TV

My first pick is broadcaster and TV content maker ITV (LSE: ITV). The ITV share price had been falling back in 2022. But it jumped 6.7% on Thursday morning on the back of the company’s half-year report.

ITV recorded an 8% rise in total revenue, to £1,679m, with a 16% increase in revenue from ITV Studios. I don’t see much to distinguish delivery platforms, and I reckon success is increasingly down to content production.

Statutory pre-tax profit rose by 65%. Adjusted EBITA did drop 3%, but the company put that down to additional reinvestment ahead of the launch of ITVX.

The committed full-year dividend of at least 5p would yield 6.8% on today’s price. And the shares are on a forecast price-to-earnings (P/E) ratio of under seven.

Drugs

Next up is Indivior (LSE: INDV), whose share price dropped 3% on first-half results. It has still doubled over the past 12 months, mind.

The generic drug manufacturer reported a 10% increase in net revenue. But operating profit dipped 14% with earnings per share (EPS) down 13%. That was pretty much in line with expectations. But analysts are forecasting earnings growth in the next few years which would drop the forward P/E to only around 11 by 2024.

It all stems from the company’s specialisation in opioid addiction treatments, with demand expected to climb in the US in the coming years. Revenue from Sublocade, specifically, grew 61% in Q2. And the board expects $390m-$420m from it for the full year.

Is the stock cheap now? Indivior is engaged in a share buyback programme, so it seems to think so.

Pumps

Weir Group (LSE: WEIR) is the third of the potentially cheap stocks I’m picking, after H1 results sent its shares up 6%. It does come after a slide since late 2021, so we might just be seeing a new buying opportunity.

The engineering firm makes pumps, turbines, valves, and things like that. And demand looks strong now. The company reported “record aftermarket orders” in the half, up 23%.

Revenue grew by 18%, with second quarter growth reaching 20%. The company does carry net debt, at a two times multiple of EBITDA, and that concerns me a little. But it expects free cash flow to increase through the second half, with 80%-90% free operating cash conversion.

And though Weir experienced input cost inflation, the firm says it managed to maintain its gross margins.

We’re looking at a P/E of close to 20. But growth forecasts would drop that to 14.5 by 2024.

Buy?

All three of these face individual risks, for sure. And I would not buy any of them based on just one set of results. No, I’d need to do some deeper research. But right now, they all look like cheap stocks to me.

I am not interested in buying a firm just for a couple of months. I want to buy businesses with robust competitive advantages and an international footprint, qualities that should help them expand and grow over the next decade.

With that in mind, here are two FTSE 250 shares that I would buy for my portfolio today with a view to holding them for the next decade or so.

FTSE 250 global leader

Part of the global economy that is currently experiencing substantial growth is the resources sector.  Demand here has exploded over the past couple of years, and companies are struggling to keep up.

The result has been a substantial increase in commodity prices, and corporations in the sector are now throwing off cash.

With profits surging, businesses are looking to invest in increasing their capacity, and that bodes well for equipment manufacturers such as Weir (LSE: WEIR).

This corporation develops innovative engineering solutions for the minerals and mining markets. That includes equipment such as pipes and valves mission-critical infrastructure, which helps enterprises improve efficiency and increase output.

With a significant global footprint and 15,000 employees around the world, the company is one of the most trusted and experienced operators in the space. This in itself is a competitive advantage.

Mining businesses do not want to install equipment that breaks a couple of months after it has been delivered. They want to buy equipment from someone they can trust. The FTSE 250 company offers just that.

Sales growth

According to its latest results release, the business is already benefiting from the increase in capital spending. During 2021, orders increased 22% to £2.2bn. Growth accelerated towards the end of the year. In the fourth quarter, the value of orders placed with the group increased 26% year-on-year.

With profits growing, the company’s redeploying cash flow back into its business. It acquired Motion Metrics in 2021, increasing its exposure to technological solutions.

Management has also hiked spending on research and development to find new products. Outlay here increased to 6% of revenue during 2021, up around 0.4% on the previous year. Management believes that the corporation can achieve a similar rate of growth in 2022, based on current trends.

