Source: Longterm Trends

Right now, the gap between growth and value shares is historically wide. But is this a sign of things to come, or a sign that value shares are about to bounce back in a big way?

Warren Buffett

According to Warren Buffett, the difference between growth and value investments doesn’t make much sense. But this is a rare occasion (I can only think of one other) where I don’t agree. 

Buffett’s point is that all investing is about trying to buy shares for less than they’re worth. And figuring out the value of a stock involves taking a view about the company’s future growth.

I agree with all of this, but I don’t think it means there’s no distinction between growth and value. In my own portfolio, I have stocks that I own for different reasons. 

I own some stocks because I expect future cash flows to be higher – these are growth stocks. In others, it’s because the share price doesn’t reflect current earnings – these are value shares.

Time for a correction?

At the moment, the gap between growth stocks and value shares might well be the largest it has ever been. And when this has been the case in the past, things have often corrected sharply.

Source: Longterm Trends

I don’t think, though, that this means value shares are set to catch up. Historically, the difference narrowing has been the results of things that have caused crashes in the stock market generally.

The difference in valuation might be unjustified (or it might not). But there’s no rule that says that just because it’s expanded it has to contract in the near future. 

I do think, though, that the unusually wide discrepancy in valuations means it’s an interesting time to be looking at value shares. And a few look interesting at today’s prices.

A stock to consider

Polaris (NYSE:PII) is one example. Shares in the recreational vehicle company are down around 30% over the last year as the firm has had to deal with a various challenges – most notably, tariffs.

This has had an effect on both revenues (which have fallen) and net income (which has turned negative). And the chance of inflation in the US leading to higher interest rates is an ongoing risk.

I think, however, that things aren’t as bad as they look. The net income loss was due to non-cash impairment charges, which can’t be ignored entirely but should be one-off in nature. 

The company’s strong brands and extensive dealer network should put it in a strong position when demand recovers. And with an unusually high 4.5% dividend yield, I think it’s worth considering. 

Growth and value

As growth stocks have outperformed value shares, the gap between the two has reached its widest level in history. And the relative discount is a sign the latter are out of fashion.

This doesn’t have to change in the near future, but long-term investors should take note. While not all value stocks are the same, I think Polaris is a quality name that’s worth checking out.

The post At a historic discount to growth stocks, are value shares about to outperform? appeared first on The Motley Fool UK.

Given that US companies account for almost 70% of the global equities, it’s probably fair to say this means stocks as a whole are expensive. But what should investors do about this?

The Buffett indicator

Buffett’s famous metric involves comparing the market value of equities with gross domestic product (GDP). And on this basis, US equities look unusually expensive at the moment.

Source: Longtermtrends

The so-called Buffett indicator has a decent history of being a good indicator of a stock market crash. Unusually high levels have often been followed by a sharp downturn in share prices.

Right now, the metric is the highest it has ever been, but I’m wary of making predictions on this basis. The main reason is that it’s been high for some time.

The Buffett indicator has been at unusually high levels since 2019. But the only stock market crashes in that time have been attributable to other things – Covid-19 and US trade tariffs.

Valuations

I don’t think valuation metrics are a good indication of what stocks are going to do in the near future. But they do mean that the effect on share prices can be dramatic if something happens.

From a long-term perspective, the picture is slightly different. One reason for this is that there can be cases where valuation multiples don’t give a good indication of how expensive an individual stock is. 

Polaris (NYSE:PII) is a good example. The firm is one of the leading manufacturers of recreational vehicles, including boats, motorcycles, and snowmobiles.

At a price-to-earnings (P/E) ratio of 56, the stock looks very expensive. But I think this is a case where things aren’t quite what they seem at first sight.

A stock that’s cheaper than it looks

Polaris relies on consumers having disposable income. And a lot of its sales involve financing, which means high interest rates can dampen demand and weigh on margins, leading to profits falling away. 

This is what has been happening recently and that’s the risk with this business. Furthermore, it makes the firm’s dividend look unsustainable if things don’t pick up reasonably quickly.

If this trend reverses however, the stock could look very cheap at today’s prices. And Polaris has generated average annual earnings per share of just over $5 over the last 10 years. 

On this basis, the current share price implies a P/E ratio of around 8, which looks much more reasonable. So despite the high valuation multiple, I don’t actually think the stock is that expensive.

Investing in an expensive market

I think the Buffett indicator is worth paying attention to. But I’m not making plans for a stock market crash based on the historically high reading at the moment.

