In 2023, growth stocks in the UK and the US outperformed even though higher interest rates were supposed to hurt them. Growth shares in the UK outperformed value stocks by almost 30%, and many are expecting similar in 2024 as interest rates come down. However, now is the time that I’m looking at UK value shares more than ever.  

Why I’m limiting growth shares

First, the general spiel for the case for growth stocks in 2024 is that interest rates would come down, changing valuations to be more attractive and making it easier for companies to borrow.

Although this isn’t false, the truth is that if the headline is already all over the Financial Times, then it’s more or less “priced in” by the market.

To truly outperform the market, you need to have an idea of what the market doesn’t fully expect or know.

Right now, it’s a given that interest rates in the UK and US would lower. Unless you are convinced that interest rates will fall further than what markets already expect – which is hard since experts get it wrong all the time – then it’s very likely that low interest rates would have a small impact on the share price itself.

In the US, growth stocks such as the “Magnificent 7” (Alphabet, Meta, Apple, Tesla, Amazon, Nvidia, Microsoft) have an average price-to-earnings (P/E) ratio of 49x, meaning investors are already paying quite the premium.

Most UK investors believe growth shares are the play in 2024. I’m taking a contrarian view and looking at value stocks where more growth opportunities could exist.

NatWest

NatWest (LSE:NWG) stands out to me as an undervalued stock.

First, though the conventional thought is that lower interest rates mean banks are less profitable, NatWest has already considered it and spun the situation as a positive.

Why? Because banks hedge against interest rate movements, meaning they lock in a rate to do business with from years prior. This makes sense since it would wreak havoc on the bank’s business if interest rates changed frequently.

Currently, NatWest still has interest rates hedged from 2019 and 2020. This meant it didn’t fully benefit from the rate hikes last year.

As old contracts expire and are reinvested into new ones, structural hedges will be a major revenue driver even if interest rates go down. RBC estimates that 50% of the bank’s income would come from structural hedges, totalling almost £5bn for NatWest by 2025.

The average UK banking P/E ratio already sits at just 5.1x, a historic low point. Meanwhile, NatWest trades at just a lower 4.44x P/E, giving it an almost 15% discount.

NatWest is investing in growth and succeeding. According to loveMONEY.com, the company brought in 59,158 net customers in Q3 2023, the most out of any other bank.

The biggest risk surrounding NatWest is that the UK government might sell its shares on the public market by 2026. This is concerning given that Bim Afolami plans to sell at a discount, meaning that NatWest’s share price would likely go down as a result.

For more cautious investors, it might mean waiting for more word on whether it would be sold to the public. For me, I believe NatWest shares have room to grow until then.

The post Why I’m investing in value shares over growth stocks even as interest rates are going down appeared first on The Motley Fool UK.

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Randi Zuckerberg, a former director of market development and spokeswoman for Facebook and sister to Meta Platforms CEO Mark Zuckerberg, is a member of The Motley Fool’s board of directors. John Mackey, former CEO of Whole Foods Market, an Amazon subsidiary, is a member of The Motley Fool’s board of directors. Suzanne Frey, an executive at Alphabet, is a member of The Motley Fool’s board of directors. Michael Que has no position in any of the shares mentioned. The Motley Fool UK has recommended Alphabet, Amazon, Apple, Meta Platforms, Microsoft, Nvidia, and Tesla. 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.

Small-cap stocks have had a rough few years, but some could explode in 2024. This is because many high-quality companies saw their shares fall due to panic rather than poor fundamentals.

In 2023, the FTSE 100 rose 3.8% while the FTSE Smallcap Index largely had negative returns until the end-of-the-year rally helped it break even.

In bad times, people tend to gravitate towards large-cap stocks for their stability. Retail investors panic and sell their holdings in small-cap stocks. This is seen with the fact that UK small-cap funds have seen consistent withdrawals since late 2021.

