Like most people in their early 30s, I don’t own much. Yet, I have liabilities lying in wait for me — tuition fees, an engagement ring, a mortgage, and much more. It becomes more disconcerting when I realise that I only have 30 more years to secure my finances. Not a long time at all. Is it too late for me? Not if I follow this Warren Buffett technique and stick to it like a plaster.

Investment options in my early 30s  

The amount I’d need to retire early is roughly £750,000 by today’s standards. But I also have liabilities to meet during my working lifetime. So I’d effectively need a kitty closer to a million.

Now in my early 30s, I have three choices to get to this figure. Either earn more, spend less, or invest more.

Though I know I will be earning more as I age, it is unlikely I will be earning millions while in the workforce. Meanwhile, spending less is something I’m unwilling to do.

Thus, my only viable option is to invest a larger proportion of my earned income into the stock market. This way I can generate a nest egg for later life, as well as supplementary income when the need arises.

Small changes, big results

Five years ago, I began investing small amounts (£840 monthly) on a regular basis in my Stocks and Shares ISA. It is a high-risk portfolio that has returned 6.37% on an annualised basis. This has given me the equivalent ISA growth of £9,700. The benefit seems reasonably high when I consider that I did little to earn it.

If I had delayed my ISA investment journey by one year, this could have represented a loss to my portfolio of over £10,000. Even if I invested double the amount, in a shorter period of time (three years instead of five), my ISA would have generated a much lower return (£7,449 vs £9,700).

The difference in my investment return for investing smaller amounts for longer is simply incredible. The reason for such a difference was made famous by Warren Buffett.

Warren Buffett technique

Warren Buffett reasons that investing small amounts, maintained consistently over time, lead to unexpectedly dramatic results. According to him, the more time your investment has to grow the greater power of compounding it will achieve. This suits an investor like me in his early 30s who is seeking high portfolio growth over a long duration.

Furthermore, the long time horizon and years of additional contributions mean I can allocate heavily toward stocks without worrying about short-term volatility impacting my long-term plans.

I admit, my 6% return average over the last five years is a good return. There’s not a guarantee of that in the future. But historically the stock market has returned an average of 10% for about the last century.

My ultimate aim is to max out my ISA account on a yearly basis. If I do this and experience the same 6% growth rate over the next 25 years, I’d have an ISA value of over a million pounds. All with a decade left to spare until retirement.  

Staying disciplined and consistent, as per Warren Buffett’s approach, is the only way I think I can achieve this.

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The London Stock Exchange Group (LSE: LSEG) plays a central role in enabling companies and governments to issue securities efficiently. It is a company I have often overlooked because the business of stock exchanges is not the most exciting to me. However, not buying this stock 10 years ago today is one of my biggest investment regrets. If I’d invested half of my stocks and shares ISA allowance in it I’d have received an eye-watering return of 1,046%. This is equivalent to over £100,000.

A decade of supersonic growth

There were several tell-tale signs the stock was going to take off that I neglected to act on.

For starters, it is an incredibly long-standing institution. UK heritage brands like this often posses intangibles that maintain its value over long stretches of time. The London Stock Exchange has been around for centuries. It is the epitome of consistency, long-term value and global repute.  I believe it is an intangible that gives the stock exchange a premium over others.

Furthermore, the company has reinvented itself more times than that queen of reinvention herself, Madonna. The company is well versed in keeping itself relevant to corporate demands. A timely merger in 2007 with Borsa Italiana (the Milan Stock Exchange), put the Group on the fast-track to success. Since then, timely stakes in clearing house LCH.Clearnet and interest rate swap business TradeWeb have future-proofed its offer.

Is another decade of stellar returns imminent?

After a decade of fantastic growth, the LSE continues to perform well. The stock’s value is in positive territory this year — up 3% in a year when FTSE 100 valuations have broadly declined. The FTSE 100, for example, is down nearly 10%.

I also see the stock as a reasonable downside hedge for market turmoil. The Group benefits from market volatility. Elevated trading volumes contribute to the exchange’s income. Meanwhile, annual earnings are forecast to grow in the double digits.

I expect both of these headline factors to be favourably priced into the share price as time passes.