Instead, I’m looking for individual stocks to buy. And one type of opportunity is where unusually low earnings are making share prices look more expensive than they are.

Polaris is one example I think is worth considering right now. The P/E ratio might be high, but there’s a clear reason why this shouldn’t necessarily put investors off.

The post Here’s what the Warren Buffett indicator says about the stock market appeared first on The Motley Fool UK.

The big question is which stock (or stocks) should I buy? I’m in a position to make something a meaningful part of my portfolio, but I’m finding it hard to decide between a few options.

Admiral

From the FTSE 100, I like Admiral (LSE:ADM) very much. It operates in an industry that isn’t discretionary – people need car insurance – and consistently outperforms its competitors.

On top of this, its policy of reinsuring most of its risk means the company is able to return a lot of cash to shareholders via dividends. This is another attractive feature of the business.

One thing to keep an eye on with Admiral is inflation. Used cars and repairs becoming more expensive is the kind of thing that can cut into margins, despite its strong competitive position.

The stock got to my price target – which is £25 – earlier this year, but I wasn’t in a position to buy then. So I’m now wondering whether I need to be patient with this one. 

Macfarlane

Another stock I’ve got my eye on is Macfarlane (LSE:MACF). With a market-cap of £172m, this is a much smaller business, but it’s one that I think has a lot of attractive features.

The company specialises in packaging products. Obviously, this is an industry with a lot of bigger competitors and this is something of a risk, especially for basic things like boxes.

Importantly though, not all packaging is like this. With healthcare products, there are certain technical requirements to meet and particular standards, creating a barrier to entry. 

The stock is actually trading well below my estimate of its intrinsic value at the moment. So it’s definitely one that I’m considering for my ISA. 

Polaris

Over in the US, I’ve got an eye on Polaris (NYSE:PII) shares. The company is one of the world’s top manufacturers of recreational vehicles (RVs), such as snowmobiles, boats, and motorcycles. 

The stock is down quite a bit recently, which is largely due to US interest rates. With a lot of the firm’s sales financed through borrowing, the possibility of rates remaining high is a risk.  

This, however, is a risk across the industry. And I think it’s one that Polaris – by virtue of the strength of its brands and its distribution network is better placed to deal with than its rivals.

As a result, I expect the company to cope with a difficult trading environment better than most. And with the stock at an unusually low price, this could be my opportunity.

Opportunities

Warren Buffett and the team at Berkshire Hathaway might be backing away from shares at the moment. But I’m not looking to build a cash position of my own. 

I’m in the unusual position of having cash available and seeing a range of opportunities, both in the UK and the US. I’m still figuring out what to do, but I’m expecting to act soon.

The post What should I buy next in my Stocks and Shares ISA? appeared first on The Motley Fool UK.

This might indicate there’s a lot of value on offer elsewhere. But when it comes to US stocks, the opportunities that stand out to me the most are outside the S&P 500. 

The Magnificent Seven

Analysts at Goldman Sachs are forecasting 10% gains for the S&P 500 – roughly in line with the historical average. And they are again anticipating strong growth from the companies known as the ‘Magnificent Seven’.

Importantly though, this isn’t the only area that’s expected to do well. Businesses that are exposed to the US economy are set to benefit from lower taxes from the new government.

Goldman’s forecast is that the Magnificent Seven will outperform again in 2025. But while the index as a whole is for a more modest gain, growth should come from a broader range of sectors.

The idea that smaller companies are set to do well is encouraging for the stocks I’m looking to buy. But I’m not just thinking about the next 12 months – I’m looking for long-term opportunities.

Five Below

Top of my list is Five Below (NASDAQ:FIVE) – the discount retailer that sells things for $5… or less. In terms of growth, the company’s looking to roughly double its store count by the end of 2030.

If it achieves this, I expect margins to expand as the business benefits from economies of scale. But even if it doesn’t, double the outlets should make for double the profits.

A price-to-earnings (P/E) multiple of 23 looks expensive, but it’s actually towards the lower end of its historic range. And the same is true on a price-to-book (P/B) basis (which I think is a better metric to use here).

Five Below price-to-book ratio 2015-24

Created at TradingView

The company depends heavily on households with low incomes and this source of revenue can be fragile. So while I’m looking to buy the stock at these prices, the risks shouldn’t be underestimated.