And it looks as if city analysts agree. Analysts have pencilled in earnings growth of nearly 40% in the current year. They have also projected growth of around 12% for 2023.

FTSE 250 projections

However, I should caution that these are just projections at this stage. There is no guarantee the corporation will hit these targets. Indeed, pressures are building across the engineering industry, which could hit the company’s growth in the years ahead.

Costs are rising significantly across the sector, with energy and materials costs putting tremendous pressure on manufacturing firms like the FTSE 250 business. Economic uncertainty resulting from the situation in Eastern Europe could also cause corporations to delay capital spending plans.

This would have a significant impact on the company’s order book and growth potential over the next few years.

Still, even after considering these charming challenges, I would acquire the FTSE 250 stock for my portfolio today, considering its competitive advantages and growth potential over the next couple of years.

Growth services market

The housing and home services market is one of the largest markets in the UK and indeed the world. And one of the best ways to invest in this market is with Homeserve (LSE: HSV).

This corporation is an international home repairs and improvements enterprise. It claims to make home repairs and improvements easier by matching customers to trades to generate repeat and recurring income.

Over the past couple of years, growth across the group has been nothing short of outstanding. Revenues have increased at a compound annual rate of 16% since 2016. Unfortunately, the company did suffer a setback during the pandemic, and profit growth hit a wall.

However, analysts expect the group to return to growth this year with a net profit of £161m pencilled in, up from £109m reported for 2019.

Bolt-on growth

Over the past couple of years, the company has developed and refined a unique growth strategy. As well as capitalising on the organic demand for its services in the UK and USA, it has been acquiring other home services businesses to complement growth.

The property services markets in the UK and US are highly fragmented. They are made up of a network of smaller traders. This presents a tremendous opportunity for the company to consolidate the market and use its economies of scale to push down costs and increase profitability.

That is precisely what the corporation has been able to do over the past six years.

FTSE 250 income stock

And as profits have grown, the company has been able to reinvest more back into the business and return cash to investors. The dividend per share has more than doubled since 2016 and, at the time of writing, the stock supports a dividend yield of 4.1%.

That said, I cannot take the company’s growth for granted. The cost of living crisis could force consumers to delay repairs to their properties, which would have an impact on growth.

Rising interest rates could also increase the cost of the corporation’s borrowing. It has relied heavily on borrowing in the past to fund its acquisition programme.

Higher interest rates could hit profitability and profit margins and lead to slower growth if the group is forced to delay further deals.

Despite these risks, I would be happy to add the firm to my portfolio of FTSE 250 shares, considering its growth potential over the rest of 2022 and beyond.

I think these sectors are set to benefit most from the global economic recovery over the next few years. While geopolitical tensions may lead to some uncertainty over the next couple of months, I think the long-term outlook for these industries is exciting. 

Indeed, some companies like Rio Tinto (LSE: RIO) are currently benefiting from what I can only call a Goldilocks environment.

Best shares to buy now for growth and income 

The price of the company’s main product, iron ore, is trading at a multi-year high. This is only part of the equation. For the past decade, the organisation has been trying to reduce its operating costs and pay down debt. The combination of these initiatives as well as the higher iron ore price, has helped the firm generate record profits. 

I believe these trends will persist for some time. By investing in automation and other efficiency initiatives, the company can keep costs down. The iron ore price is unlikely to remain high forever, but I think the cost of this crucial commodity will remain elevated as the world tries to rebuild from the pandemic. 

Rio is one company I would buy for my £5,000 portfolio. I think the engineering group Weir (LSE: WEIR) also deserves a place on my list of the best shares to buy now. 

This engineering enterprise supplies critical components to the mining, oil, and gas sectors. Due to the essential nature of these products, it is unlikely customers will try to shop elsewhere to reduce costs. This gives the corporation a competitive advantage, in my opinion. 

As mining outfits like Rio ramp up production to meet rising demand, they will need to invest in their production facilities. They will need to maintain and enhance facilities’ capabilities. This suggests Weir’s growth potential over the next couple of years is pretty strong. 