Headwinds to continued success

However, I do foresee clear headwinds regarding the Group’s growth potential over the long run.  A weak pound, Brexit, and a dwindling IPO pipeline are threats to London’s position as a leading equity market. If fewer firms choose to list on the London Stock Exchange, this could limit future growth prospects for the company.

There was already a fear following Brexit that the stock exchange’s reputation as the top global destination for listings would be under threat. So, it has proven. Its share of the total listing proceeds in Europe has fallen 40% in the six preceding years since the vote, according to Bloomberg.

Regret aversion is a negative emotional bias that urges investors to avoid regret, and thus make the wrong decision. I do not want to fall into this trap with the LSE because of my regret of not buying 10 years ago.

However, I am quite positive this is not the case with the LSE. Despite some clear headwinds, I consider it a heritage stock with solid fundamentals. I believe the positives as a defensive long-term growth stock simply outweigh the risks I see.

As such, I intend to buy some shares in the London Stock Exchange before the year is out.

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Henry Adefope 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.

My hunt for UK shares that can thrive in a low growth climate has not let up. Barclays (LSE:BARC) has long been in my sights. Its share price has been bruised as concerns about the UK economy have risen. Over the last month alone, 10% of its value has been slashed. Could this be my contrarian moment to buy the shares at a discount? Potentially. I believe Barclays shares were oversold earlier this year and are primed to blossom even in the event of a recession.

Positives

I feel the big banks can now shrug off even the most savage economic downturn. Regulators and central banks have ensured that institutions have the adequate capital buffers to absorb colossal amounts of red ink. So should the worst happen, banks should be resilient.

Additionally, Barclays’ diversified business model means many of its lines are less exposed to the direction of the UK economy. In contrast, peer Lloyds Bank is more focused in UK retail banking, thus more susceptible.

Furthermore, high inflation is increasing the prospect of higher interest rates for longer. High interest rates should boost lending margins for Barclays.

Why Barclays shares over the other banks?

I think Barclays shares are already priced for misery, so there is upside potential for a contrarian like me. Big lenders’ stocks are currently trading around 20% below share price targets set by research analysts, according to Morningstar. The reason Barclays is the most attractive to me is simply because it is the cheapest of the lot. It has a price to earnings ratio of five times, whereas its peer average is eight times. For example, Standard Chartered is valued at more than double (8.9 times) Barclay’s.

The big risk for me here is if Barclays’ big discount relative to its peers is justified. I do not think it is. Much of the bank’s trials and tribulations have been self-inflicted. I think this has weighed negatively on the sentiment of Barclay’s shares. One example is £1.9bn in litigation and conduct charges the bank settled in the first half of the year. Frankly, I don’t think Barclays shares will be on the naughty step for long once the bank gets profits moving back in the right direction.

Headwinds for Barclays

However a key challenge I envisage for Barclays is the collapse of deal-making as interest rates rise.

This year, the number of IPOs in the US and Europe have tumbled. (M&A) activity has crashed to historic lows. Barclays is a leading player in this area so a protracted lull could sting its bottom line.

Conversely, trading desks do well when financial markets are volatile, whether on the way up or down. Barclays is well positioned to reap the benefits.

Best of the banks

So, while I feel a downturn may be brutal for customers and employees, for banks it could be a gift in disguise. Barclays is not the only big bank listed on the FTSE 100 that has the potential to do well. But I am leaning towards it because it offers the best value.

The relatively cheap price looks like a bargain to me once I consider analysts price targets for the stock over the next 12 months is nearly double its current price.

I will most likely buy shares in Barclays before the month is out.

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Henry Adefope 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.

OPEC is a cartel of major oil producers, led by Saudi Arabia and Russia. It met last week (Wednesday) and decided to make its biggest production cut since the start of the pandemic. The decision to slash oil production by 2m barrels per day is a move that will likely send gas prices higher.

Consumers and governments will not be big fans of this move. Rather, the biggest winners will be FTSE 100 oil stocks and their shareholders.

Bullish market reaction

The cut to production, equivalent to about 2% of global oil demand, won’t begin until November. However prices received an immediate boost.