Polaris

Polaris (NYSE:PII) makes recreational vehicles, including snowmobiles, motorbikes, and boats. It’s one of the oldest brands in the industry and its name is a key asset that allows it to earn strong returns on equity.

Polaris return on equity 2015-24

Created at TradingView

Aside from cyclicality, the big challenge for Polaris is that it’s easy for customers to switch to another manufacturer’s product. And that’s a long-term challenge.

As I see it though, the current share price is worth the associated risks. Earnings are highly cyclical, but the current share price seems to reflect a pessimistic outlook, which I think is temporary.

Polaris price-to-book ratio 2015-24

Created at TradingView

Right now, the stock trades at a price-to-book (P/B) multiple of 2.5. That’s unusually low and I think this is an opportunity to add shares in a quality company to my portfolio at a very decent price.

US stocks

I don’t consciously look for opportunities outside the S&P 500. But sometimes companies like Five Below and Polaris present opportunities I find attractive.

In both cases, I’m hoping for something very positive over the long term. That’s why I’m looking to buy both in the New Year.

The post Forget the S&P 500 — here are the top 2 US stocks on my buy list right now appeared first on The Motley Fool UK.

Some sectors have seen big declines since the New Year. But investors should be careful – not every falling share price is a buying opportunity.

Consumer pressure

Consumer spending has been under pressure in the UK, the US, Europe and China. And that has been leading to weaker returns for companies that rely on people having disposable income.

One reason for this is higher interest rates. Consumers might be getting more interest on their savings, but they’re also paying way more on their debts. 

As a result, households have had less disposable income. And share prices have been reflecting this, especially in the consumer discretionary sector. 

Wizz Air (LSE:WIZZ) shares are down 41% over the last year and recreational vehicle company Polaris (NYSE:PII) has seen its stock fall 23%. But the two look very different to me.

Wizz Air

Shares in Wizz might be down, but I view this one as a value trap. As the pandemic demonstrated, airline costs stay largely fixed even if demand falls, meaning profits can drop away quickly.

Wizz is still anticipating decent profits this year. Net income of between £420m and £500m this year makes the stock look cheap with a market cap of £1.3bn.

The trouble is, I think the business is in a difficult long-term position. The company’s debt climbed during the Covid-19 travel restrictions and it hasn’t reduced since.

Wizz Air Total Debt 2014-24

Created at TradingView

Higher debt increases the extent to which the firm stands to benefit from lower interest rates. But this isn’t enough to change my view that the risks here are significant.

Polaris

The Polaris share price hasn’t fallen as much over the last 12 months. But there are a couple of reasons I much prefer it from an investment perspective. 

One is that it has a genuinely powerful brand – it’s one of the oldest names in power sports. Another is a balance sheet where total debt is roughly in line with 2018 levels. 

Polaris Total Debt 2014-24

Created at TradingView

In an industry with low switching costs, it can be difficult to retain customers, which is a risk with the company. But the stock is currently unusually cheap on a price-to-sales basis.

Polaris P/S ratio 2014-24

Created at TradingView

I don’t envisage the downturn in the US economy lasting forever. And I think Polaris could be a big beneficiary when consumer spending starts to recover.

Undervalued stocks

I think the consumer discretionary sector is the place for opportunistic investors to look for opportunities right now. But a stock’s decline isn’t a measure of how undervalued it is.

Some businesses can handle a difficult trading period than others. The key to investing well is finding those that limit the damage in the short term and recover strongly in the future.

The post Which stock market sectors are the most undervalued? appeared first on The Motley Fool UK.

The share price is at a 52-week low at the moment, but I don’t think there’s anything wrong with the underlying business. I think there’s a good case to be made for buying the stock at today’s prices.

What does Polaris do?

Since Polaris isn’t a stock UK investors typically pay much attention to, it’s worth saying a bit about what it does. The firm designs and manufactures recreational vehicles, mostly for powersports.

The company has a number of key strengths that I think make it worth looking at from an investment perspective. The first is its status as a global leader in the powersports industry.

This allows Polaris to build good relationships with dealers, giving it an advantage over competitors. Its strong brands also help generate customer loyalty in an industry where switching costs are low.

The business is also growing impressively, averaging 7% annual revenue growth over the last decade. And the dividend has increased each year for the last 29 years. 

Why is it so cheap?

At a price-to-earnings (P/E) ratio of 12 based on last year’s earnings, Polaris shares look cheap at the moment. And there’s a reason for that – the company gets around 80% of its revenues from the US. 