As a result, good small-cap companies get dumped along with the rest. Personally, this makes them very attractive to me since many are still undervalued. Now, institutional portfolio managers from Dunedin Income and Shires Income are planning to invest.

Given that inflation has consistently gone down and rates have peaked, stocks as a whole could see a lift in share prices and ought to help small-cap companies recover.

Brickability Group

Brickability Group (LSE: BRCK) is a collection of construction companies that work together to provide building materials and contracting services.

As the UK government plans to invest billions of pounds to fix crumbling infrastructure and secure enough affordable housing, construction companies are prime targets to capitalise on this trend.

Unlike most construction companies in the sector, Brickability stands out as having one of the best financials. Its revenue has grown from £163.3m in 2019 to £681.1m in 2023, a 42.9% compound annual growth rate (CAGR). Meanwhile, profits have soared from £6.5m in 2019 to £27.7 in 2023, a 44% CAGR. It also pays a respectable dividend, with a 5.42% yield.

Despite the company having steadily grown, its shares are down over 18% from a year ago, and over 50% from its highs in 2021. Now, it’s trading at a trailing price-to-earnings (P/E) ratio of 6.08x, over 50% lower than the industry average of 9.2x.

The biggest risk to Brickability is how well the housing market can recover and the speed of housebuilding. Despite the desperate need to speed up the pace of housebuilding, political gridlock could keep the market depressed for longer.

However, I’m looking into Brickability for its great financials, low valuation, and secular demand.

Games Workshop

Games Workshop (LSE:GAW) is a board game company best known for its line of Warhammer. In the past six months, the stock has fallen over 12% as a result of macro concerns but is now recovering.

The company has consistently grown revenue and net income in the past four years, at a 16.3% and 19.61% CAGR respectively. Its dividend has grown from £1.25 per share to £4.70 per share, giving it a 4.75% dividend yield at the time of writing.

Games Workshop’s value comes from owning the IP to Warhammer, which it can easily scale to different platforms. From a board game in the 80s, it’s now being made as a movie by Amazon. In addition, it makes money from selling video games and merchandise.

The biggest risk to the stock is its relatively high P/E ratio, which trades at 23.36x. However, I believe it justifies this valuation because of its fast growth.

In the US, growth has soared almost 450% in the past 10 years and is still very underpenetrated. The success in other markets will likely keep growth high.

With the UK economy recovering and its financials and growth strong, Games Workshop seems attractive to me.

The post 2 small-cap stocks that can explode in 2024 appeared first on The Motley Fool UK.

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John Mackey, former CEO of Whole Foods Market, an Amazon subsidiary, is a member of The Motley Fool’s board of directors. Michael Que has no position in any of the shares mentioned. The Motley Fool UK has recommended Amazon and Games Workshop Group 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.

This week, Tesla (NASDAQ: TSLA) finally released the Cybertruck at its event on November 30. Some analysts think that cancelling the product altogether will boost the share price. Meanwhile, others — like Cathie Wood — think the Tesla share price will go up due to investors’ optimism.

To better understand, let’s look at the reasons for both sides and break down the numbers.

Why it could hurt the share price

A key reason for the pessimism came from Elon Musk himself. He admitted that the Cybertruck would take a financial toll on Tesla, be hard to scale for production, and won’t be cash flow positive until 2025.

In two years, Musk projects that the company can begin mass producing the Cybertruck at 250,000 units. Analysts estimate the price to be around $60,990. With two million pre-orders of the Cybertruck already, this means $15.2bn in revenue in 2025. Not bad. However, a few things might shatter this dream.

First, the car was projected to cost only $39,000 when unveiled in 2019. It received much acclaim because it would cost $10,000 less than the most popular pickup truck (the Ford F150) while being significantly more modern. However, Tesla will likely release the Cybertruck at around $60,990 because of rising material costs. Its direct competitors have also been forced to price their trucks at around the same price.