The price of oil (Brent crude) rose 7% last week after the announcement. Meanwhile FTSE 100 oil and gas stocks have flourished as a result. I noted heavyweight FTSE 100 oil stocks BP and Shell leading the sector’s rise, hot on the heels of the OPEC decision.

Why the positive market response? Because supply cuts likely mean higher profits for energy companies.

I do not see this as a mere temporary bull signal to buy energy shares. I truly believe this will mean higher oil prices and higher cash flows for the energy majors over the medium to long term.

Furthermore, I believe the production cut will lead to higher dividends and stock buybacks among energy companies.

Reaping the rewards

This is all in addition to what has already been a strong year for stockholders of FTSE 100 oil majors.

The seven supermajors (across the UK and US markets), including BP and Shell, are predicted to return a record amount to shareholders through buybacks this year. These companies have reaped the rewards of high energy price rises amid constrained supply and elevated post-pandemic demand.

FTSE 100 oil bull run to continue

Frankly, I think this oil sector bull run can continue well into next year.

The OPEC cut is something that will keep energy prices high or push them even higher. In addition, the International Energy Agency (IEA) recently warned that gas supplies will remain tight next year due to Russia’s invasion of Ukraine. The combined effect has heightened my worries that inflation will remain higher for longer. If so, this will prolong the need for aggressive interest rate rises by global central banks.

This is problematic for the majority of companies listed on the FTSE 100 that depend heavily on debt capital. Nevertheless, I need to find stocks within the index that can thrive in a high inflation and potentially recessionary environment.

Recession is a double-sided coin for me though. A global one could seriously deplete demand for oil — which would be a sledgehammer to the profitability of oil stocks.

However, I believe the oil sector has been a clear winner ever since global inflation started ticking upward. Just look at the performance year to date: the FTSE 100 is down nearly 10%. Conversely, BP shares are up nearly 30%.

Shell shares are up by even more (35%).

Certainly, I do not foresee current conditions reversing any time soon, so I expect a similarly stellar performance from the oil sector’s leading companies. Earnings season is near, with Shell up first on 27 October. The upcoming results are the last piece of the puzzle that will help me decide which of the sector offers the best value. Then I’ll buy.

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Henry Adefope 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.

It’s a tough world out there, but I see two positives regarding the market environment so far this year. Firstly, value-oriented FTSE 100 stocks have held up better than growth stocks. Secondly, FTSE 100 valuations are broadly lower, suggesting I could potentially buy shares for less than they cost at the start of the year.  

High-yield value stocks

In even more positive news for me, FTSE 100 income yields have generally risen across the board as share prices have dropped throughout September. The key drivers behind this fall were concerns around the UK economy, alongside the now notorious mini-budget.

Market turmoil can bring opportunity for me. As such, I believe I’ve unearthed some underpriced, high-yielding stock market gems following the September market dip.

The first of these is BT Group. The share price has fallen by more than a quarter (25%) this year. The result is a spike in its dividend yield. With an expected yield of 6% now, it’s one of the FTSE 100’s highest-yielding stocks. The company is integral to the Government’s superfast broadband pledge, so gives me a defensive buffer as well as a competitive income.

Another heavily discounted stock is Schroders. It’s priced at 30% less than it was at the start of the year. I see its expected 5% yield as impressive. With yearly earnings growth of 7%+, and analysts forecasting a 50% valuation hike over the next 12 months, I’m keen to buy.

Finally, advertising group WPP, has seen 33% slashed off its valuation this year. Its expected yield at 4.5% is healthy. The company generates revenues from around the globe so isn’t hamstrung by the UK’s economic turmoil. Its forecast earnings growth is in double-digits, and I expect this to reflect positively on the share price in due course.

Long-term outlook for dividend payers

I find these FTSE 100 stocks attractive, but it’s important not to fall into income traps.

Two specifically come into my mind. The first is the bargain trap. I know the market tends to be efficient at pricing stocks. Thus, any reduction in value may be justified.

The second is what I like to call the ‘high-yield illusion’. In the past I’ve bought companies because of the high yield on offer, only to find out many of them couldn’t afford what was being paid out.