Several businesses making products people want but don’t need have been finding the US difficult lately. And this is because GDP growth has been relatively weak during the first three months of 2024.

For Polaris, this has been showing up in earnings. The company reported lower-than-expected revenues and earnings per share of $0.23 between January and March, compared to $2.05 a year ago. 

There’s no question that investing in a business that sells discretionary products in a market that is under macroeconomic pressure is risky. But I think the decline looks like a terrific opportunity.

How serious are the risks?

There are a few reasons I think the Polaris share price looks hugely attractive at the moment. The first is the dividend.

The company currently pays out $2.64 per share to investors. And with last year’s earnings coming in at $8.80, things have to get much worse for a long time before there’s any danger of a dividend cut.

Another is the firm’s balance sheet. The danger with a cyclical company like Polaris is that it needs to be able to meet its financial obligations even when sales are slow. 

I don’t think there’s any danger on that front either, though. Interest payments account for around 25% of the firm’s operating income, leaving plenty of headroom in this area.

A stock to consider buying

Warren Buffett advises investors to be greedy when others are fearful. But that can be a really bad idea – sometimes investors are fearful for a reason.

With Polaris, though, I don’t think this is the case. I think this is a terrific opportunity to buy shares in a quality business at an unusually good price.

The post This under-the-radar dividend stock is on my list of shares to buy in June appeared first on The Motley Fool UK.

As a result, I’m casting my net a bit further afield. By looking over to the US, I’m hoping to diversify my portfolio and find some great investment opportunities.

Berkshire Hathaway

Top of my list at the moment is Warren Buffett’s company, Berkshire Hathaway (NYSE:BRK.B). The business has a lot of qualities that I look for in an investment.

Berkshire is a conglomerate with a number of smaller businesses as subsidiaries. These include insurance companies, a railroad, and a utilities operation.

This means that the business is reasonably well diversified by itself. There’s a common theme in that it’s focused on the US, but it has a number of different revenue sources. 

The key to the company’s success is its discipline. It avoids taking excessive risk in its insurance operations and is careful not to overpay when it makes investments.

I think that the risk with the company is relatively low, but if there is one, it’s growth. Berkshire’s enormous size makes it hard for the company to grow at the rate it used to.

At today’s prices, though, I consider the stock a bargain. And its decentralised culture means that I expect it to continue to do well even without Buffett in charge.

Johnson & Johnson

I also think that there’s a rare opportunity in Johnson & Johnson (NYSE:JNJ) shares. The stock currently trades at a price-to-earnings (P/E) ratio of 16. 

In my view, that’s not at all bad for a business that has consistently grown its earnings over the last decade. And the stock is down 11% since the start of the year.

The reason the stock has been falling is because there’s a risk here, though. The company is dealing with lawsuits relating to its baby powder, which could get expensive.

Johnson & Johnson attempted to sidestep the problem, but was blocked from doing so by the courts. The uncertainty about what costs the company might face is weighing on the stock.

I think there’s an opportunity here, though. The falling share price looks to me like an overreaction. 

Buffett’s success with American Express came from buying the stock when it was dealing with a scandal of its own. I’m looking to buy Johnson & Johnson shares for a similar result.

Polaris

Lastly, I’m looking at a company called Polaris (NYSE:PII). The company is a leading manufacturer of off-road vehicles.

Polaris isn’t as well-known as Berkshire Hathaway or Johnson & Johnson. But I think there’s an impressive business here. 

The company achieves a 70% return on its fixed assets. I think that’s impressive, especially for a manufacturing business.

This is partly the result of strong brand power. Polaris is the market leader in the all terrain vehicles industry, with around 23% of the global market.

Importantly, the stock doesn’t look expensive at the moment. It trades at a price-to-earnings (P/E) ratio of less than 12.

The main risk is that the macroeconomic outlook doesn’t look promising. A recession is a concern for Polaris, with discretionary purchases from customers likely to slow down.

I see this as a short-term headwind, though. Over time, I expect the company’s assets and economic characteristics to prove durable and generate a good return for investors. 

The post 3 shares I’d buy with the FTSE 100 at record highs appeared first on The Motley Fool UK.

Polaris

Polaris (NYSE:PII) manufactures recreational vehicles, such as motorbikes, snowmobiles and quad bikes. It’s one of the best-established powersports brands. There are two major headwinds facing the company at the moment. The first is inflation. High commodity prices means that Polaris has to spend more manufacturing its vehicles and then try to pass this on to its customers. The second is global supply chain issues. Difficulties getting hold of parts — most notably semiconductors — increase the time it takes Polaris to build its vehicles, slowing down revenues.

