Profit warnings have come thick and fast in 2022.
 
They’re never pleasant for shareholders. The company’s share price typically falls by double digits on the day.
 
How should investors respond? Sell the stock? Hold? Maybe even buy? Or, with more profit warnings likely on the way, stay out of the market altogether?

Getting grimmer

It’s certainly been a tumultuous 2022. According to consultant EY-Parthenon, there were 136 profit warnings from UK companies in the first half of the year — 66% higher than in the first half of 2021.
 
And EY has just published its third-quarter report. It makes for grimmer reading still. An eye-watering 86 companies issued profit warnings in the period — the highest Q3 total since the global financial crisis.
 
The average share-price fall on the day of the warning was a painful 19%.

Headwinds

We don’t have to look far to see the reasons why forecasting and planning have become increasingly difficult for many companies.
 
EY said 57% of the Q3 profit warnings cited rising costs. And 23% cited labour market issues. We’ve also heard plenty about supply chain disruption, and falling consumer confidence and demand.
 
Indeed, EY noted that more than half the Q3 profit warnings came from consumer sectors. Retailer Next — pointing to “a general weakening of underlying demand” — was just one of them. Its shares fell 12% on the day.

More pain

Things haven’t improved in the first weeks of Q4, as far as I can see. I’ve noticed a number of profit warnings already.
 
Toys and games company Character said it’s expecting a “curtailment of consumer spending in the lead up to Christmas due to concerns over cost-of-living increases.” Its shares fell 9% on the day.
 
Marshalls, a supplier to the construction, home improvement and landscape markets, warned on profits due to “a marked softening of demand for private housing repair, maintenance and improvement.” Its shares slumped 17% on the day.
 
Similarly, Luceco, a supplier of wiring accessories, EV chargers, LED lighting, and portable power products, issued a profit warning last week as “demand from the UK DIY market continued to slow.” Its shares ended the day down 9%.

Myths vs data

There’s a well-worn saying around the stock market that “profit warnings come in threes”. However, empirical data suggests this perceived wisdom is off the mark.

EY has been tracking profit warnings since 1999. In a 2019 deep-dive into its 20-year dataset, it found only 18% of companies that issued a profit warning went on to issue multiple warnings.

However, those that do issue multiple warnings can get into deep trouble, including insolvency. As EY put it: “The third profit warning is a knockout blow for one in five companies.”

Rising risk

Right now, there appears to be an elevated risk of companies issuing multiple warnings. EY said that 41% of the companies that issued a profit warning in Q3 had already warned in the prior 12 months.
 
And that 28 companies are now in the ‘danger zone’ of having issued three consecutive profit warnings in the past year — up from 18 at the end of Q2.
 
Furthermore, the macroeconomic outlook for the foreseeable future suggests to me that more profit warnings are in the pipeline. Historically, January is the deadliest month (another takeaway from the EY 20-year study).

Rational decisions 

Is the current environment a reason to sell any stock that issues a profit warning? Or even to shun the market altogether?
 
I don’t think so. At The Motley Fool, we aim to make rational investment decisions from a business perspective. That means judging profit warnings on a case-by-case basis. And asking a lot of questions.

• Has the reason for the profit warning materially changed the prospects for the company’s long-term profits?
• Has the risk of a permanent loss of capital from the stock increased to a dangerous level?
• How low could profits go, before paying interest on any borrowings and meeting debt/profit covenants become serious issues?

Depending on the answers to these and other questions, a profit warning may have created an opportunity for patient long-term investors to buy at a bargain price.

Or, at the other end of the spectrum, it may have raised the risk of a capital wipeout from the stock to an unacceptably high level.

At times of economic stress, the challenge for investors of separating the wheat from the chaff is more important than ever.

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G A Chester has no position in any of the stocks mentioned in this article. The Motley Fool has no position in any of the stocks mentioned in this article. 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.  

Tobacco and food retail are sectors that are generally considered ‘defensive’. That’s to say, resilient when economic times are hard. It makes sense. After all, smoking is an addictive pastime and everyone has to eat. And yet, 2022 has so far been a year of contrasting fortunes for two FTSE 100 stocks in these sectors: tobacco group Imperial Brands (LSE: IMB) and top supermarket chain Tesco (LSE: TSCO).

Up and down

Imperial’s shares are up 21% year to date. Tesco’s are down 31%.
 
The theme continued on news from the two companies last week. A trading statement from Imperial produced a 2.5% rise on the day, while Tesco’s half-year results provoked a 4.1% fall.
 
Why the contrasting fortunes? And where will the stocks go from here?

Imperial in line

Imperial updated on its performance for its financial year ended 30 September. It said trading had been in line with its previous guidance. And that it expects to report full-year net revenue and adjusted operating profit growth of around 1% at constant currency.
 
Management also reiterated guidance for the next three years. It continues to expect low single-digit constant currency net revenue growth, with adjusted operating profit accelerating to deliver a mid-single digit compound annual growth rate over the period.