The way I avoid this now is by by ensuring any high yields are financially sustainable with the companies having good long-term prospects. The key for me is to make sure that the dividend is well covered by a firm’s retained earnings.

I believe the FTSE 100 shares I’ve highlighted all broadly fit this profile.

Bargain FTSE 100 stocks

Market turmoil has often turned out to be a positive for me for several reasons. I’ve been able to snap up quality stocks at cheap prices in such an environment. I’ve also seen many of my higher-risk stock picks benefit from the greater volatility the turmoil brings.

In my opinion, the latest market sell-off has created a buying opportunity for some high quality, and consistent dividend payers.

I intend to buy shares in as many high-yielding bargains as I can. The FTSE 100 stocks I mentioned here are currently at the top of my watchlist.

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Henry Adefope 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.

Defensive qualities

My experience tells me the valuations of defensive stocks are more resilient than cyclicals in downturns. For me, supermarket chain Tesco embodies the idea of a defensive stock. It sells many of the necessities that people will buy regardless of circumstances. By way of being the market leader, I believe that its earnings can remain relatively stable during a down cycle. This should have a positive effect on the valuation of Tesco shares.

Furthermore, I see Tesco as a relatively strong income payer, regardless of the conditions. The grocery giant offers a higher dividend yield (6%) than the FTSE 100 average (4.1%). It has also been increasing its dividend coverage ratio for years — a positive indicator of its financial health. So, the combination of high sustainable payouts with share price stability, is a safe bet for me.

The company’s share price was hammered in September as concerns for the UK economy rose. It’s down by a third (30%) since the start of the year. This type of discount is often a buy signal for me. That said, I have a few lingering doubts about Tesco’s longer-term prospects.

The cost-of-living crisis

I’m worried about the discount war kicking off between the big supermarkets. I sense that higher inflation and interest rates will continue to tighten wallets. Shoppers will have no choice but to shop at the places with the cheapest prices. Ominously, Aldi and Lidl have been grabbing market share at an increasing pace. But Tesco has been losing market share.

To its credit, I’ve noted a spirited response from the company. It has gone from boosting its online presence to increasing its product discounts. But price slashing can be problematic for supermarkets. It certainly is for Tesco, a company with already wafer-thin profit margins.

The more immediate headwind for Tesco is the weak pound. It sources products internationally. Therefore, it will need to pay more money in pound terms to buy the same products.

Headwinds abound

I remain confident that Tesco can be a resilient stock in this recession. But simultaneously, I’m put off by the headwinds in the shape of intensifying competition and the greater costs it’s facing.

I also see limited upside in the share price because its price-to-earnings ratio is well above competitors like Sainsbury’s and Asda. I take this to mean it’s already generously priced.

Overall, I’m finding more negatives than positives about Tesco shares. I think September’s fall indicated a broader price correction by the market. Yet while I won’t be buying now, it’s a stock I intend to continue monitoring.

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

The boohoo (LSE:BOO) share price hit some glorious highs during the pandemic. Young consumers used retail therapy to good effect to soothe their boredom. But was this the crescendo for the seismic growth story of fast fashion? I feel it could be.

Since the New Year, Boohoo’s share price has been slashed by more than half (65%). I think the fall is indicative of the sun setting on the fast fashion growth story. I anticipate companies like boohoo becoming the sector’s biggest casualties over the long run. Yes, I no longer consider boohoo a growth stock, and I will detail why.

Is the party over?

Fast fashion is exactly what it says on the tin. The sector is built on constantly churning out cheap, trendy clothing inspired by celebrity culture. The fashion is ‘fast’ because it is delivered at breakneck speed to the consumer.

However, the ‘fast’ nature of it is being challenged now. The churn of the speedy delivery is becoming more expensive. This is because high freight and container costs have been eroding gross margins. Meanwhile, the delivery times for the goods have extended.

Frankly, I feel this undermines the whole business model. And all the while, customer returns are increasing. These factors are the bane of an online retailer. Clearly, they have been the bane of the boohoo share price, too.

Analysts at UBS seem aligned with me regarding the sector’s challenges over the long run. The bank has forecast revenue declines of up to 30% over the next five years for the sector.

