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It’s that time of year again. Investors the world over are desperate for a sneak peek into the best shares to buy for 2022.
But, of course, anyone who tells you this year’s winners with 100% confidence is either lying or stupid. Or both.
Before we get stuck in, it’s important to highlight that this isn’t a suggestion or recommendation that you buy or sell any of the individual stocks mentioned.
These aren't necessarily the best stocks to invest in. Though, they may offer you an idea or two about some stocks to watch.
Remember that everyone has their own goals and unique financial circumstances. These, along with your tolerance for investment risk and time horizon, should inform the mix of assets in your portfolio.
Our resource hub for investing in the stock market might be able to help make that blend a bit clearer for you and our guide on how to invest in stocks is a great start for a first-timer's investment decisions.
And if you are still unsure of how to pick investments, speak to a qualified financial advisor to develop your investment strategy.
Sure, some of last year’s top performers can shed a light on some sectors that performed well in 2021. They can sometimes even point to a trend that’s foreshadowing themes for the year ahead.
Past performance is not a reliable indicator of future returns.
But just because a stock or a sector had a stellar previous year is no indication of what will happen in the year ahead. Past performance is not a reliable indicator of future returns.
And boy, does the tech sector know it.
2022 started with a sell-off in global technology stocks after the US Federal Reserve suggested they would raise interest rates faster than anticipated.
Many firms which had been considered attractive growth opportunities for 2021 were suddenly shedding value from their market caps as their stock price fell. For some, their current price is now very far off from where it was this time last year.
Our head of equity research, Paul Allison explains why:
“In theory, the price of a stock is the present value of all future profits a firm will produce. If you could magically predict that number, and you converted it into a value today, you would have a fair value (or intrinsic value) of that stock.
To discount a value in the future (those predicted profits) back to a value today, you divide by a discount rate. A large component of that discount rate is the prevailing interest rate.
So as interest rates go higher, the amount we need to divide those future values by increases.”
Growth stocks generally have more profits coming from the future (or at least, that's what we're hoping for when we invest in them).
That’s why, when rates go up, it's a double whammy for them. You’re now discounting future profits by a higher rate, and that rate is being pushed further back. Basically, that company will have a lot more to prove.
The other factor to keep in mind is that a sell-off of tech stocks probably isn’t just about interest rates. A lot of these growth plays were looking quite expensive to begin with, and rate increases were maybe just a catalyst for an overdue correction.
Now you might be thinking, “if I can’t get fast growth, can I at least get cheap growth?”
There’s no doubt about it - good, cheap companies are out there for you to invest in. But no amount of cheapness can make a bad business look good.
The pandemic serves as a useful fork in the road to distinguish between those two cases.
Firms that weren’t looking too hot before the pandemic and didn’t manage to benefit from Covid-related trends are probably not going to bounce back anytime soon.
But those that escaped the pandemic relatively unscathed, or perhaps even thrived (WFH tech gear and puppy food firms, unite!) likely had solid fundamentals from the get-go.
Return on capital employed (ROCE) can be a good indicator of a firm’s ability to generate profits from its capital. A high ROCE indicates the firm works hard at using its money to make more money.
And if it’s putting your money to good use - then perhaps it’s a good deal.
Games Workshop has a ROCE of 53.7%. This indicates that for every £1 of capital employed, it’s generating around £0.57 in profits.
While the games maker is certainly no penny stock, it proves that ‘cheapness’ is relative. It’s not about the price you pay, it’s about the value you’re getting.
There are a lot more aspects to consider than ROCE before you invest, not least management behaviour (Games Workshop is still in a nasty spat with its users over taking down fan-made online content, which has dented the share price).
But it is still a sensible strategy to look at the companies already flagging or doing well before the pandemic. At the very least you’ll be able to see if they really can blame or praise Covid, or if their fortunes were already well underway.
Speaking of value, keeping your finger on the pulse in a certain sector can be a great way to spot it. Here’s a look at some industries and the things to watch out for this year.
The US has had a pretty stellar run over the pandemic, with the S&P 500 up 89% since its lows in March 2020.
While tech valuations maybe aren’t as astronomical as a lot of investors think, with a price correction seemingly now underway, selectivity going forward is key.
One name here could be PayPal.
Over 75% of the top 1,500 global businesses take PayPal at checkout, making it the most accepted digital wallet worldwide. It’s the engine behind most e-commerce businesses out there.
But that’s the kind of thing that’s already baked into the share price by now. Investors might still be factoring in some of its newer offerings for 2022 though.
Fraud detection, buy now, pay later (BNPL) services, mobile wallets, crypto, and shopping rewards are all recent proposition enhancements to get users doing more than just paying for goods through the app.
Its "Buy in 4" service, designed to compete against the likes of Klarna, saw a 400% increase last Black Friday compared with 2020.
None of us want to think about it but if another round of lockdowns does materialise, PayPal could benefit from more online shopping. Even if that doesn’t happen it’s still a market leader in digital wallets, the use of which is projected to double by 2025.
Past performance is not a reliable indicator of future returns.