Improving returns

Imperial said it’s completed the two-year ‘strengthening’ phase of its five-year strategic plan, announced in January 2021. And is now moving into the next three-year ‘improving returns’ phase.
 
In addition to the existing “progressive dividend policy,” the company has started “an ongoing, multi-year share buyback programme” with immediate effect.
 
This means investors who stick with the company for the long term should not only receive a flow of rising dividends, but also an increasingly larger slice of the ownership of the business. All being well.

Deep in value territory

As I’m writing, Imperial’s shares are trading around the £20 mark, compared with a 52-week low of nearer £14. Buyers of the stock today are paying 7.6 times the earnings expected in the full-year results. The dividend yield is 7.1%.

Despite the strong rise in the share price this year, the earnings multiple and yield remain deep in traditional ‘value’ territory.

Tesco sets out its stall

Tesco reported a constant currency 3.5% rise in sales (excluding VAT and fuel) in its first-half results for the six months ended 27 August. However, adjusted operating profit was down 9.8%.
 
The company said the lower profit was due to the impact of reduced year-on-year volumes (as a result of a post-pandemic normalisation of trading), cost inflation and keeping the price of the weekly shop as affordable as possible for customers.
 
Tesco unwisely took its customers for granted during the hard times of 2008/09. I reckon the current strategy of doing its best for them — at the cost of lower profit margins — is the right way to go for the longer-term good of the company. 

Guidance

Despite the headwinds, management maintained its retail adjusted operating profit guidance for the full year within its previous range (£2.4bn-£2.6bn), although pulled it to the lower end: between £2.4bn and £2.5bn.
 
More positively, it upgraded its retail free cash flow guidance (previously £1.4bn-£1.8bn) to “at least £1.8bn.”
 
Nevertheless, the board also cautioned that “significant uncertainties in the external environment still exist, most notably how consumer behaviour continues to evolve.”

Valuation

Tesco’s share buyback programme, which started in October last year, hasn’t done a lot to support the share price. As I’m writing, the shares are trading near to £2, compared with a 52-week high of around £3.
 
On the plus side, this means Tesco’s been able to buy back a lot more shares at a lot lower prices as the year’s gone on.
 
Buyers of the stock today are paying 9.3 times the company’s trailing 12-month earnings. And the running dividend yield is 4.2%.

At the checkout

Tesco’s earnings multiple is higher than Imperial’s and its dividend yield is lower. However, the supermarket’s rating is by no means rich.

If you believe — as I do, and the company’s management does — that Tesco has “the right long-term strategy,” you may well be inclined to see value in the stock today.

Meanwhile, despite a strong share-price rise and perennial worries about the future of the tobacco industry, Imperial’s earnings multiple and dividend yield continue to look attractive to my eye.

I’m only sorry I didn’t buy the stock this time last year when our Motley Fool Share Advisor analysts identified it as their top pick for income and growth.

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G A Chester has no position in any of the shares mentioned. The Motley Fool UK has recommended Imperial Brands and Tesco. 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 pound went into freefall.
• UK government bonds (gilts) were heavily sold off.
• And the Footsie stock index ended the day deep in the red.

Why was Kwarteng’s mini-budget so badly received? Which FTSE sectors and stocks were worst hit on the day and which were the biggest gainers? What should investors do now?

Tax cuts galore

On top of the government’s previously announced multi-billion pound scheme to subsidise energy bills, the chancellor unveiled a raft of tax cuts — the biggest tax giveaway in half a century.

We had a reversal of the rise in National Insurance introduced by his predecessor, Rishi Sunak. The abolition of the highest rate of income tax. An axing of the cap on bankers’ bonuses. The scrapping of a planned rise in corporation tax. And a big uplift in the stamp duty threshold.

Risky gamble

Investors and traders appear to have viewed the government’s heavily debt-funded plans as an abandonment of fiscal discipline for a risky gamble on jump-starting economic growth.

To put the financial markets’ response into some perspective, the pound slumped to a new 37-year low against the dollar ($1.08), with some analysts predicting it could go on to fall to parity for the first time in history. Meanwhile, the tailspin in the bond market saw some of the biggest one-day negative gilt price moves in decades.

Falls of 2% for both the FTSE 100 and the more UK-focused FTSE 250 may not have been quite as dramatic, but they rounded off an overall negative response to the mini-budget across financial markets.

Big fallers

Not all UK equity sectors and stocks were down on the day, but let’s begin with the big fallers.
 
One striking feature was the number of real estate investment trusts (REITs) on the fallers’ board. FTSE 100 giants Land Securities (-5.9%), Segro (-4.5) and British Land (-4.4%) were there. As were a host of mid-cap FTSE 250 real estate firms, including Warehouse REIT (-8.3%), Tritax Eurobox (-8.3%) and Urban Logistics REIT (-7.1%).
 
It’s been said that REITs can act as bond proxies, and that the slump in these stocks reflected the hammering taken by government bonds.
 