Challenges and opportunities 

Despite their attractive qualities, these companies will both face some challenges as we advance. Economic disruption and supply chain issues could push up prices. They may not be able to pass all of these price hikes on to consumers. Further, commodity prices can be incredibly volatile. If they suddenly fall off a cliff, these firms may suffer a decline in profitability. 

Even after taking these headwinds into account, I believe these are some of the best shares for me to buy now in the mining and engineering sectors. There are other opportunities, of course. Rio’s peer, Anglo American, exhibits similar qualities to the iron ore giant.

Nevertheless, I believe these two businesses are some of the best corporations in the most exciting sectors I could own right now. As the world rebuilds over the next five to 10 years, I think these two companies should be able to capitalise on the rebound.

I think all of the three companies outlined below have significant growth potential, which is why I would buy them for my portfolio today. 

Growth potential

The first company on my list is the engineering business Weir (LSE: WEIR). The group produces engineering equipment for the mining and oil and gas sectors, and it is currently benefiting from an increase in commodity prices. As prices rise, miners have more cash to spend on new and existing projects. This means more orders for Weir. 

According to its interim results for the six months to the end of June, orders during the period increased 17% and adjusted operating profit jumped 12%. 

I think commodity prices will continue to boom as demand for critical resources expands. Governments are spending significant sums on infrastructure projects worldwide, and the resources for these projects will need to come from somewhere. Weir may continue to benefit as miners grow to meet this demand. 

That is the main reason why I would buy this stock for my portfolio of UK shares. However, I should note that the commodities industry is incredibly volatile. If prices slump, producers could slash orders. That would be terrible news for Weir. 

Recovery play 

In my opinion, casino operator Rank Group (LSE: RNK) is an attractive pandemic recovery play. During the pandemic, the firm’s casinos were forced to close. The company survived by boosting the size of its online business, which provided much-needed cash flow for the organisation. 

Thanks to its online business, the group was in a solid position to stage a recovery as the economy reopened. And since that reopening, in the 13 weeks to 15 August, sales have rebounded. During the period, they were just 19% below the same period in 2019. With average weekly revenues of £5.7m, the firm is comfortably above its cash break-even level of £4.4m. 

I think these figures imply the company is set for a strong recovery in the weeks and months ahead. That is why I would buy the stock for my portfolio of UK growth shares. 

Issues that may destabilise the group’s growth include the risk of another lockdown, and additional regulations, which may increase costs and reduce customer spending. 

Basket of UK shares 

The final company I would buy as a growth investment is Virgin Money UK (LSE: VMUK). 

I think this challenger bank has tremendous potential. Its growth slowed last year, mainly due to the pandemic, but management is targeting expansion this year. The company is trying to grow in personal lending and mortgages, and it is targeting higher interest loans to improve profit margins. 

It is also investing heavily in its digital capability, and this is already yielding results. Over 100k customers have signed up for online products, and it is working with other fintech companies to improve the offering for consumers. 

As the bank pushes ahead with its growth plans, I would buy the stock for my portfolio of UK shares. 

However, this equity might not be suitable for all investors. Banks can be challenging to understand, and if there is a sudden economic downturn, this sector is usually the first to feel the pain. 

FTSE 100 shares

The first company on my watch list is Barclays (LSE: BARC). There are a couple of reasons why I’d buy this FTSE 100 stock. 

Not only is it one of the largest retail banks in the UK, but it also has a large international investment bank. This suggests to me the business will be able to ride the UK economic recovery. But, at the same time, its global investment arm should benefit from increasing market activity as the economy recovers.

Indeed, the FTSE 100 group’s investment bank was invaluable last year. Fees generated from investment banking deals more than offset losses in other sections of the enterprise at the height of the pandemic.

While it isn’t possible to say if the same will happen over the next few months, I think it’s likely Barclays’ diversified business model will help the group outperform in the recovery.

In addition, the bank is currently trading at a high-single-digit price-to-earnings (P/E) multiple and a discount to book value of around 40%.

While I’m optimistic about the FTSE 100 company’s outlook, I’m also aware it could face some challenges. These include ultra-low interest rates, which could weigh on profit margins for years. Regulatory constraints may also hold back the group’s dividend and growth potential.

Despite these risks and challenges, I’d buy the FTSE 100 stock for my portfolio today.

