Time to turn the engines on

Elevated inflation and the rise in commodity prices (such as oil) have been negative for easyJet (LSE: EZJ). The budget airline has also struggled with a summer of airport disruption, with low staff levels leading to flight delays and cancellations. Over the past year, the share price is down 51%.

It’s been a bit of a disaster and I’m sure the management team is looking forward to putting 2022 behind it. But what of the outlook for 2023? I think it’ll be better than this year.

If we strip out the woes on pricing and disruption, the load factor and flying hours are increasing. For example, in the half-year report, the load factor was 77.3%. This was up from 63.7% in H1 2021. In a trading update last week, the Q4 load factor could be as high as 92%.

My take here is that fundamentally, easyJet is recovering. It’s being blighted by one-off issues, but none that I think will remain deep into next year. On that basis, it’s a stock I think I need to consider buying.

A growth stock that has halved in value

Another stock that has taking a battering this year is Currys (LSE: CURY). In the past year the share price has fallen by 50%.

The firm has been cautious on the outlook for the business throughout this year. It has flagged up concern around inflation and how this could dent sales. The financial year runs May to May, so I don’t have a perfect vision of how the past few months have been. Yet even during the financial year that ended May 2022, sales only dropped by 2%, despite inflation moving higher.

I actually believe the management team is being overly cautious about the future. Sure, people will be more careful on spending going forward. But we’re talking about Curry’s here, not a luxury fashion brand or high-end designer goods. In the world of TV’s, computers and even washing machines, if I need something I’ll buy it. How many people are going to go without buying a new TV if their old one breaks? Not many.

Importantly, it’s also taking steps to help customers, including the provision of credit for purchases and locking in the prices of certain goods. This could help to get repeat business and also attract new customers from competitors.

Buying in a diversified portfolio

In both cases, my main risk is that these stocks continue to head south. Given the size of the move lower already, it’s feasible for the shares to fall 10%-20% further in coming months. Even though I’m probably going to buy both soon, they won’t be the only stocks I own. Putting them in my diversified portfolio means that my risk is reduced, even if both companies take longer to recover than I anticipate.

You might be wondering what “shorting” or “short selling” is. To short a stock is to borrow it from someone else, and sell it at the current price. If the price declines, the short-seller can buy it back at the lower price, return it to the original owner, and make a profit. On the other hand, if the share price rises, the short-seller has to buy it back at a higher price, and will make a loss.

It is worth mentioning that when short-sellers load up on certain stocks, this is because they expect, often for good reason, that something negative will drive the stock’s price down.

Tech and home retailer

Currys is one of the UK’s leading retailers of technology products as well as household electrical and white goods. It currently has over 800 stores spanning seven countries and operates online too.

So what’s happening with Currys shares currently? Well, as I write, they’re trading for 59p, which puts Currys into the penny stock category. At this time last year, the stock was trading for 137p, which is a 56% drop over a 12-month period.

A penny stock with risks

I believe the reason that Currys shares have dropped is due to macroeconomic headwinds. Soaring inflation, rising costs, and global supply chain issues have affected it. Inflation levels have hampered many consumers’ ability to purchase certain goods, often considered luxuries, like large TVs or the latest technology that Currys sells. This will hurt performance and returns.

Another issue that could affect Currys is the competitive sector it operates in. Many of its products are generic products on offer from a number of retailers. If a competitor were in a position to offer better value for money, especially in current tough times, Currys could see market share and performance affected.

Why I like Currys shares

So to the positives then. Firstly, I believe Currys’ dominant market position, coupled with its profile and presence, will help see it through current economic volatility.

Next, Currys performance for FY 22/23 made for good reading, in my opinion. I do understand that past performance is not a guarantee of the future, however. For the full-year ending 30 April 2022, it said sales totalled £10.2bn, down 2% compared to last year, but pre-tax profit increased by a healthy 19% to £186m. Store sales increased well and it also opened two new stores in Cyprus too as part of its growth plans.

A penny stock with a passive income opportunity is enticing to me. Currys offers just that with a dividend yield of just over 5%. The FTSE 250 average is below 2%. I am aware that dividends can be cancelled, however. As a bonus, due to Currys shares falling, they look decent value for money on a price-to-earnings ratio of 10.

To summarise, I expect Currys to encounter headwinds in the shorter term. My approach has always been to buy and hold for the long term, however. I would buy and hold the shares as I expect Currys’ dominant market position to boost long-term growth and lucrative returns.