Elsewhere in the property space, FTSE 100 housebuilders Barratt Developments, Berkeley Group, Persimmon and Taylor Wimpey, which initially rallied on the stamp duty news, soon fell back to end the day underwater. Online property portal Rightmove (-4.5%) also suffered.

Global fears

Oil heavyweights BP (-5.5%) and Shell (-5.3%) sank as the oil price fell to levels last seen before Russia’s invasion of Ukraine. This on fears not only about the UK economic outlook, but also the prospects for other major economies, like the US.
 
The same fears sent mining companies’ shares down. Anglo American (-5.9%), Antofagasta (-5.9%) and Glencore (-5.8%) joined BP and Shell on the FTSE 100 top 10 fallers list.

The FTSE risers

A big theme on the risers board was the prominence of stocks in the healthcare sector. This sector is considered ‘defensive’ — largely shielded from fluctuations in the wider economy.
 
Shares of AstraZeneca (+0.8%), rival pharma firm GSK (+1.3%), and the latter’s recent consumer health spinout Haleon (+4.3%) were in demand. And the theme continued among FTSE 250 stocks, with private hospitals specialist Spire Healthcare Group (+1.1%), Worldwide Healthcare Trust (+1.1%) and Hikma Pharmaceuticals (+0.8%) all on the mid-cap top 10 risers list.

Investment companies

Another theme among the FTSE risers was the prominence of investment companies focused on the economic growth potential of Asia and emerging markets. These included Fidelity China Special Situations (+1.3%), VinaCapital Vietnam Opportunity Fund (+0.6%), Schroder Oriental Income Fund (+0.6%) and Templeton Emerging Markets Investment Trust (+0.6%).
 
There was even greater demand for hedge-fund-style investment companies with strong records of making money in times of uncertainty. Pershing Square Holdings (+1.6%) was the FTSE 100’s fourth-biggest riser and BH Macro (+4.1%) topped the FTSE 250 leaderboard.

What should investors do now?

First, I think it’s worth noting that the FTSE 100 fell below 7,000 during mini-budget day. This compares with an all-time high of over 7,900 in May 2018. If history is any guide, the FTSE 100 will sooner or later reach and surpass that previous high.

Second, the mini-budget day risers and fallers are a reminder that all sectors have their days in the sun. But by buying discount shares of diverse, well-managed businesses — often in times of uncertainty — investors can raise the overall potential of their long-term returns.

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Graham has no position in any of the stocks mentioned in this article. The Motley Fool UK has recommended British Land Co, GSK plc, Haleon plc, Hikma Pharmaceuticals, Landsec, Rightmove, and Warehouse REIT. 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.

Last week was a momentous one, with Liz Truss winning the battle to be the next prime minister, and the death of Her Majesty Queen Elizabeth II.
 
I couldn’t help but think of how the latter’s long reign and consistent principles contrasted with the relatively fleeting tenures and successes of the 15 prime ministers who served under her — often characterised by transient policies, U-turns and a personal imperative to win general elections and keep hold of the PM position.
 
I thought I might draw an analogy to long-term investing and short-term trading. However, I think I’ve perhaps got a better take-off point to approach the subject for us commoners.

An early retirement

By the time you’re reading this, I’ll be on a week’s holiday in Switzerland, staying with my brother. It’ll be my last visit, because he’s at the end of his final year’s work and will return to the UK permanently to enjoy an early retirement.
 
He’s saved and invested through his life. He’s made some sacrifices, including working the last decade in Switzerland, with only a few days a month in the UK with his family and a few weeks a year on holiday with them. But it’s helped him to retire early.
 
I’m pretty sure he’s never checked stock and bond prices daily, or house prices, or the prices of other assets. He’s just taken a long-term view, worked hard and steadily built his wealth. For me, looking at share prices every day is a necessary part of my work, but my strategic focus is nonetheless on the long term.

The Glacier Express

In the context of our shared long-term views, it struck me that the one outing we have firmly booked during my stay in Switzerland is entirely appropriate.

We’ll be taking the Glacier Express from Chur to Zermatt. In terms of speed, the ‘glacier’ part of the name is more fitting than ‘express’. It’s known as the slowest express train in the world. Travelling at an average speed of 24mph, the journey will take us over six hours.

Starting at Chur (1,919 ft above sea level), we’ll climb to the Oberland Pass (6,670 ft), and descend into the Upper Rhone valley, before climbing again to Zermatt (5,310 ft). A short cogwheel train to Gornergrat will take us up to 10,135 ft, with the view ahead being the peak of the mighty Matterhorn at 14,690 ft.

The analogy

Now, I reckon if you were to plot all the altitudes of the journey on a chart, it would bear more than a passing resemblance to the long-term chart of a stock market index, like the FTSE 100, or the share price charts of many individual companies. That’s to say, numerous peaks and troughs along the way, but ultimately a long-term trend of reaching higher and higher altitudes.
 
There are investors who regularly hop off the metaphorical train in the uncertain hope of picking up a cheaper or faster one. But I’m convinced that for most people, following a long-term, ‘get rich slow’ strategy — owning shares and continuing to buy more through the market’s many ups and downs — is a surer way to reach a desired financial destination.

