trading closer to £7

Gabriel McKeown has no position in any of the shares mentioned. The Motley Fool UK has recommended Tesco 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.

After an extremely tough time during the pandemic, things were looking up for Rolls-Royce (LSE: RR) in 2021. The share price began to stabilise and the stock finished the year up almost 11%. However, this respite was short-lived, as continued financial pressure and weakening fundamentals hampered the company’s recovery. As the end of 2022 approaches, the share price is down almost 28%.

This decline needs to be considered in the context of the last few years. When looking back to pre-pandemic levels, the Rolls-Royce share price is down 63%. Despite these continued falls and the recovery narrative that often surrounds this iconic company, I am not tempted. The financial struggles are not yet over, and the fight for survival is ever-present.

Deep dive

When first looking at the company, it is essential to remember that although the name ‘Rolls-Royce’ is most commonly associated with a range of luxury cars, this stock represents the civil aerospace, power systems, and defence business elements. The car portion is wholly owned by BMW. By understanding this business, it’s possible to get a better insight into why the company started to suffer. Aerospace saw a considerable decline in demand throughout the pandemic, and as the company’s largest segment, this severely impacted fundamentals.

Currently, the company has very low profit margins, combined with high debt levels. Additionally, the cash return on invested capital is negative, indicating that the company is struggling to generate positive cash flow. Further weakness is indicated by the company having to cut the dividend during the pandemic. This still hasn’t been reinstated.

Wider context

It’s clear the pandemic increased the pressure on Rolls-Royce, and accelerated the share’s price decline. However, this wasn’t where the trouble started. Since 2018, the company has been running at a significant loss, starting with a loss of £956m in 2018. This then increased rapidly during the pandemic, hitting an operating loss of £2.1bn and a bottom line loss of almost £3.2bn.

The company has returned to some level of profitability in the 2021 financial year, achieving a full-year profit of £120m. This is by no means back to previous levels, and even generating a profit at this stage will not be enough. These last few years have not been kind to the company’s balance sheet, with total borrowing soaring. The level of borrowing reached almost £8bn in 2021, while cash levels have continued to fall, now just £2.5bn.

Future outlook

There are two positives to consider when looking at the company’s future outlook. The latest report outlined that it was experiencing a continued recovery in many underlying business sectors and that full-year guidance would remain unchanged. Rolls-Royce also outlined how the disposal of the company’s underlying holding, ITP Aero, allowed it to repay a £2bn loan due in 2025. Additionally, it now has £5.5bn of undrawn borrowing facilities in order to manage cash flow if needed.

Despite these announcements being a step in the right direction, performance is far below previous levels, and the company still has £4bn in debt. I believe that the next few years will continue to be challenging for the company, and therefore despite the share price fall, I am not tempted to add Rolls-Royce to my portfolio.

The post I’m not tempted by Rolls-Royce shares, here’s why appeared first on The Motley Fool UK.

More reading

• Up 1,119% in 65 months, is there anything left to say about Rolls-Royce shares?
• Could this cheap FTSE 100 stock be the next Rolls-Royce?
• Should investors snap up Rolls-Royce shares on the dips?
• Are Rolls-Royce shares’ best days behind them?
• Here’s what £5,000 invested in Rolls-Royce shares at the start of 2023 is worth today

Gabriel McKeown 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.

As the New Year approaches, I am looking for stocks that can boost the income from my portfolio. These holdings can be a great way to diversify away from the normal growth and value sectors. Also, 2023 could be as tricky as this year has been. So having a small number of high-quality holdings delivering consistent income could help with my overall annual performance.

I have a few core requirements that should allow me to find a productive new holding from a dividend perspective. I want a dividend that has been paid consistently for many years. Furthermore, I want this yield to increase in the next financial year. I also want a track record of year on year growth. This is useful for identifying the higher-quality income shares within an index.

Smurfit Kappa Group

The first company on my list is Smurfit Kappa Group (LSE: SKG). A manufacturer of paper-based packing products operating in the UK, Europe and America. The stock has performed well for the last few years. However, 2022 has been challenging, with the price falling almost 22%. Despite this, the underlying fundamentals are attractive, with solid forecast earnings growth and reasonable profit margins.

However, the dividend potential has grabbed my attention most. Smurfit has a yield of 3.5%, and has paid out consistently for 11 years. The payout has also grown for 10 years. Its yield is forecast to grow by 14.5% to 4% next year, significantly above its three-year average growth rate. Also, its yield should be covered by earnings per share (EPS) as much as 2.7 times.