Moreover, Musk has repeatedly stressed that it would be tough to scale production, since the Cybertruck is so advanced that the manufacturing process will be very different from its production of saloons. Overall, both the demand and supply of Cybertrucks are in jeopardy.

In addition, Tesla’s free cash flow — which is the key number used to value companies — has already declined due to the price cuts and operating expenses from the Cybertruck and AI, resulting in earnings decreasing by 44% year on year. With even more investment needed to scale production of the Cybertruck, it will continue to decrease free cash flow and I believe worsen the valuation and sentiment in the short term.

Why it could boost the share price

However, the excitement around the Cybertruck itself could lift the shares higher. When Tesla released the Model Y in 2020, the hype around the company also led to higher sales of the Model 3.

Most importantly, despite the initial high prices, management will likely be able to cut costs down the line. We can’t forget that Tesla still has the highest margins in the industry due to Musk’s genius. Its production process involves fewer parts and is more streamlined than any other car company.

Finally, Tesla has already established itself as a premium brand. Many of the two million who pre-ordered will still be eager to purchase the Cybertruck.

My verdict

However, considering that Tesla’s price cuts haven’t been effective in driving sales, the company has more fundamental problems to deal with than the Cybertruck. Even though the truck could turn out to be a jewel in the crown for Tesla, I believe that the cash burn will only worsen investor sentiment.

The Cybertruck release will likely do little in the short term to boost Tesla shares, but in a few years could pan out to increase its share price when it starts making money.

The post Will the Cybertruck boost Tesla’s share price? appeared first on The Motley Fool UK.

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Michael Que has no position in any of the shares mentioned.The Motley Fool UK has recommended Tesla. 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.

UK housing shares have fallen across the board. There is widespread fear in the housing market, with many headlines pointing out that prices are declining at record rates. However, there are specific companies that I choose to be greedy about while others are panicking.

Is the housing market going to crash?

First, it’s important to note that housing prices are still higher than they were before the pandemic. Stimuluses and low interest rates artificially inflated housing demand. What we are seeing right now should be described more as a correction rather than an Armageddon of the housing market.

One factor that will continue to drive housing prices is the shortage of homes. The UK has built the fewest residentials in Europe since the 1980s, and the British spend the most on housing out of any other OECD (Organisation for Economic Co-operation and Development) country. Furthermore, real wage growth is now outpacing inflation and should provide a strong backbone to the market.

Therefore, companies that can take advantage of this crisis are UK housebuilders. House building has slowed down even more due to interest rates and falling housing prices. As a result, those that dominate the sector have become powerful because they own massive scores of undeveloped lands and control the housing supply. Subsequently, parliament continues to debate deregulation and subsidies to support housebuilders and solve the housing shortage.

Berkeley Group Holdings

One of the major housebuilders in the UK is Berkeley Group Holdings (LSE: BKG), which is still down over 25% from its peak in 2020 and 8% from earlier this year. It’s mainly a residential property developer and builder in London, Birmingham, and the South of England. It recently became the largest new house builder in London.

What’s significant is that the value of the land owned by Berkeley is worth over £3bn. That’s almost three quarters of its market capitalisation. It has a price-to-book ratio of just 1.28, meaning investors are barely valuing it over what its assets are worth.

Revenue and free cash flow have decreased since pre-pandemic. However, it’s to be expected that Berkeley Group couldn’t build as many homes due to pandemic restrictions and has delayed new construction in the face of high interest rates and a tough real estate market.

However, there are three things that make Berkeley Group attractive to me. First, its price-to-book ratio is near its 10-year low. Second, revenue for Berkeley is sure to pick up as housing is a necessity that needs to be filled. With a huge backlog of houses waiting to be built, revenue has a lot more room to grow. Finally, though Berkeley’s dividend yield hasn’t been consistent, it has ranged from 1.96% to a respectable 7.32% in the past nine years.