Final thoughts

At the risk of overstretching the analogy, let me give you a few final thoughts on the journey I’m expecting.
 
Dozens of bridges and tunnels are a feature of the route. I’ll be reminded that, in a lifetime of investing, there’ll be many occasions when the potential downside looks terrifying or when the immediate outlook is entirely in darkness.
 
But I’ll also be reminded that in the history of the stock market, times of fear and uncertainty have always passed. And that, over the long term, the market has invariably gone on to reach new highs.

Enjoy life along the way

My brother tells me we won’t be travelling in the most expensive class. It’ll be very comfortable, rather than extravagant. A three-course meal with a modestly priced bottle of wine, rather than seven courses with champagne and all. And a cheap ticket on a standard service for the return journey to Zürich.

I’ll be reminded that with a little care you can enjoy life, while continuing to invest and build your wealth. Like my brother, you may even be able to retire early, if that’s your goal.

I’ll doubtless raise a glass on the journey and toast the Glacier Express, long-term investing, and his early retirement.

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Back at the start of 2022, I discussed the question of how much company debt is too much.
 
I also suggested it would be a good learning experience for readers to follow an unfolding situation in real time. And recommended closely watching developments at cinemas group Cineworld in 2022.
 
The company’s share price has collapsed in the way I predicted, so now seems a good time to review how and why this happened. I’ll also give you a shortcut for avoiding companies with too much debt in future.

Flashback

Let me briefly recap Cineworld’s position when I was writing in January. The company had last reported net debt of $4.6bn. It was facing a debt covenant test at 30 June 2022, requiring net debt to be no more than five times trailing 12-month EBITDA (earnings before interest, tax, depreciation and amortisation).
 
It had made a loss in four out of the first five of those months. I said it had “a snowball’s chance in hell” of meeting the covenant test and that its level of debt was unsustainable.
 
I thought it possible that debt holders could push the company into administration or, only slightly better for shareholders, force it into a financial restructuring involving a debt-for-equity swap. This is where lenders write off a significant portion of debt and are issued with new shares instead.
 
I wrote: “At 32p a share, Cineworld’s current shareholders are collectively sitting on value of £440m. Based on experience, I’d expect to see this drop to somewhere in the region of £20m-£40m (1.5p-3p per share) in a debt-for-equity restructuring.”

Plot development

Let’s look at some of the key developments since January (I haven’t got space to cover them all). Industry box office numbers through the first months of the year suggested Cineworld’s financial position was only getting worse.

The company’s annual results, issued in March, confirmed this. And the directors said uncertainties around future admission levels and the film slate created “a material uncertainty that may cast significant doubt upon the group’s ability to continue to operate as a going concern.”

Net debt had increased a further $200m in the space of six months to $4.8bn.

Horror movie

Lenders had twice waived Cineworld’s debt covenants during the pandemic. These waivers were both announced a month before the test dates. There was no announcement a month ahead of the 30 June 2022 test, and the test date itself came, went and disappeared in the rear-view mirror with still no news lenders had agreed a waiver.
 
On 17 August, management announced it was considering a number of strategic options, including a financial restructuring that would “likely result in very significant dilution of existing equity interests in Cineworld.”
 
Five days later, following a weekend report in the Wall Street Journal that Cineworld was preparing to file for bankruptcy within weeks, the company issued another update. It confirmed that one of the options it was considering was a Chapter 11 bankruptcy filing in the US and similar proceedings in its other markets.
 
In the wake of this announcement, Cineworld’s shares slumped again to trade in that 1.5p-3p area I referred to in January.

Did you see the ending coming?

Predicting the collapse of Cineworld required a number of things. These included an understanding of what industry box office figures meant for the company’s financial performance. Also, knowledge of its debt structure, and the mindset and likely behaviour of lenders. And experience of comparable situations to appreciate what its shares might be worth.
 
Of course, many small private investors don’t have competencies and experience in such areas. However, sophisticated hedge funds do. And they can provide a useful hack to the question of whether a company has too much debt.
 
Hedge funds can make a profit by taking a ‘short’ position in a stock — a bet on the share price falling. They’re required to disclose a position of 0.5% or more to the Financial Conduct Authority (FCA). The FCA publishes a daily spreadsheet, but the website shorttracker.co.uk presents the information in a far more digestible way.
 
Now, not all stocks are shorted because of debt. However, if you have any concerns on the debt front, checking shorttracker is a smart move. Significant short interest in a stock is often a good indicator that the company’s debt may be too high.

Closing credit

As a wise man once told me: “If you can avoid stocks with extreme downside risk, the upside for your shares portfolio will take care of itself.”

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G A Chester 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.

Last week, in the wake of Glorious Goodwood and ahead of the York Ebor Festival, the UK’s sports betting and gaming stocks were in the news.
 
The big FTSE 100 players, Flutter Entertainment (LSE: FLTR) and Entain (LSE: ENT), both issued their half-year results. And boy, did they make a splash.
 