Bargain buy

FTSE 100 constituent Imperial Brands (LSE: IMB) is one example of a bargain dividend stock I’d be willing to buy. Placing ethical arguments to one side, it’s hard to contest the idea that tobacco companies can weather economic storms better than most due to the addictive nature of what they sell. This goes some way to explaining why Imperial’s valuation is up 25% over the last year and 15% in 2022.

Despite this, the stock still changes hands at price-to-earnings (P/E) ratio of seven. Yes, tobacco stocks will never trade at the same level as your typical tech company. Even so, this does feel very reasonable to me.

Reliable dividend stock

The income stream looks great too. Analysts have Imperial returning 143p per share for the current financial year. Based on the price, as I type, this gives a monster dividend yield of 7.5%. Better still, this payout looks set to be very affordable for this cash-generative business, making a cut pretty unlikely.

Sure, there’s substantial regulatory risk here due to the damaging effects of smoking. However, this is exactly why only a few players dominate the industry. This rather odd advantage, combined with Imperial’s near-perfect record of increasing dividends on an annual basis, makes me think this could easily be a core holding in my portfolio.

Cheap for a reason

A second dividend stock that looks dirt-cheap right now is tech retailer Currys (LSE: CURY). However, this is one company whose shares I definitely won’t be buying.

Like most retailers, confidence has been dented by inflation. People simply don’t have the money to splurge on new things, especially shiny electronics. Naturally, a lot of this is already reflected in the share price. Currys has almost halved in value since the beginning of the year.

Worse to come?

The cost-of-living crisis looking like it will get even worse in the months ahead. As such, I think there could be more pain for those already invested. Moreover, I question management’s belief that Currys can ride out the storm better than rivals because of its scale and geographical/product diversification.

If people are able to put big-ticket purchases on hold, they will. And even if they can’t, the margins made by Currys in making a sale look woefully small to make this competitive edge feel pretty insignificant.

Out of interest, Currys is targeting adjusted pre-tax profit in the range of £130m-£150m for the full year. That’s significantly down from the £186m achieved in FY22/23.

Long-term focus

Perhaps I’m being harsh. The shares are certainly cheap, trading at a P/E of just six. A dividend yield of 5% isn’t to be sniffed at either. Similar to Imperial, it looks like it will be easily covered by profit.

But I’m a Fool. And a Fool thinks about owning stocks for years, not months. Am I that bullish about Currys’ earnings outlook (and, ultimately, its income credentials)?

The answer has to be a firm ‘no’ for me. I see nothing exceptional here to make the risk/reward trade-off sufficiently attractive.

To put that in context, rival AO World sells around £1.5bn of goods annually. Small-cap Marks Electrical managed just £80m last year. Currys looks cheaper than all of its rivals to me. I think this unloved stock could offer value today.

Customers still like shops

Currys has just reported its results for the year ended 30 April. Sales fell by 2% to £10.1bn, but adjusted pre-tax profit was up by 19% to £186m, thanks to an improvement in profit margins.

The numbers were pretty much as I expected, but one surprise for me was that Currys’ store sales were “higher than expected” last year. According to boss Alex Baldock, customers have been rediscovering the benefits of stores, especially in the UK.

That makes sense to me. Although online shopping is great, it’s not always easy to compare electricals online. I’d guess that there are still plenty of people who find it much easier to compare options in store and discuss products with expert staff.

I can also see some other advantages to Currys’ store estate. Popular click-and-collect services cut down on delivery costs. Shops also act as a useful hub for repair and recycling services — Currys says it repaired more than 1.7m pieces of technology last year.

Hidden risks?

Currys isn’t without risk. A recession could cause a sharp slump in consumer purchases. We don’t yet know if that’s going to happen in the UK, but I certainly think it’s possible.

The company’s guidance for the year ahead suggests profits will fall this year, although management says “forecasting 2022/23 is difficult”.

More broadly, I think it’s worth remembering that Currys operates in a very competitive sector. It sells generic consumer products that customers can always buy elsewhere. For this reason, I think Currys will always have low profit margins.

Baldock appears to recognise these risks. He was previously targeting a 4% operating margin by 2023/24. He’s now scaled back this ambition to 3%. Based on broker forecasts for 2023/24, that’s equivalent to a £95m reduction in operating profit, from £380m to £285m.

Currys share price: bargain buy?