On the negative side, it has slightly more debt than I am happy with. Its debt is currently sat at 40% of its market capitalisation. And despite the share price fall in 2022, its price-to-earnings (P/E) ratio is almost 14. This could still fall further before being undervalued.

Nonetheless, I still believe the company represents an excellent opportunity for generating income. I am keen to add it to my portfolio in 2023.

CRH

The second company on my list is CRH (LSE: CRH), a global manufacturer of building products. After a solid performance over the last few years, the stock has struggled this year, down almost 14%. Yet its underlying fundamentals are solid. It high free cash conversion, reasonable profit margins and strong return on capital employed (ROCE).

Its dividend potential is also appealing with a current yield of 3.1%. This has been paid consistently for the last 29 years and has grown for the previous six. Furthermore, it is forecast to grow by over 14% in 2023. It would have comfortable dividend cover of 2.4 in 2023.

Once again though, its current debt level of almost 41% of market capitalisation could pressure future dividends if earnings decline. I am likely to wait until the share price begins to stabilise before buying as recent increased volatility could lead mean further falls to come.

However, I believe CRH presents an excellent income opportunity for my 2023 portfolio. So I will probably add it to my portfolio in the New Year

The post 2 stocks I’d buy in 2023 for great passive income appeared first on The Motley Fool UK.

More reading

• BAE Systems shares are up 274% in 46 months. And I reckon there could be more to come
• 5 years ago, £5,000 bought 218 Greggs shares. How many would it buy now?
• How big does an ISA need to be when aiming for a £500 monthly second income?
• Up 1,119% in 65 months, is there anything left to say about Rolls-Royce shares?
• Why the UK might be the best place to look for growth stocks

Gabriel McKeown 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.

Growth stocks can lose momentum. This results in the share price falling, leaving just two options: hope for a recovery or sell the position. Likewise, a value investment may take years before the market capitalisation catches up to its true value. This is why income holdings can be of great benefit to my portfolio. Regardless of the share price, dividends should continue to be paid each month or quarter.

What I’m looking for

Despite how simple this strategy may appear, it involves looking at several factors to find a consistent income-generating holding. I’m looking for simple, high-quality companies whose business models aren’t difficult to understand and who I can trust to pay a dividend continually. For me, a high-quality business will generate plenty of cash flow, have strong earnings growth, and sensible profit margins.

Of course, it’s essential not to forget the dividend itself. For this reason, I have a few requirements when it comes to the yield being offered. I want to see a dividend that has been paid and grown consistently for many years. This track record is vital, as I want to be able to rely on this company’s dividend for many years.

My latest find

A  prime example of what I’m looking for is Drax Group (LSE: DRX). It is a UK-based company focused on renewable energy generation. It has experienced impressive share price growth over the last two years, growing over 61% in 2021. However, it is now down almost 7% this year and over 32% from its peak at the beginning of 2022. Despite this, the price-to-earnings (P/E) ratio is currently 25.5, although it is forecast to reach just 6.9 by next year.

The underlying fundamentals are also strong, with good levels of free cash generation and reasonable profit margins. Additionally, turnover is forecast to grow by 26% next year, and earnings per share (EPS) is expected to increase by 267%. These impressive forecasts support the idea the current dividend is secure and likely to grow further.

The current yield of 3.3% has been paid consistently for the last 16 years and has grown for the previous five. The dividend cover ratio of over one suggests that this level can be paid comfortably with current EPS. The dividend is also forecast to grow by over 11% next year, reaching 3.8%. This new level can still be comfortably covered by EPS, giving a dividend cover forecast of just under four.

My conclusion

It is essential to note that the current share price level is relatively high, so if the expected EPS and turnover growth aren’t achieved, the current price-to-earnings ratio could make the stock overvalued. Also, the current debt level is almost 70% of market capitalisation, so I want to keep an eye on these.

Nevertheless, this is an excellent opportunity to access a consistent dividend yield. I will add the company to my portfolio once I get the necessary funds.

The post I’d buy this share for monthly passive income in 2023 appeared first on The Motley Fool UK.

More reading

• BAE Systems shares are up 274% in 46 months. And I reckon there could be more to come
• 5 years ago, £5,000 bought 218 Greggs shares. How many would it buy now?
• How big does an ISA need to be when aiming for a £500 monthly second income?
• Up 1,119% in 65 months, is there anything left to say about Rolls-Royce shares?
• Why the UK might be the best place to look for growth stocks

Gabriel McKeown 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.