While the company’s stock is trading as though investors are seeing an enduring problem here, I’m anticipating both of these headwinds turning out to be temporary. An investor buying Polaris shares today could pick them up at a price-to-earnings (P/E) ratio of around 14, but I don’t believe this tells the full story. This is a company that will have ups and downs, yet I think that now might be a good time to invest. I’m looking at adding some shares to my portfolio at the moment.

Adobe

Unlike Polaris, Adobe (NASDAQ:ADBE), is fairly well shielded from inflation. The company makes software for creative publishers. Its line-up includes photo and video editing programmes, e-signature apps, and marketing software. As a software company, it doesn’t have to buy in physical commodities or materials to sell its products. The result is that those products tend to have high margins and its stock tends to have a high price tag. 

To my mind, Adobe is clearly a wonderful business. The trouble is, nearly everyone else seems to agree. As such, Adobe’s shares are almost never cheap. They’ve been falling recently, though, so the question is whether or not they’ve fallen enough to make the stock attractive from an investment perspective. I think that they have.

Adobe shares currently trade at a P/E ratio of just over 40. That’s quite high, but with earnings forecast to increase by around 25% annually, I take the view that Adobe has the capacity to justify this price tag. I also believe it’s worth noting that Adobe’s shares have historically traded at an average P/E ratio of around 52. While that by itself isn’t a reason to buy a stock, I think it’s worth paying attention to.

Summary

Right now, I’m looking at two major themes as I search for stocks to buy. The first is companies that are facing inflationary headwinds. I think that inflation will subside over time (though I’m not taking a view on exactly when that will be) and that companies like Polaris will be able to use their strong brands to pass on a good amount of their additional costs. I’m also looking at technology stocks that have been falling as interest rates rise. And I believe that Adobe might have fallen too far, providing an opportunity for investors like me. At today’s prices, I’d be happy buying either for my portfolio.

The post What should I invest in right now? appeared first on The Motley Fool UK.

Kellogg

The first dividend stock that I’m watching in March is Kellogg (NYSE:K). The stock has a dividend yield of around 3.5% at the time of writing, but dividend isn’t just about looking at yields. It’s about looking at the underlying business, and I think the business at Kellogg’s is in decent shape. Rising input costs due to high commodity prices and supply chain shortages are a threat at the moment, but I think that Kellogg can weather the storm and provide a reliable dividend.

Kellogg is best known for its cereal brands, but about half its revenue these days comes from its range of snacks (Pringles being the most prominent). The company has entrenched relationships with retailers, which helps protect its competitive position and its management has been investing in its brands, which I view as wise. I’m very interested in buying this stock, priced at around $60.

British American Tobacco

The second dividend stock on my radar is British American Tobacco (LSE:BATS). The usual view on stocks like this one is that they have attractive economics but a diminishing market. So an investment comes down to whether or not there’s enough left in the market to justify the current price. I agree with half of this. I agree that the economics of smoking are attractive, but I don’t think that the market is diminishing. While it’s true that smoking is less prevalent, the number of people who smoke has increased steadily since 1990. 

The drawback to British American Tobacco is that it generates the majority of its revenue outside the geographic regions where the number of smokers is increasing the fastest. But I think the global growth of smoking goes some way toward explaining the company’s steady revenue growth over the last decade. The company currently pays a dividend with a 6.5% yield and I think it might well continue to do so. 

Polaris

The last stock on my dividend stock list for March is Polaris (NYSE:PII). The company designs and manufacturers off-road vehicles. With a 2.1% yield, this isn’t the most obvious stock to include here. But I think the company’s investment proposition might be attractive to me as an investor seeking passive income going forward.

At the moment, Polaris is battling a collection of headwinds. Supply chain disruption, cost inflation, and a slowing global economic environment are all pushing against the company’s sales. But I think that this is reflected in the stock price and these headwinds won’t last forever. 

The risk for this investment comes from uncertainty around how long these headwinds will persist. I think, however, that the market is currently overreacting to a difficult macroeconomic situation for Polaris, so this might be a good time to pick up shares in a strong company that is a reliable source of passive income.

The post 3 dividend stocks to buy in March for sustainable passive income appeared first on The Motley Fool UK.