Despite the concerns I’ve highlighted above, I think Currys is a decent business with good management. I don’t think the shares are too expensive, either.

The latest broker forecasts I can find price Currys at seven times 2022/23 forecast earnings, with a 4.9% dividend yield.

Last week’s accounts show decent cash generation with a substantial reduction in debt and pension liabilities, so I’m fairly confident the dividend should be affordable.

I’d be comfortable buying Currys shares for my portfolio at current levels. I think they offer value and could do reasonably well over the next few years.

However, I suspect that the low-margin nature of this business will ultimately limit the returns that are available for investors. For this reason, I’m going to keep hold of my cash and continue hunting for more profitable opportunities elsewhere.

Banking on more rate hikes

The first company in my focus is Investec (LSE:INVP). The bank is split between operating in South Africa and the UK. It has performed well over the past year, with the share price up almost 55%.

A good amount of the gain can be attributed to a stellar performance over the last financial year (that runs March-March). Basic earnings per share jumped 106.3%. The increase in earnings was driven by growth in operating income.

Funds under management grew by 9.2%, with net core loans up 13.2%. These were two key drivers that helped to boost profits. This is also why I think the business is a smart buy for me right now.

The higher the interest rate is, the more money the bank make on the funds and deposits. It also allows the bank to make a larger spread on the rate charged on loans. Given the fact that the Bank of England is likely to continue to raise rates this summer, I think Investec is going to continue to benefit from this.

I do think that the South African operations are a risk though. Even as they diversify the company, I’m aware of the instability that exists in that region and this could have a negative future impact.

An undervalued UK share

The second stock I think I’ll buy in July is Currys (LSE:CURY). In contrast to the share price performance of Investec, the Currys share price has fallen by 40% over the past year.

A key driver behind this move has been the lowering of profit guidance as the company has experienced problems. This has included supply chain issues, causing product availability problems. I think investors are also concerned about how consumer demand will hold up going forward, given the cost of living crisis.

Despite this, I think that the share price has been aggressively sold to the point of being undervalued. The business is still profitable, even if 2021 profit was much lower than pre-pandemic levels. As such, the price-to-earnings ratio sits at just 6.76. In my eyes, this is quite low and so does grab my interest.

I also disagree with the thinking that consumer demand will meaningfully fall due to a downturn in the economy. Products such as kitchen appliances and other household goods are staples. If my fridge breaks down, I’m going to find a way to buy another one! Further, the business has a good credit offering as well, providing an additional revenue line.

By purchasing now, I may be able to pick up the shares at beaten-down prices. I’ve found three exciting firms that I want to look at further.

Currys

Currys (LSE:CURY) is an online and in-store electronics retailer. This company has been caught up in the wider sell-off in the retail industry.

This has been caused by a combination of factors including inflation, rising interest rates, and higher energy costs. 

These all mean that customers have less money in their pockets to buy items, and this trend may not end for a while yet.

As a result, the shares are down 33% in the past month and currently trade at 69.6p.

However, with a cash balance of £100m at the beginning of 2022, it may be able to navigate any further issues. It has also initiated a share buyback scheme.  

Currys suffered supply chain issues over Christmas but used the time during the pandemic to build its online presence. This development of online operations complements the firm’s tradition of offering face-to-face advice and service for the sale of electronics.

Wizz Air

Secondly, Wizz Air (LSE:WIZZ) is an airline specialising in short-haul flights around Europe, the Middle East, and North Africa.

In the past month, the share price has fallen 33% and currently trades at 1904.5p.

The airline operated an extremely restricted schedule during the pandemic and, with staff shortages and flight cancellations, this summer could bring further disruption. At some point, however, international should return to normal. 

The firm also warned that it could report a loss for the three months to 30 June, citing cancellations and increasing staff costs. 

Furthermore, it had a policy of not hedging its jet fuel. It has since reversed this decision, but this original policy has left the airline at the mercy of surging oil prices for the moment. 

Harbour Energy

Finally, Harbour Energy (LSE:HBR) is a global oil exploration and production business. The shares are down 20% in the past week and currently trade at 375p.

The company is benefiting from high oil prices, with Brent crude currently trading at $116 per barrel. 

Today, it announced a $200m share buyback scheme, indicating that the business is in a financially healthy state.

For the first three months of 2022, the company beat production guidance and had operating costs of $14.1 per barrel. It expected costs to be between $15 and $16 per barrel.