Industrial giant

The other cheap FTSE 100 stock I’d buy for my portfolio today is Weir Group (LSE: WEIR). This company produces critical components for the mining, oil and gas and power sectors. Products include pipes, valves and ore processing machines.

Over the past 12 months, prices for essential commodities such as iron ore and copper have jumped as demand has increased. Governments around the world are spending trillions on infrastructure projects to jumpstart their economies after the pandemic.

To meet the increased demand, mining companies will have to invest in new equipment. That could translate into rapid earnings growth at equipment producers like Weir.

As such, while the FTSE 100 stock doesn’t look particularly cheap, at the time of writing (it’s trading at a P/E of 24), I think the stock’s future growth may compensate for this high valuation. What’s more, due to the unique nature of Weir’s products, I reckon the company deserves a higher-than-average multiple.

That said, there’s no guarantee booming commodity demand will translate into higher sales for Weir. The company could also suffer from additional lockdowns, which could inflict further pain on the economy.

Some of those smaller businesses score well against quality indicators and often look and feel more dynamic. As well as dividend income, I reckon many of them are capable of delivering capital growth via a rising share price. I’d aim to buy these stocks when their valuations make sense for a long-term investment and then hold them for at least 10 years.

Over a decade, the underlying businesses will have time to grow. And I could see a decent return. However, as with all shares, positive returns are not certain. And it’s possible for me to lose money even when investing over such a long period.

A FTSE 100 stock positioned for growth

Nevertheless, I like the look of Weir (LSE: WEIR), the engineering business serving mining, infrastructure and oil & gas customers in more than 50 countries. In early March, chief executive Jon Stanton said the business was “resilient” in 2020. And the company has transformed itself recently into a “premium” mining technology provider. He reckons Weir is positioned to benefit from powerful long-term structural growth themes in the industry “for many years to come”.  

Stanton says underlying trading conditions are favourable. And he’s “confident” the business will outperform its markets over the next three years and deliver sustainable long-term profitable growth. But such an outcome is not guaranteed, of course. And one potential negative is that the mining industry is notoriously cyclical. If a general downturn arrives, Weir’s business could suffer and investment returns could decline for the company’s shareholders.

Meanwhile, with the share price near 1,744p, the forward-looking earnings multiple is around 20 for 2022. And the anticipated dividend yield is close to 1.8%. That isn’t a cheap valuation. So, although I’m keen on the business, I’d put Weir on watch for the time being and aim to pick up a few shares at a better buying point.

Serving today’s digital world

I’m also keen on security software company Avast (LSE: AVST). At the beginning of March, the company reported “another strong year of top-line organic growth, high levels of profitability and cash flow generation”.

Cybersecurity products were in high demand during 2020. And chief executive Ondrej Vlcek explained that more people and businesses turned to technology “to keep their lives and their work enabled“.

Looking ahead, Vicek is “confident” Avast can “unlock” new opportunities for growth with its commitment to ongoing product and technological innovation. Meanwhile, City analysts expect earnings to grow by around 65% in 2021 and 7% in 2022.

With the share price near 479p, the forward-looking price-to-earnings rating is just below 17 for 2022. And the anticipated dividend yield is around 2.6%. I reckon that’s a full-looking valuation. And it could end up looking even higher if the company misses its earnings expectations. If that happens, we could see the share price fall. Meanwhile, the business has a record of volatile earnings and shareholder dividends have only been around since 2018.

Nevertheless, I’d aim to pick up the stock on dips, down-days and general stock market corrections with the aim of holding for the long term

Of course, buying stocks and shares may not be for everyone. Investors should only invest what they can afford to lose. Returns are never guaranteed. However, I’m comfortable with the level of risk investing involves. As such, I’m always looking for opportunities.

And with that in mind, here are my top three shares to buy today. 

FTSE 250 stocks 

Spirent Communications (LSE: SPT) provides engineering services for the information technology sector. The company has recently been rolling out infrastructure to help with the 5G data revolution. Demand for its services is currently running high. City analysts forecast earnings growth of 10% for the business in 2020. 

As the world becomes more and more reliant of technology, I think the business will see a prolonged period of growth. That’s why I believe this is one of the best shares to buy today and would add it to my portfolio.