Long-term outlook for the share price

Of course, I could be wrong about the direction of the boohoo share price. The company has rather bullishly been on an acquisition spree recently. The spree has armed the Group with several brands that cater to slightly different customer segments. A diversified business model will never be a bad move in my eyes.

Reassuringly, the company also has a relatively strong balance sheet. Financial resilience is what this company will need. I am pretty sure the cost-of-living challenge will see a sharp cut back on fast fashion spending from young consumers.  

However, the most tantalising part of boohoo’s upcoming interim results this Wednesday will be its outlook. I expect to see its management strike a cautious tone regarding the medium-term prospects.

What the interim results will not highlight

Most pertinently, I believe there is a separate issue putting pressure on the boohoo share price. This relates to charges of ESG malpractice against the company that have been lingering for some time. I am seeing it have an effect on the tastes of young consumers. The sarcastic reaction on social media to the Group’s appointment of Kourtney Kardashian as its sustainability ambassador does not bode well with me as a potential investor.

I understand this is an issue boohoo is trying to mitigate. However, its efforts have landed them in hot water with the authorities regarding greenwashing before. ASOS too.

Certainly, I see changes in consumer behaviour as being more powerful than companies’ ability to respond commercially. I think this, combined with the operational challenges, will continue to weigh negatively on the boohoo share price.

Overall, I must conclude fast fashion shares have no place in my portfolio for the foreseeable future.

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Henry Adefope 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.

So here’s my pick of defensive FTSE 100 shares with the potential to generate positive returns amid negative economic growth.

Getting defensive

The widespread appeal of defensive stocks is that they usually outperform the market during recessions. Regardless of external events, their dividends, earnings and share prices should remain stable, often because they offer a product or service for which there’s consistent demand.

I find that these stocks are more resilient than others. That’s mainly due to the underlying business either holding a dominant market position or providing necessities to consumers.

The best FTSE 100 shares that embody these characteristics often benefit from ‘inelasticity of demand’. Basically, if they raise prices to tackle inflation, consumers will still buy the product or service.

Adding such shares should at least minimise some of the risks to my portfolio.

Best defensive FTSE 100 shares

Fortunately, the FTSE 100 is packed with some of the best defensive sector stocks for me to pick from.

The consumer staples sector is a good one at times like this. Consumers will always purchase food, household products, and — many of them — tobacco, regardless of financial means. Thus, consumer defensive specialist Unilever, and a notable dividend payer like British American Tobacco, are my favourite picks currently. The Unilever share price has fallen to a much greater extent than the FTSE 100 year to date. But I expect to see greater demand for the shares if overall business conditions deteriorate. Additionally, the British American Tobacco share price has remained steady this year despite the volatile market. The stock also tends to be one of the highest-yielding on the main market.

Telecoms is another one of my go-to defensive FTSE 100 sectors. Expansion into 5G and superfast internet means that a market titan like Vodafone is unlikely to see weakened demand, even if a recession strikes.

Shares than can perform in down markets

Rising inflation and interest rates continue to increase the risk of a full-blown UK recession. So the consistency of value-oriented FTSE 100 shares has become ever more appealing to me.

Some sectors such as the tobacco, consumer staples and telecoms segments that I’ve mentioned, are notable for having stocks where the underlying business performs consistently. This is regardless of changing economic conditions.

Additionally, the FTSE 100 is a global index. I feel that adding companies from it to my portfolio should provide a better hedge against a recession than FTSE 250 stocks can.

I feel that Unilever, British American Tobacco, and Vodafone should help my portfolio weather what I anticipate will be a tough winter for the stock market. This is why I plan to buy shares in all three stocks before the month is out.

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

The shares are currently trading in bearish territory. A value investor like me rubs his hands at the potential of getting my hand on an under-priced stock.

However, I do not believe Kingfisher is one of these. The stock looks like a value trap to me, and here are the reasons why I will avoid buying in this business cycle.

Bearish market for retailers

I would be naive if I did not remind myself of the mid-to-long term outlook for the global economy when making an investment decision. High inflation and interest rate rises create challenging conditions for most businesses. I don’t see these conditions fading anytime soon either.