The week also brought news of a contraction in the UK economy, fuelling expectations of a recession. ‘Sin stocks’, like fags, booze and bookmaking firms, are often said to be resilient when times are tough. Could investing in Flutter and Entain be a smart move for investors?

On form

Entain was first up with its results, which were issued on Thursday. On a down day for the market, the stock headed the blue-chip leaders board with a rise of 3.7%. It gained a further 4.1% on Friday.
 
Flutter Entertainment, which released its results on Friday, topped the leaders board that day, bolting home with an impressive surge of 14.1%.
 
Despite these gains, both stocks are down on a 12-month view. Entain by 27.3% and Flutter by 23.4%. And the declines look worse set against the Footsie, which has put on 8.2% over the period.
 
However, extend the timescale further still — to 10 years — and the two stocks have real thoroughbred pedigrees. Flutter has delivered an annualised 20.8% return and Entain 26.7%, compared with 6.5% from the Footsie.

You never meet a poor bookmaker

At a very basic level, the business of bookmaking is a simple and attractive one — at least for investors who have no moral objection to gambling.

You’re probably familiar with horse-racing betting odds: 7/4, 100/30, 6/1, and the like. All these fractional odds have a percentage equivalent. If the odds on a race were to total 100%, the bookmaker should break-even. If they were to total less than 100%, punters would be able to back every horse in the field and make a profit.

Bookmakers lay odds that total over 100%. In a three-horse race, or any three-outcome event (such as win-draw-lose on a football match), the ‘overround’, as it’s called, may be in the 105%-110% region.

However, the bigger the number of possible outcomes to the event, the bigger the overround tends to be. For example, on the Grand National it’s been as high as 165%. In this instance, for every £165 taken in bets, a bookie would expect to hand back around £100 to winning punters and pocket £65.

It’s not without reason that the saying “you never meet a poor bookmaker” has been around for donkey’s years. It all starts with the overround.

Accumulators

The status of Flutter and Entain as FTSE 100 stocks is a testament to the structural growth of the industry and the success of the two companies’ business strategies. They have some key things in common.
 
Both are consolidators in the industry, making multiple acquisitions. The brands accumulated under the Flutter umbrella include Betfair, Paddy Power and Sky Bet. Entain’s portfolio includes Coral, Ladbrokes and Sportingbet.
 
Increased scale, expertise, technology and resources give Flutter and Entain competitive advantages over smaller, standalone operators.

Spread betting

Helped by acquisitions, both companies have become increasingly diversified, including significant growth in online operations.
 
Meanwhile, international expansion has broadened their geographical diversification. For example, Flutter owns US #1 sportsbook FanDuel, while Entain owns European betting band bwin, with leading positions in markets including Germany, Belgium, France, Italy and Spain.
 
Flutter and Entain are also diversified beyond sports betting, as shown by brands like PokerStars and tombola (Flutter), plus CasinoClub and Foxy Bingo (Entain).
 
Wide diversification by geography and business line should help Flutter and Entain remain resilient in a UK recession.

Stayers’ race

In their half-year results, both companies reiterated their financial guidance for the full year. They said they’re vigilant to the uncertain macroeconomic backdrop, but Flutter reported “no discernible signs” of a deterioration in key spend indicators and Entain said that “momentum remains strong.”

Could investing in these two gambling stocks be a smart move for investors? Well, I see a lot to like about the businesses. They appear to have successful strategies and long growth runways. Both already have strong records of growth through regulatory change and headwinds, forged by their increasing scale, diversification and operational excellence.

Their 10-year records of 20%+ annualised shareholder returns are impressive, and the weakness of their shares over the last 12 months could represent a good opportunity.

One thing’s for sure, while I have a fancy for Earl of Tyrone in the Ebor Handicap on Saturday, I’d sooner back Flutter and Entain for long-term wealth building!

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G A Chester 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.

Equity markets have been under pressure so far this year. Spiralling inflation and slumping investor confidence have taken their toll.
 
Over in the US, the S&P 500 index suffered its worst first half since 1970, falling 20.6%. And the tech-heavy Nasdaq — down 29.2% — had its worst first half since the dotcom crash.
 
The UK’s FTSE 100 has been more resilient, with a first-half loss of 2.9%. However, there’s been considerable volatility along the way. Notably, the half ended with a fall of 5.7% in June — the biggest monthly drop since the Covid sell-off of March 2020.
 
Let’s have a look at the Footsie’s top risers and fallers over the first-half period.

Big winners

The five biggest risers all made gains of 26% or more.
 
BAE Systems (+55%) was the standout performer. It was followed by Standard Chartered (+38%), Shell (+33%), British American Tobacco (+31%) and AstraZeneca (+26%).

Russian aggression

Russia’s invasion of Ukraine stunned the world. NATO countries are now seriously rethinking their defence budgets.
 
UK defence giant BAE Systems is likely to see a considerable increase in demand for its products. Its 55% first-half rise reflects the market’s response to the seismic shift in the defence landscape.
 