While the company does face risks, such as increased competition and rising costs, it has managed these challenges well in the past, although that doesn’t guarantee future performance. What’s more, if the corporation makes a grave mistake, which ends up causing a client to lose data, it could suffer severe reputational damage, so that’s something I’m going to watch out for. 

Shares to buy today

Thermal processing is a niche technical industry. However, it’s one Bodycote (LSE: BOY) specialises in, providing heat treatment services for clients worldwide. Bodycote is one of the largest players in this sector globally, giving it a competitive advantage. It can offer customers lower prices due to economies of scale. Moreover, customers can trust the business to produce a quality product. 

These qualities have helped the FTSE 250 business go from strength to strength over the past few years.

However, the company is exposed to similar risks as Spirent. It may have a good reputation, but that means the pressure is on to maintain quality. Customers could leave the business if it decides to cut corners to improve profit margins. An economic downturn may also lead to reduced demand. Despite these risks, I think this is one of the best shares to buy today, based on its competitive advantages. 

FTSE 250 engineering group Weir (LSE: WEIR) has similar qualities to the two companies outlined above. It produces critical components for the resource industry, such as pipes and valves. These aren’t the sort of products customers want to go wrong, as the costs of a broken pipe can be high. That’s Weir’s advantage. It’s a trusted provider that has been engineering products for clients for decades.

Unfortunately, this industry is highly cyclical. The company’s earnings can and do gyrate significantly based on economic cycles. Therefore, a prolonged economic downturn may cause significant pain at the group. This suggests the business may not be suitable for all investors. 

Nevertheless, companies with competitive advantages like Weir are few and far between. That’s why I’d buy this engineer despite its exposure to the highly cyclical resource industry. 

This sale will, of course, depend upon shareholders approval. But I think this is likely to be given. After all, shareholders have known for some time that this spin-off was in the pipeline. Weir management is keen to streamline operations and focus on its core business of supporting global mining operations.

So, with all this in mind, is now a good time to buy Weir’s stock? Well, it all depends…

Weir Group share price forecast

Historically, divestitures are generally good for investors. The share prices of parent companies often perform well and most of my own research suggests that most sell-offs increase shareholder wealth. Consequently, an immediate rise in Weir’s stock price upon the sale announcement was always likely.

However, some academic studies have also shown that’s it’s not uncommon for divesting companies to undervalue the asset up for sale. But in this case, Weir’s oil and gas division provided the firm with a £372m pre-tax loss in 2019, on top of a £546m impairment charge. And with low oil prices denting demand for pumping equipment, it’s likely that the financial profile of the division no longer complements its mining business. Moreover, this situation would likely increase costs, damaging profits further.

I’m not convinced the energy equipment maker is in a position to wait for a higher bidder. But, I’m expecting a volatile share price as investors weigh up whether £313m is a good price for the oil and gas division.        

Other factors to consider

At the current price around 1,483p, Weir Group is selling without a valid price-to-earnings ratio. This is because its 2019 earnings, and indeed its five-year average earnings figure, is negative. In other words, over the last five years, Weir Group has not made an overall profit. As an investor, this is a big red flag for me and makes its current selling price very expensive.

However, a major reason earnings per share were negative in 2019 was due to a write-down of oil and gas assets. And in the first half of this year, its oil and gas division saw a 48% drop in revenue and an operating loss of £4.4m.

From this perspective, the sale of this division is good news. Weir will use the cash to pay off debt and enable the group to move forward as a “focused, premium mining technology business“. Management is relying on growing demand in harvesting essential metals sustainably and efficiently. As its core business, this bodes well for the future and I suspect this optimism is what caused the explosion in Weir’s share price yesterday.

However, as I’m not already an investor in the firm, I think I’ve missed the short-term opportunity for any capital gains relating to the sale of its oil and gas division. Indeed, Weir’s stock is now too expensive for me.

Yet once the sale has gone through, Weir Group is well-positioned for the future and I’ll consider it again when the price settles down. But for now, I think there are other investments out there that may provide better returns.   