While I wait for house building to inevitably pick up and increase the stock price, I can also get a decent return through dividends.

Conclusion

Overall, I see housebuilder stocks as an attractive investment due to the inevitability of their rebound. The UK economy will not be able to function if housing prices remain this elevated, and support for private house building is one of the main ways to increase supply. Therefore, by buying shares in Berkeley Group soon, I believe I’d be safely capitalising on the fear in the housing market.

The post UK housing shares: be greedy when others are fearful appeared first on The Motley Fool UK.

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Michael Que 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.

Consistent dividends

Currently, Vodafone boasts a 10.4% yield, significantly beating the 3.83% dividend yield of the communications sector. This massive increase in yield wasn’t because it increased dividends, however. Rather, it’s because the stock has fallen almost 10% this year and over 50% in the past five years. At the same time, management has been keen to maintain a 9p dividend per share since 2019. 

Are dividends unsustainable?

But it begs the question, are these high dividends sustainable? Many investors don’t think so, and that’s why it’s trading at a price-to-sales ratio of just 0.51x, compared to its 10-year average of 1.17x. And they wouldn’t be completely wrong. Revenue has slowly been decreasing since 2016 and free cash flow declined by 3.9% in FY 2023. This is due to the rising cost of living across Europe, as revenue decreased in many regions including Germany, Spain and Italy.

Competition in the telecommunication sector is also fierce, and it has been a bloodbath for companies to provide the lowest cost to frugal customers. 

However, there are also some positives for Vodafone. For one, the company is planning a merger with Three. This would lead to a combined market share of over 35% and become the biggest mobile phone provider in the UK. Already, revenue grew around 5% quarter over quarter in the UK, solidifying Vodafone’s position. Not to mention, the company is also laying off around 10% of its staff to improve profitability.

Finally, Vodafone has enjoyed substantial growth in developing countries. For example, it is one of the largest providers in Africa and provides services to over 170 million people on the continent. It has almost 30 years of experience in Africa with significant infrastructure already set up. As mobile adoption continues to accelerate in Africa, Vodafone’s first-mover advantage on the continent looks likely to generate substantial income for investors down the line. 

Conclusion 

For me, Vodafone looks like a buy for its consistent dividends and potential in Africa. Though it faces some short-term hurdles due to macro conditions, it’s making good moves to counteract the loss of growth.

Its cheap valuation gives what Warren Buffett calls a “margin of safety,” and gives room for error if the buy thesis is wrong. Overall, I’m considering putting Vodafone in my long-term portfolio for its steady stream of dividends and to bet on its consolidation of the African market. 

The post 10%+ yield! Is Vodafone the best dividend stock on the FTSE 100? appeared first on The Motley Fool UK.

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Michael Que has no position in any of the shares mentioned. The Motley Fool UK has recommended Vodafone Group Public. 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.

British American Tobacco (LSE: BATS) shares have fallen over 18% year to date at the time of writing, as it has been hit by high inflation and regulatory action from various governments. However, the stock boasts a respectable dividend that has continued to grow.

With its shares down so much and dividends strong, investors can’t help but be drawn to the stock. However, let me offer some more nuance and explain why I would think twice before jumping on British American Tobacco shares.

Cigarettes fundamentally declining

The cigarette business faces a problem known as “secular decline”. To put it simply, it’s a trend that people are smoking old-fashioned cigarettes less.

Though British American Tobacco is trying to diversify its business, around 82% of revenue still comes from combustible cigarettes, which declines between 3-5% in volume every year in developed countries.

So, you might be wondering, how is British American Tobacco able to grow revenues whilst volumes of cigarettes are declining? It’s because it has continued to increase prices. However, this strategy is by no means sustainable. Parliament enacted a law early this year that would raise duty rates 2% above RPI inflation every year – all to make the UK smoke-free by 2030.