There aren’t many stocks in the FTSE 100 as popular for debate as Rolls Royce (LSE: RR). The balance between diehard supporters of the company, and those who think its days are numbered, seems to change as quickly as the share price. This is especially the case in the month when the price has risen by an astonishing 35%.

However, this rally needs to be considered in the context of the last few years, with the stock still down over 27% in the previous year.

It’s fair to say that the stock has had a difficult time over the last few years. The price fell 52.5% in 2020 during the pandemic. It then had a slight recovery in 2021, rising just over 10%. This was short-lived, however, given the fall that occurred this year. It is now down around 63% from pre-pandemic levels, which has raised questions about whether it is a bargain or worth avoiding.

Looking at the company

To determine the likely cause for this fall in stock price, I have to better understand the business model. The name ‘Rolls-Royce’ is most commonly associated with a range of luxury cars, however, BMW wholly owns the car production business. This stock represents the civil aerospace, power systems, and defence business elements.

When looking at the underlying fundamentals, I’m not massively enticed. The company has high debt levels and very low profit margins. Also, the return on capital employed (ROCE) is very low, indicating that the company is not particularly efficient at generating profit from invested funds. Furthermore, the company had to cut the dividend due to the pandemic and is yet to reinstate this payment.

Director outlook

Recently Rolls-Royce released its trading statement, which provided a great opportunity to get an insight into the outlook from the executive team. The report outlined a continued recovery in many underlying business sectors and that full-year guidance will remain unchanged. The board also outlined a plan to be disciplined due to the inflationary headwinds impacting the wider economy. This is certainly encouraging and helps to explain the recent share price rally.

The announcement also highlighted that the disposal of ITP Aero, one of the company’s underlying holdings, allowed it to repay a £2bn loan due in 2025. It also has £5.5bn of undrawn borrowing facilities, which can be used to aid cash flow if needed. This is undoubtedly a step in the right direction. However, it’s important to note that the company still has £4bn in debt.

Past performance

In addition, it is essential to look at these improvements in the context of the previous year’s performance. The company has produced a substantial loss consistently since 2018. This rose dramatically in 2020, hitting a full financial year loss of £3.2bn. This did improve significantly in 2021, with a full-year profit of £120m, although this is by no means back to previous levels.

There is a long way to go before Roll-Royce is back to its previous levels. There have certainly been steps in the right direction. However, the business is still in a challenging position, and this starts to justify the poor share price performance. Therefore I would not be keen to add the company to my portfolio at this stage.

The post Despite the rally, I wouldn’t buy Rolls-Royce shares anytime soon appeared first on The Motley Fool UK.

More reading

• Up 1,119% in 65 months, is there anything left to say about Rolls-Royce shares?
• Could this cheap FTSE 100 stock be the next Rolls-Royce?
• Should investors snap up Rolls-Royce shares on the dips?
• Are Rolls-Royce shares’ best days behind them?
• Here’s what £5,000 invested in Rolls-Royce shares at the start of 2023 is worth today

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

A core part of my passive investment strategy is to have annual reviews of my portfolio. I like to decide what holdings to include for the next year based on performance over the previous year. In addition, I also like to find exciting new opportunities that may help me achieve my goals in 2023.

It is no secret that I am very interested in income-generating shares. These give me the best chance of generating a consistent monthly return on my investment while being reasonably passive to manage. I like to make these selections at the end of the year so that they can be left alone to compound throughout the new year. This allocation also acts as a good form of diversification from my growth and value-focused investments.

My investment approach

Finding the right income-generating share is sometimes quite tricky, and finding a balance of returns and fundamentals can take a while. I also want a reasonably priced share so that I don’t get caught in a growth-style investment by accident.

I’m not looking for companies that offer the highest dividend. Instead, I am happy to pick a stock with a lower yield if it has a high level of forecast dividend growth. This is especially important when making long-term investment decisions, as it will help to boost the compounding effect of these dividends.

For this reason, I have looked at many new companies that have paid and grown their dividends for years. Although I am not after a large yield, I expect a reasonable dividend in the region of 3%-3.5%. I am also after solid fundamentals, with good cash flow and positive forecast performance.

My 2023 opportunity

To build this 2023 portfolio, I have been looking at CRH (LSE: CRH), a global manufacturer of building products. The company has performed well over the last few years, increasing by 27.5% in 2021. However, this has reversed slightly. It is now down almost 14% this year and has a price-to-earnings ratio of under 12.