The engineer was in trouble long before the coronavirus crisis emerged, though. The price of its stock has more than halved during the past year because of challenging conditions in the North American oil and gas market. In 2019, hardware orders from the fossil fuel industry had tanked 30% year on year. No wonder Weir recently announced that it’s looking to divest its oil and gas operations, then.

It looks, however, that the FTSE 250 firm may have waited too long to pull the plug. The recent collapse in Brent prices means that Weir may have a struggle on its hands to offload its battered oil and gas business. And in the meantime it will continue to suffer from frightful profits declines as US storage facilities hit their limits and benchmark prices plummet.

Oil industry in meltdown

The terrible outlook for the oil market was outlined by Chris Beauchamp, chief market analyst at IG Group today. He comments that “we are witnessing markets finally play catch-up to the reality on the ground in the oil market – huge oversupply and non-existent demand have combined with nearly-full storage facilities to drive complete dislocation in the crude oil market.”

In a worrying precursor Beauchamp noted that values of the June contract are following what happened to the previous month’s contract and already falling through the floor. Both WTI and Brent contracts have fallen below $20 per barrel.

Cheap but risky

Even before this more recent collapse, Weir said late last month that business had started to dry up. Then it said that a mix of reduced black gold prices and widespread reductions in exploration and production (E&P) had damaged orders from North America.

This was not the most chilling aspect of the release, though. The engineer continued that “we expect to see continued sequential declines in activity through 2020 with E&P capex now expected to be down at least 30% year on year versus our prior expectation of 10%.”

The extreme shortage in oil storage capacity means that US producers could start shuttering oilfields with no plans to reopen them in the long term, too. Weir’s problems clearly extend beyond the start of the new decade. And things could get even worse should a collapse in commodity prices affect demand for its products from the mining industry, too. The company also said in late March that it had “seen a slowdown in original equipment orders” from minerals diggers.

I don’t care about Weir’s low price. Currently, it carries a forward price-to-earnings (P/E) ratio of below 12 times. This is a share that I’ll continue to avoid.

Oil and gas technology firm Weir Group (LSE: WEIR) seems to have asked itself the same question recently, and concluded it should focus its efforts.

Cutting dead wood

Weir Group has been forced to ask itself this question after it posted results showing full-year pre-tax profits falling from £86m to a loss of £372m for the 12 months ending December. Its numbers dropped so dramatically after its oil and gas business was forced to incur a £546m impairment charge last year.

The company said that much of its troubles stem from its North American shale business, where customers have been forced to cut their capital expenditure in large part due to softer crude oil prices. This is, of course, a trend also seen and felt elsewhere.

Weir CEO John Stanton referred to these troubles with the price of crude, saying, “Market dynamics have changed with shorter cycles and higher levels of volatility leading to a very different financial profile to our mining businesses”.

Following the poor results, Weir laid the ground for its intention to consolidate its business by saying it is focusing “now on becoming a mining technology pure play”.

Pareto principle

The trade-offs when considering diversifying or specialising are pretty simple. Diversifying generally reduces your risks by giving you multiple profit streams, perhaps in different markets. The downside, however, is that your resources are often spread thinly, both in terms of capital and in focus and expertise.

On the other hand, specialising allows you to hopefully focus your resources where they can add the most benefit. The risk, of course, is that if this one area fails, all your options fail. Not only that, but the problem is exacerbated by the fact so much of your resources will be focused in this one area.

An analogy perhaps would be the roulette wheel – placing all your money on just one number will give you a massive payoff if that number comes in, but you could lose everything if it doesn’t. Spreading your bets across the table will mean any win you do get will pay less, but you are also more likely to get a win.

This is in essence, the Pareto principle. Also known as the 80/20 rule, it states that in almost any case, the majority of outcomes (be them profits, technical failures, or fruit in an orchard) are brought about by a minority of causes. The 80/20 derives from an estimated 20% of actions resulting in 80% of the results.

The natural outcome of this is that if you can focus all your resources in the 20% of actions that bring the best results, those results will increase exponentially. I am a big fan of the Pareto principle, and specialising can be a gold mine for businesses and investors alike.

It’s early days for Weir, but taking advantage of Pareto is a sure way to make good money in my book.