City economists are similarly pessimistic. A recent analyst note from Goldman Sachs forecast a recession at the end of this year, lasting all the way until 2024.

I am certain that this not ideal for a company like Kingfisher. The company relies on discretionary spending and its products are not essential for everyday life. Therefore, the hit to the business from consumers tightening their belts could hammer earnings for a good while yet. It is something I believe investors have priced into the discounted Kingfisher stock currently. The shares are down 30% year to date.

However, it is not just the Kingfisher share price that I am seeing affected. Other retailers like JD Sports and Frasers have seen an even steeper fall in share price (47% drop).

Ominous sentiment for Kingfisher shares

It must be said, that I discern a more bearish tone for Kingfisher compared to other retail and leisure stocks.

For instance, just last month it was one of the FTSE’s most shorted companies. My intuition tells me the bears are knocking on the door of the Kingfisher share price due to a combination of two things. These are intensifying competition within the DIY retailer sector, as well as some less than enthusiastic commentary from peers. For example, home improvement retailer Wickes recently warned it faces an “uncertain macroeconomic environment“. This came as the company announced weaker sales figures than the year prior.

Future prospects

Certainly, I do not think the discount on the Kingfisher share price represents a bargain. On the contrary, I believe the shares will continue to be beaten down while current conditions prevail.

Kingfisher is not the only retailer that will suffer. The DIY boom has eased, so I expect many of its direct peers to be similarly hit.

I like Kingfisher’s turnaround potential in the event of a growing economy. But, against the current backdrop, I believe the downside potential will be a drag on its valuation. The stock simply poses too much downside risk in the medium-term than my portfolio can tolerate.

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

I have been scouring the market for stocks that can benefit from inflationary price rises. Commodity exposure has proved a good diversifier for my portfolio in the past for this. I recently discussed my pick of commodity stocks, focusing on bigger names like Shell and BP. But I do not want to overlook lesser known oil explorers that may offer me better long-term value. The Tullow Oil (LSE:TLW) share price at £0.50 looks cheap when I consider its future growth potential.

The shares have underperformed for around a decade, but I believe they look set for takeoff. Here are my reasons why.

A cheap portfolio diversifier

The stock is down 70% over the last three years. It is easy for me to forget that the shares traded for well over £10 each a decade ago. But I believe the turnaround story is afoot.

In my view, Tullow Oil is deeply undervalued compared to peers. It also has higher earnings growth potential due to some recent cash-generative acquisitions. I am a long-term investor, so these value-oriented features are highly attractive to me.

Can the share price grow from here?

The mid-cap does not pay a dividend. But in an environment with high inflation and a high risk of economic recession, income is not the top of my agenda. Growth is.

I think the near-term picture, as well as the long-term one, look promising for the Tullow Oil share price.

The company has rewarded existing shareholders with a total return of 4.1% in the last 12 months. Of course, these recent returns are much better than the loss of 11% per year over the previous five years. Tullow Oil’s earnings growth forecast also exceeds both its sector and the broader market.

These are all indicators to me of a bargain worth adding to my portfolio.

The rally is coming

As oil prices have hit multi-year highs, oil majors like Shell and BP have seen their share prices rally by more than 50% over the past 12 months.

Meanwhile, Tullow as a smaller oil producer, has lagged, rising by a meagre 15% or so.

Make no mistake here, I am well aware that Tullow is a loss-making company. But I also feel that the market is under-rating its potential. The company has grown net income year on year, from a loss of -£1.22bn to a smaller loss of -£80.70m despite declining revenues. Meanwhile, the company is expected to break even financially a year from now, according to several oil and gas analysts.

I expect this trend of the company operating more profitably to continue.

Meanwhile, I believe the price of oil is likely to be stubbornly and persistently high, beyond 2022 and 2023. Positively, this feeds into the hands of Tullow Oil. Though, of course, rising oil prices are no guarantee.

But in the event oil prices continue rising, the stock could be gold dust for me in what is likely to be a challenging environment for growth over the coming business cycle.

Thus, it will be interesting to see signs of continued operational improvements in Tullow’s latest earnings results due tomorrow. If so, then it could well be a signal for me to buy and hold over the long run.

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Henry Adefope 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.