Of course, the dividend is a primary focus for me when looking at this stock, and the yield of 3.1% is in line with my expectations. Furthermore, this dividend has been paid consistently for the last 29 years and has grown for the previous six. Also, it is forecast to grow by 13.9% next year, which is an important consideration when finding an income investment.

The underlying fundamentals are also strong, with reasonable profit margins, strong return on capital employed (ROCE), and high free cash conversion. Turnover and profit are expected to grow above the company’s three-year average, which is encouraging. It is expected to increase by nearly 13% in 2023, and profit is forecast to grow by 18.4%. This is an important characteristic, as the forecast dividend needs to be accompanied by increasing earnings to ensure it can continue to be paid comfortably.

However, debt levels are higher than I would like, at over 42% of market capitalisation. Also, the sudden stock price decline this year could indicate that momentum is fading. If this continues, it could start to erode any future income generated by the share.

Nonetheless, CRH presents a great income opportunity for my 2023 portfolio. Therefore I intend to buy the share at the beginning of the new year once I get the necessary cash.

The post Is this income share the key to a great 2023 portfolio? appeared first on The Motley Fool UK.

More reading

• BAE Systems shares are up 274% in 46 months. And I reckon there could be more to come
• 5 years ago, £5,000 bought 218 Greggs shares. How many would it buy now?
• How big does an ISA need to be when aiming for a £500 monthly second income?
• Up 1,119% in 65 months, is there anything left to say about Rolls-Royce shares?
• Why the UK might be the best place to look for growth stocks

Gabriel McKeown 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.

As I’ve been building my portfolio over the years, I have found it difficult to think of new investment ideas. I often experiment with new strategies, filters, and techniques, yet there are times when my mind is blank. In those circumstances, I tend to turn to the investors that first inspired me. Trying to follow the approach of history’s greatest investors allows me to come up with new opportunities, and get back on track.

The Buffett approach

In this instance, I have decided to once again come back to the legendary value investor, Warren Buffett. He is one of the most successful investors of all time, and after amassing a fortune of over $100 billion, it isn’t hard to see why. Despite this success, Buffett’s main investment strategy is quite simple. He is an advocate for buying cheap stocks, holding these for the long term, and steadily growing the position until the market prices the company correctly.

Of course, this is an oversimplification, and finding the right opportunity does take time. I like to think of it in a similar way to fishing, and how a core part of that activity is the waiting. When applied to investing, I use an index filter to scan for the potential opportunity, then sit back and wait until I get a ‘bite’. This approach does require a lot of discipline and patience. I want to wait for the wider market to neglect a great company, as this will allow me to buy it for a discounted price.

My latest find

A prime example of this style is Future (LSE: FUTR), a media and publishing company. This is a stock that has performed fantastically over the last few years, frequently achieving triple-digit returns. But in 2022 things appear to have changed, with the share price down 64%. This is a big change to the 120.4% return achieved in 2021 and has resulted in a price-to-earnings (P/E) ratio of just 10.4.

Despite this considerable correction, the underlying fundamentals are very impressive. Profit margins, cash generation, and return on capital employed (ROCE) are all exceeding their three-year averages. Also, the forecast performance is extremely encouraging, with turnover expected to increase by 35%, and bottom-line profits by almost 90%. These strong characteristics are certainly not being reflected in the share price, given the reversal this year.

It is important for me to not overlook some of the less appealing factors. The level of debt has increased significantly, reaching 33% of market capitalisation. This is much higher than the three-year average of just 5.4%. Also, the current dividend yield of 0.2% is not particularly enticing, even when factoring in the expected dividend growth of around 18% in 2023.

Nonetheless, I think Future represents a typical Buffett-style investment. It is a company with strong fundamentals, and a reasonable valuation, which is currently being ignored by the wider market. For that reason, I would be keen to add the company to my portfolio once I get the necessary funds.

The post Struggling to come up with ideas? I’m copying Warren Buffett’s approach appeared first on The Motley Fool UK.

More reading

• BAE Systems shares are up 274% in 46 months. And I reckon there could be more to come
• 5 years ago, £5,000 bought 218 Greggs shares. How many would it buy now?
• How big does an ISA need to be when aiming for a £500 monthly second income?
• Up 1,119% in 65 months, is there anything left to say about Rolls-Royce shares?
• Why the UK might be the best place to look for growth stocks

Gabriel McKeown has no position in any of the shares mentioned. The Motley Fool UK has recommended Future. 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.