There is the potential threat that further Chinese lockdowns could lead to lower oil prices. In addition, future pandemic variants could cause demand for oil to decline and may cause a fall in the value of Harbour Energy’s produce.

Overall, these three companies have been caught up in the recent market correction and could be good investments for the long term. I will be buying shares in all three businesses soon.  

Household name

Currys is a leading retailer of technology products and services including household electrical and white goods as well as home entertainment and more. It operates through its online store but you can also find nearly 830 stores across seven countries. I must admit I have purchased many home electrical items from a Currys store.

So what’s the current state of play with the Currys share price? As a quick reminder, a penny stock is one that trades for less than £1. Currys shares are currently trading for 87p. At this time last year, the shares were trading for 136p, which is a 36% drop over a 12-month period.

Currys sector has seen many online-only disruptors appear, eating away at the market share of larger household names like Currys. This, and the recent stock market correction caused by macroeconomic headwinds and geopolitical tensions have driven down the share price, in my opinion. A recent warning on profits due to a challenging market won’t have helped the penny stock either.

For and against buying the shares

FOR: Currys performance is a positive in my eyes. I do understand that past performance is not a guarantee of the future, however. Looking back, it has recorded consistent revenues of over £10bn for the past four years. I believe its brand power, profile, and presence has allowed it to command a healthy share of the market and kept performance consistent.

AGAINST: Recent macroeconomic headwinds are a concern. Soaring inflation, rising costs of materials, and the supply chain crisis mean retailers like Currys could see profits squeezed and a lack of stock to sell. This could affect performance as well as investor sentiment and returns.

FOR: Currys shares would boost my passive income stream through dividends. The shares currently yield close to 4%. There aren’t many stocks in the penny stock category that command such an enticing yield. In addition to this, the shares look good value for money on a price-to-earnings ratio of 13 currently.

AGAINST: As mentioned earlier, competition in the marketplace is rife. Gone are the days where everyone would go to their local high street, pop into Currys, and buy a TV or laptop. The e-commerce boom and rise in online-only operators has had an impact on Currys performance. Currys has to worry about footfall and rent for its numerous locations. If spending habits and the momentum of online-only disruptors continues, Currys performance and returns could be affected.

A penny stock I’d buy now

The market correction has thrown up some excellent bargains in recent months. My investing mantra has always been that of buying to hold for the long term. Currys shares fit that mantra down to a tee. Although they look beaten down currently, I believe the shares will rise in time, out of penny stock territory.

Currys has the brand power and profile and diverse business model to continue to succeed in my opinion. This will underpin performance which should also see returns increase, especially those juicy dividend payments I seek to boost my passive income stream. I’m planning on buying the dip!

Buying the dip in the Tullow Oil share price

While oil companies generally performed well during the recent sell-off, the Tullow Oil (LSE:TLW) share price is down 14.5% in the past two weeks. It is currently trading at 53.3p, down 4.8% in the past year.

As an oil exploration and production business, it primarily operates in South America and parts of Africa. In the results for the 2021 calendar year, revenue slipped from $1.4bn to $1.27bn, year on year. Despite this, gross profit rose from $403m to $634m. 

Furthermore, the loss after tax narrowed significantly from $1.2bn in 2020 to just $81m. Net debt also fell from $2.37bn to $2.1bn and cash flow guidance for 2022 remains at around $750m.

Combined with the surging oil price, I think these results are very encouraging. It should also be noted, however, that past performance is not necessarily indicative of future performance.

While there is always the risk of future Covid-19 variants halting production, the recent deal to increase interests in the Jubilee and TEN fields in Ghana is exciting news. The suggests the firm is now focused on controlled expansion.

What about Currys?

The second business I’m buying during the dip is Currys (LSE:CURY), a technology products and services retailer. The shares are currently trading at 89.45p, down 8% in the past month and 36% in the last year.

In an update for the six months to 31 October 2021, pre-tax profit increased from £40m to £48m. Despite this, revenue for the period fell by 2%, year on year. Investment firm AJ Bell suggests that results could drop off after increased trading during the pandemic. In addition, any future lockdowns could negatively impact the ability to open Currys shops.

However, the company announced a share buyback scheme of £75m. This may be an indication that the business is in a healthy position.

What’s more, sales for the six months to 31 October 2021 were up 15%, compared with the same period in 2019, but down 1% year on year. As my Motley Fool colleague Rupert Hargreaves has mentioned, however, supply chain issues may become a problem in the future.