With taxes increasing, British American Tobacco has less room to increase prices and make up losses. Worse, with inflation remaining stubbornly high, smokers might soon reach a breaking point.

Investors are wooed

However, many investors are optimistic about new products that it has launched, such as vapour and even cannabis. Indeed, these products have been performing well, growing between 10-30% year on year.

However, the caveat is that these new products still run British American Tobacco at a loss. Not to mention, their margins are much worse than traditional cigarettes due to higher production costs and a fiercely competitive market — filled with new players undercutting one another.

British American Tobacco is at a transition point in its business and is losing the security and, in turn, the premium that it once had.

Is the stock cheap?

The question then arises, is British American Tobacco trading at a good price? Its price-to-earnings (P/E) ratio is at just 6.97x. For context, its five-year average P/E ratio is over 10x.

However, it’s also true that British American Tobacco has continued to disappoint investors even when the stock looked like it was trading at a “discount”, as the stock has seen virtually no returns since 2019.

Sure, British American Tobacco has done a good job maintaining its dividend yield, but how long can that last when its core business needs to be rapidly shifted to avoid extinction?

But it makes sense that dividends have been such a big priority. After all, the company needs to compensate investors for the risk of transitioning its entire business and its mediocre returns.

Will I be buying?

For me, I will be thinking twice about buying it as a safe dividend stock. Instead, it’s an opportunity to bet on the expansion of new products. Even though these products could prove to be successful, they will inevitably face more competition and have lower margins.

It’s important to recognise one’s investment goals and risk tolerance. In the case of British American Tobacco shares, I view it more as a gamble than something I’m comfortable holding long term in my portfolio.

The post British American Tobacco shares: reasons to buy vs reasons to avoid appeared first on The Motley Fool UK.

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Michael Que has no position in any of the shares mentioned. The Motley Fool UK has recommended British American Tobacco P.l.c. 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 interest rates continue to rise in the UK, safe stocks on the FTSE 100 with high yields are where I think investors can potentially get the best returns. Below are two cheap dividend stocks that I’m thinking of buying.

Reckitt

Reckitt (LSE: RKT) is the parent company of most of the hygiene and health products you can find at home (Lysol, Durex, and Nurofen just to name a few). Reckitt’s stock has fluctuated in the same range for the past five years, without much return or loss. But investors would be sitting at an almost 20% loss if they had bought at the peak in July 2020.

Trading at a meagre price-to-sales ratio of 2.75x, its valuation is near its all-time low in over a decade.

What’s even more attractive about Reckitt is its consistency in dividends. For the past decade, Reckitt has maintained an average yield above 2%, which has increased to over 3% in the past year. Just recently, it raised its dividend again by 4.9%.

Fundamentals for the stock are improving as well. A big reason for the share price’s sell-off was that Reckitt couldn’t pass on inflation to its consumers. For example, after raising prices by 8.4%, its volume of sales fell by 4.3%. However, management is expecting inflationary pressures to cool off. In addition, the company also improved gross margins to 59.4%, a 130-basis point improvement and a return to 2020 levels.

Though inflation is falling, it’s still expected to remain between 4-5% throughout 2024, which will put pressure on the company in the near term. In addition, its latest sales volumes haven’t been released yet. If the cooling inflation can’t improve its sales volume, the share price could fall further as investors question the company’s market leadership.

Lloyds

Year-to-date, Lloyds (LSE: LLOY) shares have fallen over 13%. Lloyd is trading at a meagre price-to-sales ratio of 1.37x, a number not seen since 2020 when lockdowns hurt its business.

In late July, Lloyds raised dividends again to £0.63, continuing its trend of growing payouts. Looking at the stock’s fundamentals, there are good reasons for it to continue increasing. Lloyd’s net interest income (the difference between a bank’s interest it earns from loaning and its interest expenses from deposits) still grew 7.2% year on year in 1H 2023. Because of central bank interest rate hikes in the UK, banks such as Lloyds can charge higher interest rates to consumers and, as a result, massively increase their net interest income.