The invasion also impacted the price of oil. It broke through $100 per barrel after Russian boots marched on to Ukrainian soil. Shell’s 33% gain caught the eye, but fellow Footsie producer BP also outperformed the index, with a rise of 19%.

Banks

Economic growth for the next few years is forecast to be much stronger in regions like Asia, Africa and the Middle East than in the UK and other advanced economies.
 
Standard Chartered, with its first-half gain of 38%, happens to do the vast majority of its business in Asia, Africa and the Middle East, although HSBC, which has a large focus on Asia, also performed well (+22%). This contrasted with negative returns from UK-focused Lloyds and Natwest, and UK/US-focused Barclays.

Defensives

Tobacco and pharmaceuticals are classic defensive sectors. This means their earnings tend to be relatively resilient to inflation.

British American Tobacco and AstraZeneca are the biggest stocks in these sectors. Their first-half gains of 31% and 26%, respectively, round out the Footsie’s top five winners, although their blue-chip sector peers — Imperial Brands (just outside the top five) and GSK — also made positive returns of 25% and 13%, respectively.

Big fallers

The FTSE 100’s five biggest fallers in the first half all suffered losses of 40% or more.
 
And there were marked sector themes among the 10 worst performers. The 10 consisted of three retailers, three financial services firms, three industrials, and a housebuilder.

Retailers

Ocado (-51%), JD Sports Fashion (-46%) and B&M European Value Retail (-41%) occupied three of the top five spots on the fallers table.
 
Market concerns about inflation and the cost-of-living crisis have hit the retail sector. Loss-making Ocado — long valued more like a tech stock than a grocer — was the Footsie’s biggest faller of all.

Financial services

Those firms in the financial services sector whose fortunes are closely geared to growth in the value of their assets under management also performed poorly.
 
Negative movements in equities, bonds, and a number of other asset classes hit sentiment for companies like retail investment platform Hargreaves Lansdown (-42%), alternative asset manager Intermediate Capital Group (-37%) and investment trust Scottish Mortgage (-37%).

Industrials

Most firms in the industrials sector are sensitive to the economic cycle. We’ve been seeing downgrades to economic growth forecasts, particularly in Western economies, and rising recession fears.
 
The industrials sector is a conspicuous one facing headwinds from big increases in raw materials and energy prices, and wage inflation and global supply chain turmoil. Industrial equipment rental firm Ashtead (-40%), and engineers Halma (-37%) and Spirax-Sarco (-37%) are big casualties in the FTSE 100.
 
UK housebuilders are facing some of these headwinds, as well as particular pessimism about the outlook for the domestic economy. Barratt Developments (-37%) was one of the Footsie’s top 10 first-half fallers, but fellow volume builders Taylor Wimpey (-30%) and Persimmon (-26%) were also big losers.

Opportunities

The overall performance of the FTSE 100 is one thing, but there are always stocks whose gains or losses depart significantly from it.

As always, with a Motley Fool business-focused and long-term investing philosophy, our analysts are concentrating on high-quality enterprises. The shares of some of these have risen but are still undervalued, while others have been dragged down by indiscriminate sector sell-offs.

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Graham has no position in any of the shares mentioned. The Motley Fool UK has recommended B&M European Value, Barclays, British American Tobacco, GlaxoSmithKline, HSBC Holdings, Halma, Hargreaves Lansdown, Imperial Brands, Lloyds Banking Group, Ocado Group, and Standard Chartered. 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.

Choosing which stocks to invest in doesn’t have to involve complex financial calculations. Answering ‘yes’ to a few simple questions can be enough:

• Does the company operate in a sector whose products or services are virtually certain to remain in demand for many decades to come?
• Does the company have a durable competitive advantage over its rivals?
• Am I prepared to own the stock for the long term?

I see a strong case for answering ‘yes’ to these three questions when I look at Tesco (LSE: TSCO). Let me elaborate.

Essential

The first question is easy to answer in the affirmative. Tesco clearly operates in a sector whose products or services are virtually certain to remain in demand for many decades to come. After all, food is essential to human life.

Two-part question

The answer to the second question isn’t so black and white. It requires an element of judgement.
 
I think Tesco currently has — and has had for many years — a competitive advantage over its rivals. And I think it would be hard to argue against that. Where the element of judgement comes in, is on whether the advantage is durable.

Sector dominator

Size is a well-recognised competitive advantage in many sectors. Economies of scale give larger companies an advantage over smaller ones.

Tesco’s share of the UK grocery market has never been less than 25% over the last two decades. According to data from market-watcher Kantar, its share currently stands at 27.3%. The next two largest chains, Sainsbury’s and Asda, have market shares of 14.9% and 13.7%, respectively.

Tesco is far and away the dominant force in UK grocery retail. Indeed, you’d be hard pressed to find another sector in the UK where one company has such a commanding market share.

Economies of scale

Tesco enjoys a number of economies of scale. It has purchasing economies from buying larger quantities of goods than smaller grocers, giving it lower per-unit costs.