At the end of every year, I like to review my current portfolio and think about ways to improve it. This assessment process was probably one of the only benefits of 2022 being such a tough year, as it gave me a lot of areas to improve.

My value investments suffered over the year, with the already low stock prices falling even further. Likewise, my small selection of growth holdings saw a significant reduction in their price-to-earnings (P/E) ratios. The only promising group was the dividend portion, which provided a consistent source of passive income.

I am keen to diversify further as 2023 nears, and to increase my dividend allocation. One of the ways I plan to do this is by looking for quality companies that are trading at reasonable prices. This approach focuses on solid fundamentals first, then narrows potential options by price.

Unilever

The first stock on my list is Unilever (LSE: ULVR), one of the largest consumer goods companies in the world. It provides a wide range of personal care, food, and home products. The stock price has been fairly stable over the years and has risen by just over 3% in 2022. However, it is still down 13.2% from pre-pandemic levels.

The stock currently offers a dividend of 3.6% but is forecast to hit 3.7% next year. This yield has been paid consistently for the last 30 years and can be comfortably covered by earnings per share (EPS) with a dividend cover ratio of 1.5.

The underlying fundamentals are strong, with significant profit margins, reasonably low debt levels, and sound free cash generation. Turnover is also forecast to grow by 13.3% next year, considerably above its three-year average of just 0.9%.

Despite the downward share price trend since before the pandemic, it still has a P/E ratio of 17.7. This is above the FTSE 100 average P/E of around 14, so could be considered slightly expensive.

Nonetheless, I think the solid underlying fundamentals, and track record of strong performance, are worth paying a premium for. Therefore I will add Unilever to my new 2023 investment portfolio shortly.

Hargreaves Lansdown

The second company on my list is Hargreaves Lansdown (LSE: HL). It operates a range of investor services in the UK, such as managed funds and support services. Unlike Unilever, this stock has suffered considerably over the last few years. It has fallen almost 40% in 2022 and now has a P/E ratio of around 16.

Despite this poor stock price performance, the fundamentals are very strong. The return on invested capital (ROCE) is high at nearly 45%, combined with very low debt levels. Also, turnover and profit are expected to grow significantly next year, considerably above their three-year average.

Still, I think it is important to remember some of the reasons for the recent poor stock performance. The company has struggled with negative publicity surrounding the Woodford fund collapse and its alleged role in this debacle. Also, analysts have been questioning whether a fall in investment activity after the pandemic may reduce the company’s earning potential.

Nevertheless, I think this is a prime example of a high-quality company with strong profit margins that is still trading at a reasonable price. So I am keen to add to my position when I get the cash.

The post I’d buy these 2 FTSE 100 shares for my new year portfolio appeared first on The Motley Fool UK.

More reading

• Down 11% in a month, is this the FTSE 100’s best bargain?
• Is the FTSE 100 heading for an epic stock market crash?
• Is this a once-in-decade chance to buy top UK stocks on the cheap?
• Value investors: Unilever shares are down 7% in a day!
• Could getting out of the food business help the Unilever share price?

Gabriel McKeown has positions in Hargreaves Lansdown. The Motley Fool UK has recommended Hargreaves Lansdown and Unilever. 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.

Rather than using index filters or focusing on a specific sector, I’ve started to find investments by looking at stocks being viewed by other investors. This is certainly not a foolproof strategy, as companies can become popular for many reasons. However, looking at the most searched-for stocks in the market within the last 24 hours can narrow the number of options I need to research.

For that reason, I used software to highlight which UK stocks have recently been searched for by investors, producing a list of 10 companies. The vast majority of this list is traded on smaller exchanges with market capitalisations below £50m. I’m not particularly interested in such stocks, as they can be very volatile, so significant gains and falls in the share price can attract many investors and make them appear popular.

An interesting find

However, one company that grabbed my interest (while also clearly being of interest to many other UK investors) was Associated British Foods (LSE: ABF). The company operates in a number of core sectors, from agriculture to grocery services and even sugar. But it’s the retail segment that is its most significant turnover contributor, and arguably its most recognisable holding. This is due to it operating the hugely popular clothing chain Primark.

The share price has struggled over the last few years, falling 26.3% this year. It’s also down just over 45% from pre-pandemic levels. Despite this, the price-to-earnings (P/E) ratio is above the FTSE 100 average at almost 18. However, this is forecast to fall dramatically to just 11.3 in the next year.