The biggest risk to Lloyds is its mortgage segment. High interest rates also mean fewer people getting new mortgages and refinancing properties. However, it’s being offset by Lloyd’s loans as reported by management in its 1H report. So even though growth might be slower, I’m confident that Lloyds can increase or at least maintain its dividend yield.

Conclusion

The reason I’m eyeing these two stocks is because they are trading at a reasonable price, have good track records of paying dividends, and finally have good underlying fundamentals going for them. Though some risks still exist, they present a good risk-to-reward ratio to me right now.

The post 2 top FTSE 100 dividend stocks that are dirt cheap appeared first on The Motley Fool UK.

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Michael Que has no position in any of the shares mentioned. The Motley Fool UK has recommended Lloyds Banking Group Plc and Reckitt Benckiser Group 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.

Ocado (LSE: OCDO) was the pandemic darling of the UK: now trading at around 740p, the shares once peaked at a high of 2,800p.

At first, the return of in-store shopping and rising inflation significantly hurt the stock. But then, as a tech company with negative cash flows, rapidly rising interest rates pushed investors towards safer assets and made the stock less attractive.

A unique player

Ocado is a unique company in the grocery business. It uses automation to beat traditional stores in online groceries, saving five times the labour that traditional grocery stores need to fulfil online orders.

Moreover, with experience running its own online grocery stores, it’s able to offer end-to-end solutions for automating online groceries for stores around the world.

Technology solutions can carry this stock

One of the most optimistic parts of its business is its technology solutions segment, which sells software and hardware (known as CFCs, customer fulfilment centres) to grocery stores around the world to improve their online grocery efficiency. As consumers’ pockets tighten, grocery stores have an even bigger incentive to streamline their operations, which led technology solutions to grow at an astounding 59% year on year (YoY).

Its offerings are also effective. Retailers like Kroger saw a 25% increase in units picked per labour hours, explaining why Kroger continues to implement Ocado’s products in more of its stores.

Finally, its customers are very sticky, as recurring fees increased by 61% YoY. This makes sense because not only does Ocado save companies money, it’s also hard to switch away once stores build out Ocado’s hardware.

While this segment only comprises 11% of total revenue, with a lot more CFCs to come and management forecasting 40% growth in revenue, it’s no surprise that investors are so optimistic.

Worrying financials

Ocado’s major weakness is its financials. Net losses have continued to widen year over year due to inflation. Its grocery business has been hit the hardest, as EBITDA declined from £31.3m in 1H 2022 to a £2.5m loss in 1H 2023. On the positive side, Ocado has been able to marginally improve its market share and management is expecting slightly positive EBITDA in retail next year.

In addition, its capital expenditures continue to be high because of investments in its technology solutions segment, increasing 18.9%. As interest rates continue to rise and macro conditions remain uncertain, the lack of profitability not only worsens investor sentiment but makes the stock highly volatile.

Valuation

Looking at its price-to-sales (P/S) ratio, it’s trading at a mere 2.74x – just slightly higher than its five-year low of 1.01x. Though it seems like it’s trading at a steep discount, the company is also transitioning from a phase of rapid growth to pivot to technology solutions as the macro conditions sour for its online grocery business. As a result, the stock seems cheap because investors are uncertain about its future.

Should I buy it?

Ocado is at a critical point in its business where a successful expansion in technology solutions could significantly grow revenue and earnings for years to come. At the same time, the macroeconomic environment — especially the projected 2024 UK recession — is hurting Ocado at its core of online groceries. Taking everything into account, I’m not going to be taking a gamble on Ocado until we have a more accurate picture of the economy or if the stock becomes oversold.

The post Is it time to buy Ocado shares ? appeared first on The Motley Fool UK.

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Michael Que has no position in any of the shares mentioned. The Motley Fool UK has recommended Ocado Group 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.