It generates vastly more cash than its rivals, so it can afford to invest more in newer and smarter technologies that bring greater efficiencies. For example, unrivalled data and analytics — on a far larger number of shoppers than its competitors — give it better insight into individual customer behaviour, as well as into emerging trends within the broader grocery market.

It also enjoys financial economies of scale. Lenders generally see larger businesses as more reliable and creditworthy, and offer lower interest on borrowings than they offer smaller businesses.

Durability?

The competitive advantages Tesco enjoys seem reasonably clear. But are they durable?

There’s a line of argument that says discounters Aldi and Lidl are sweeping all before them. And that Tesco’s market share will steadily be eroded.

Undoubtedly, Tesco was complacent and underestimated the immediate, and longer-term challenge posed by the rise of the discounters during the 2008/9 recession.

New equilibrium

It’s taken some time, but Tesco has successfully adjusted its operations and reset its profit margins to mover closer to the discounters.

Meanwhile, in expanding beyond their original regional and demographic heartlands, the discounters have moved closer to Tesco. They’ve had to increase the range of products they offer and enter areas — the emblematic ‘leafy Tunbridge Wells’ — where costs (notably property) are higher.

It may not be quite there yet, but as far as I can tell, the UK grocery market is getting close to a new post-discounter-disruption equilibrium. And Tesco remains the dominant player, with a durable competitive advantage.

Overcoming setbacks

One of the things about a high-quality business, with a competitive advantage and prolific cash generation, is that it can survive setbacks and go on to prosper.

A misjudged expansion into a new sector or geography, a failure to anticipate an evolving dynamic in the market or tardiness in responding to it, can ultimately be overcome.

Which leads me to the third question…

Am I prepared to own the stock for the long term?

When I say long term, I do mean long term. The impact of management missteps or simple market disenchantment with the growth prospects of a business can persist for a surprisingly long time.

For example, investors in Coca-Cola Co endured a ‘lost decade’ of negative returns between 1998 and 2009. Nevertheless, the great Warren Buffett — Mr Long-Term Investor himself — is now sitting on a terrific return on the shares he bought in 1988.

Such precedents among great businesses are why I’m looking at Tesco — which suffered a similar negative-return malaise between 2007 and 2016 — as a bargain stock hiding in plain sight today.

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Graham has no position in any of the shares mentioned. The Motley Fool UK has recommended Tesco PLC, J Sainsbury PLC and Coca-Cola Co. Views expressed on any 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 celebrations of the Queen’s Platinum Jubilee were quite something. There was a good deal of barbecuing, partying and toasts to Her Majesty in my neck of the woods.
 
But I also watched and read some of the media coverage of national events, which included a fair bit of reflection on the huge economic, social and cultural changes of the last 70 years.
 
Perhaps fittingly, in this context, more of my viewing was on digital devices than on traditional broadcast TV, and all my reading was online, rather than via the quaint old medium of newsprint.

Overcoming ups and downs

Some things haven’t changed. The Queen has remained an enduring figure of resilience through the Royal Family’s highs and lows, and the UK economy has prospered, weathering a number of major crises and recessions.
 
Likewise, despite some big ups and downs, we can also celebrate 70 years of impressive stock market returns.

Back in 1952

The UK was a very different place when the young Princess Elizabeth was crowned Queen Elizabeth II in 1952.

Winston Churchill was on his second stint as prime minister; heroic wartime computer scientist Alan Turing was convicted of “gross indecency between males;” Newcastle United won a then-record fifth FA Cup; and, late in the year, the Great Smog of London blanketed the capital, causing chaos and an estimated 4,000 deaths.

The FTSE 100, the UK’s best-known stock index today, didn’t even exist in 1952. The FT30 (also called the FT Ordinary Share Index) was the index of the time.

Barometer of the UK economy

The FT30 was devised by the editor and chief leader writer of the Financial News in 1935. It was originally known as the Financial News 30-Share Index, until the paper merged with the Financial Times in 1945.
 
The index was designed to track the performance of a selection of the companies that were significant to the UK economy. It was an unweighted geometric average of 30 such stocks. Changes to the constituents were (and still are) infrequent, usually on a company being taken over. And a replacement stock is chosen by the FT editor with an eye to maintaining the index as a barometer of UK economic performance.

Industrial nation

At its inception, the FT30 was dominated by heavy industry sectors, such as coalmining, steelmaking and textiles. Names like Bolsover Colliery, Dorman Long, and Fine Spinners and Doublers.

Despite post-war nationalisations taking some stocks out of the index, replacements like shipbuilder Swan Hunter meant the prominence of industrials was little changed when the Queen took the throne in 1952.

Shift towards service industries

Reflecting the significant change in the complexion of the UK economy over the subsequent 70 years, there’s been a shift in the composition of the FT30 away from heavy industry towards service sectors.

The financial sector (originally excluded from the index) now has representatives from banking, insurance and asset management, including Lloyds and Legal & General. BT and Vodafone are also members. Other service businesses include credit checker Experian, media group ITV, retailer Next and advertising agency WPP.