Overall, I think both of these firms are in a strong position going forward and they seem good options for investment during the coming month. I will be buying shares in both in the coming weeks.   

Focusing on mid-cap penny stocks

Firstly, in terms of where I’d invest in penny stocks, I’d concentrate on the FTSE 250. I feel this gives me sufficient confidence that the companies are reputable and large enough to avoid major pitfalls. For example, I think there will be enough liquidity in the trading of shares to allow me to buy and sell easily if I needed to. With some very small firms, this isn’t always the case and can mean that I couldn’t readily sell if I had to.

In the FTSE 250, there are several companies worth considering that have a share price below 100p. One that I like at the moment is Currys (LSE: CURY). The share price is down 37% over the past year, dragging the price to 91p at the moment. In the latest annual report, it cited risks such as supply chain disruption and uneven customer demand.

I accept this as a risk, but feel the company is in the right sector to benefit going forward. Tech is a growing space, especially with virtual reality and the metaverse. It also should be able to take advantage of a post-pandemic boom, with consumers more confident in spending more on hardware than this time last year.

Diversifying my £2k

When it comes to how I’d invest my £2k in penny stocks, I’d ensure I pick a range of companies. Even though I like Currys, I don’t think it would be wise to put all of my money there. It’s a high risk stock, so to reduce this I’m better off allocating just a proportion of my money there instead.

With £2k, I’d split it up between five different penny stocks, each with £400. This is a large enough amount to be able to benefit from a move. However, it doesn’t water down my exposure to the extent that owning 20 companies with £100 in each would do.

I also wouldn’t be in a rush to buy everything today. Sure, I’d buy some penny stocks right now. But others I’d prefer to keep an eye on in coming weeks. Further, stocks are sensitive at the moment to developments in Ukraine and Russia. So I don’t want invest everything now, only for the market to correct lower in coming weeks due to some negative headlines.

By dipping my toe in, I can keep some money aside and then deploy it if the volatility at the moment presents an opportunity.

Quite a few UK companies have received takeover bids recently, but I think there are still some bargains out there. Today, I want to take a closer look at the Ted Baker situation and reveal another UK stock I think could be targeted by cash-rich private equity funds.

Ted Baker shares: too late to buy?

The Ted Baker share price is up by 20% at 118p, as I write. But the stock was trading above this level a year ago.

Since then, the business has continued to recover from the impact of the pandemic. Sales during the 12 weeks to 29 January were 35% higher than a year ago, although they’re still below 2019 levels.

It’s too soon to be sure whether Ted Baker’s turnaround will succeed, but broker forecasts today are pricing the shares on 19 times forecast earnings for the 2022/23 financial year.

Is it too late to buy? Three large shareholders control more than 50% of Ted Baker share, including founder Ray Kelvin. For a bid to succeed, I think Sycamore would have to make an offer significantly above the current share price of 118p.

If I bought TED shares today, I might still profit from a takeover bid. I’m not going to do this though, because there’s no guarantee an offer will be made. If Sycamore loses interest, I think Ted Baker’s share price would probably fall again.

A cheap UK stock

Private equity funds like to buy businesses that generate plenty of cash. One company that’s on my radar at the moment for its strong cash generation and low valuation is electrical retailer Currys (LSE: CURY).

In addition to the well-known UK business, Currys also has market-leading retail brands in Scandinavia and Greece. The company’s turnaround under Alex Baldock has seen profits start to recover and cash flow improve significantly.

With the Currys share price currently under 90p, this FTSE 250 stock trades on just 8.5 times forecast earnings, with a 4% dividend yield. Although profit margins are quite low, this seems attractive for my portfolio, especially as Currys generates plenty of cash.

Indeed, Baldock says that by 2023/24, Currys should be generating £250m a year of sustainable free cash flow. Currys’ current market-cap is just £1bn, which means that the shares are potentially trading on just four times forecast free cash flow. That would be exceptionally cheap, in my experience.

We don’t yet know if Baldock can hit this ambitious target. One risk is that Currys will always be forced to compete on price against lower-cost online operators, including Amazon.

However, I’m encouraged by the group’s recent performance. I think Currys is big enough to continue doing well.

Takeovers are completely unpredictable, so I would never buy a stock purely because I thought it might receive a bid. But I could certainly see a private equity buyer taking an interest in Currys.