Why is it so popular?

I find it useful to try and get to the root cause of the stock’s popularity in the last 24 hours, and in ABF’s case, it’s due to the release of its annual results and final dividend. These results were strong, with turnover growing by 22% and profit growing by 48%. Management expects significant growth in sales and profit as part of its full-year outlook in 2022. This is very encouraging and helps to explain the 5% rise in price that occurred in those 24 hours and why it was of interest to many UK investors.

The full picture

However, these optimistic forecasts are somewhat misleading. They come on the back of a significant decline in performance in the last two years compared to pre-pandemic levels. A number of its core fundamentals are still below its three-year average. Profit margins could be more encouraging at 7.4%, below the average of 8.7% over the last few years. Likewise, free cash generation could be better at 70.8%, which is also below the historical average of 85%. Additionally, debt levels have risen significantly, reaching just shy of 33% of market capitalisation.

Nonetheless, looking at the most popular shares may have allowed me to find an intriguing new opportunity. The positive sentiment outlined by management in the latest update, could be a step in the right direction. Therefore I would like to add the company to my portfolio. However, I intend to wait until the financial year end to determine if the negative trend has reversed.

The post 1 of the most popular UK stocks right now, according to investors appeared first on The Motley Fool UK.

More reading

• 2 UK dividend stocks to consider buying in April

Gabriel McKeown has no position in any of the shares mentioned. The Motley Fool UK has recommended Associated British Foods. 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.

It’s no secret that I’m a big fan of using index filters. These are created by setting a range of desired characteristics and then scanning the market to find companies that match my criteria. When I started searching the market this way, I found the process quite daunting. I’d read about other private investors who created really complex filters taking in many different objectives that needed to be met.

Instead, I decided to look for a simple filter to avoid things becoming too complicated. This involves looking within the FTSE 100 and finding stocks recently trading at a one-year low. My rationale is that when a share hits its lowest price for the year, it could indicate that it’s now in good value territory. Of course, this isn’t the whole story, and I can’t just buy any company at this low level. However, this should narrow my search and make finding a share to analyse easier.

A new opportunity

Given that the broader market has been seeing negative performance over the last few months, I decided to narrow my filter. I searched for companies that had hit their year-low level in the previous week. This allowed me to spot brand-new opportunities rather than outdated finds. Shares that saw a fall in the last few weeks, and hit their year-low, are less useful than those that more recently fell in value. Why? Well, these new finds are less likely to have recovered from the fall.

Airtel Africa (LSE: AAF) appeared in my filter, as the stock hit a year-low price in the last seven days. This company provides low-cost mobile services in Africa and has been trading on the UK market since 2019. The stock is down 9.7% in 2022 after an extremely strong 2021, where it grew by almost 77%. It’s now trading with a price-to-earnings (P/E) ratio of just 8.6. This is below the FTSE 100 average of around 15.

Assessing the fundamentals

The share price is, of course, just one element to consider, and frequently a share price has fallen for a good reason. However, looking at Airtel’s core fundamentals, I’m quite pleased. Profit margins are very high, cash generation is strong, and the company pays a decent dividend. This yield is currently 3.6% and is forecast to grow by almost 25% next year, reaching 4.5%. Furthermore, the dividend cover ratio of 3.2 confirms that it can comfortably pay this yield from its earnings per share (EPS).

However, there are a few less encouraging signs too. Debt high, currently reaching 76.2% of market capitalisation. Also, forecast earnings are well below previous levels. Turnover is expected to increase by 13.9% in 2023, below the three-year average of 15.3%, and bottom-line profit is forecast to rise by 10.6%, a considerable decline from the average of over 52%.

Nevertheless, looking for shares that have recently hit the year low has allowed me to find an attractive new opportunity. The low P/E ratio and strong fundamentals are certainly encouraging. Therefore, I’ll likely add the company to my portfolio once I get the cash.

The post I’d buy this FTSE 100 company after it hit its 1-year low appeared first on The Motley Fool UK.

More reading

• BAE Systems shares are up 274% in 46 months. And I reckon there could be more to come
• 5 years ago, £5,000 bought 218 Greggs shares. How many would it buy now?
• How big does an ISA need to be when aiming for a £500 monthly second income?
• Up 1,119% in 65 months, is there anything left to say about Rolls-Royce shares?
• Why the UK might be the best place to look for growth stocks

Gabriel McKeown has no position in any of the shares mentioned. The Motley Fool UK has recommended Airtel Africa 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.