70 years of stock market returns

There have been some big falls in stock markets during the Queen’s reign. The FT30 lost 73% of its value around the 1970s recession. It also suffered significant falls sparked by the dotcom bust, the financial crisis and the Covid pandemic.

Nevertheless, according to asset manager Schroders, UK equities have returned just under 12% a year since 1952 — almost double the 6% a year savers have earned on cash.

Some investors may have enjoyed even better returns. Those who steered clear of the UK’s structurally declining heavy industry sectors and/or diversified their portfolios with stocks from higher growth markets, such as the US.

Looking ahead to the next 70 years

The historic, long-term wealth-building power of owning equities is why our analysts here at The Motley Fool have a large focus on identifying great UK (and US) businesses in industries that have structural drivers for growth, with a view to buying and holding their shares for many years.

Like the Queen, and most of you reading this column, I won’t be around seven decades from now. However, I’m as confident as I can be that current investors, and those of the next generations, will reap rewards from patient, long-term investing in the stock market.

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Graham has no position in any of the shares mentioned. The Motley Fool UK has recommended Experian, ITV, Lloyds Banking Group, Vodafone and Schroders (Non-Voting). 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.

Recent results from National Grid (LSE: NG) and Royal Mail (LSE: RMG) were released on a bad day for global stock markets. The UK’s FTSE 100 index, for example, fell 1.8%.
 
National Grid, which had made an all-time high the previous day, dropped 3.1%. Royal Mail fared worse, crashing 12.4%, making it the Footsie’s biggest faller.
 
However, both companies declared dividends in line with market expectations. Could they be top income buys for me today?

Social compact

As a starting point, it’s worth mentioning that for many years the assets and operations of both businesses — and a number of others — were considered so important to the UK that it was thought best they be ‘owned by the nation’.
 
Today, they’re owned by shareholders, and there’s an implicit social compact. In return for investing in the assets and operational efficiency of former state-owned infrastructure, regulators allow a company to make reasonable returns.
 
On paper, this should lead to resilient and predictable cash flows for the company, and sustainable dividends for its shareholders.

Regulated and reliable

Most of National Grid’s businesses, in the transmission and distribution of energy in the UK and north-east US, are regulated. The company is currently pivoting to an increased focus on electricity infrastructure to help move to a greener, net zero world.

Asset sales and acquisitions, and a massive five-year £30bn-£35bn investment programme, are in progress. Management is also targeting £400m cost efficiencies by March 2024 to help deliver supply at the lowest possible cost to customers.

The firm reported good headway on all fronts in its latest results, and its numbers were in line with market expectations. A sign of confidence in the long-term cash-generating capacity of the business is that the group has multiple lenders, and that maturities on some its borrowings extend as far out as the 2080s.

Structurally challenged

Royal Mail is the UK’s Designated Universal Service Provider. It’s required to deliver a one-price-goes-anywhere service on a range of letters and parcels to any location within the UK.
 
However, the letters market is in structural decline, due to increasing digital communication. Offsetting this is parcels. Royal Mail has a lot of competition — both domestically and in its expanding international network across Europe and the US — but the overall parcel market’s growing, thanks to the rise in online shopping.
 
Unfortunately, while the company’s latest dividend was in line with market expectations, its profit wasn’t, because cost savings fell short of target. Management also highlighted challenges ahead. Namely, the weakening economy, growing inflationary pressures, and pay negotiations with the Communication Workers Union.
 
The company’s net debt more than doubled over the course of last year, and the longest maturity on its borrowings is 2026.

Contrasting dividend records

National Grid has a long record of annual dividend increases. For its latest financial year, ended 31 March, it declared a dividend of 50.97p. This was a 3.7% increase, consistent with its policy of raising the dividend in line with the increase in the year’s average UK CPIH inflation.
 
Royal Mail’s dividend record is less robust. For its 2018/19 year, the firm paid a 25p dividend. However, it announced it intended to ‘rebase’ the dividend to 15p the following year. It said it needed to make additional investment in its UK business, and that it expected lower cash generation in the early years of the plan. However, the dividend was suspended altogether when the pandemic struck.
 
Payments have now resumed. The board declared a dividend of 20p in its results for the year ended 31 March. It also paid a special dividend of 20p during the year. This was recompense for the absence of distributions during the pandemic, and the board isn’t proposing any further special dividends.

Trade-offs

On the back of the results, National Grid’s running dividend yield was 4.2% and Royal Mail’s was 6.7%. The difference in the yields suggests the market sees National Grid’s dividend as likely to be more reliable than Royal Mail’s.

On the one hand — while always remembering no dividend is guaranteed — National Grid’s record of growth could make it a top buy for income. On the other, if the market’s concerns about the sustainability of high-yield Royal Mail’s payouts prove unfounded, it could be a more lucrative income buy.

In practice, a well-diversified income portfolio — avoiding an over-reliance on just a few companies — will inevitably contain a range of trade-offs between a higher yield and a higher level of confidence in the sustainability of the dividend.

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G A Chester 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.