Firms will inevitably continue revving up existing net-zero mandates while touting new ESG initiatives this year. Though it’s not just consumer demand driving the change - increasingly, governments are insisting on eco-friendly alternatives too.
In late November, the UK announced all new homes and buildings would be required to install EV charging stations. Britain’s largest recharging installer Pod Point could end up being a beneficiary of the nation’s change in policy.
So far, its share price has had a lacklustre start to the year. But there’s talk of the UK’s Office for Zero-Emission Vehicles (OZEV) requiring automakers to allocate a fixed percentage of new car sales as zero-emission vehicles. If it does, demand for chargers will likely ensue.
The bigger question might be whether Pod Point can even meet those needs. It’s warned the semiconductor shortage could lead to delivery delays and higher costs. Pod Point also only relies on one supplier - so one small disruption could wreak a lot of havoc.
Travel stocks are still doing their best to recover from (sorry) some turbulent times.
This time last year, UK residents spent 90% less on travel than they did pre-pandemic. The erratic changes in lockdown policies across the world have turned airline and hotel stocks into a particularly risky play. Cars, however, might offer a proxy to investing in travel.
They also double down on the emerging theme in renewable energy.
Ford, while perhaps a surprising pick relative to its exclusively-EV peers, could be well equipped to navigate the OZEV’s policies should they arrive. That is, if it manages to steal a scoop of the market from Europe’s leading all-electric car seller Volkswagen.
Given VW is plugging $19bn into improving its EV software and charging capabilities, that may become increasingly challenging. (More on VW’s foray into EVs here).
This year’s all about sifting through the wide range of tech companies to filter the gems from the duds.
P/E ratios for firms in the sector provide a useful basepoint to do just that. They're a powerful tool providing a glimpse into a stock’s relative value. So in a sector at times notorious for overinflated valuations, comparing P/E ratios is a useful tool to separate the good from the not so good.
As of 27 Jan, Microsoft’s P/E was 31.6 while Salesforce’s was 116.6. All else the same, if Microsoft continued to earn the same profit year after year, it would take nearly 32 years to recover what an investor paid for one share from the firm’s future profits.
While that’s a lot of trips around the sun, it doesn’t look so bad next to about 117 years in Salesforce’s case.
The comparison is critical here, as these numbers fail to paint a full picture on their own. If nothing else, the P/E ratio can help us understand that a selloff for the entire tech sector might be an overreaction.
Sometimes the whole sector gets tarred with the same brush and it can be a useful task to try to figure out who’s been unfairly punished.
The devil’s in the details, and only by getting granular can you begin to make sense of it all.
2022 might warrant a transition away from some of the glitzier biotech health startups and into insurance instead.
Hold the yawns and hear us out.
If inflation sticks around and rates do rise, some UK stocks in the bargain bin might start to look attractive again.
Insurance companies like L&G could be a good play here. Here’s a much more detailed piece on why, but the TLDR is that these companies invest too.
And a lot of what they hold is fixed income (or bonds, to me and you). So you aren’t just investing in the firm’s insurance business, it’s its own investment business as well.
Bond yields have been pretty much nailed to the floor since the financial crisis but if a rate rise gives them a lift, that could really benefit the insurers heavy on bonds.
The likes of L&G have also made tentative comments about expanding into China. The burgeoning middle classes in the East tend to follow a pattern of spending that involves turning to wealth management, better healthcare and insurance, when they have a bit more money to spend.
If that middle class transition accelerates under the country’s common prosperity policy, healthcare and financial firms could benefit.
Roblox, the online gaming platform, hit over 47m daily active users last year.
Concerns over its ability to sustain and grow that figure in a post-lockdown 2022 seem valid, as there is a risk reopening will hurt Roblox. But the firm leverages user-created worlds and games.
That means Roblox is reliant on its own community, rather than internally hired developers, for growth. In that sense, revenue growth from users is organic, and likely cheaper.
Ultimately, when a firm can develop that sort of momentum through its own users, it doesn’t have to be so concerned with external forces threatening its business model. Web 3 competitors with crypto-based economies can also better incentivise users to partake
And that may very well be just the protection firms need this year as they navigate ongoing threats of rising interest rates and pandemic-related uncertainties.
Whether or not another lockdown is in the cards this year, remote work (to at least some extent) is here to stay for many.
That means the high streets have a lot less foot traffic, and digital has captured much more of our retail spend. Aside from the usual e-commerce winners, packaging could be a big winner from the shift.
MacFarlane (a small-cap stock) and Smurfit are UK packaging companies that saw their box volumes skyrocket in 2021. They’ve also been able to pass on rising transit costs to customers - which is just the type of pricing power that should come as music to investors’ ears.
While demand for these goods and services may not continue growing at the rate it has been, it’s certainly not going to outright stop this year. If you’re selling products online, you’re going to have to ship them somehow.
There’s a certain irony in a firm called Future selling print magazines. But that’s why its full-steam transition towards a digital-led model can seem so appealing.
So far, the strategy at the Bath-based publisher has been to snap up popular titles like FourFourTwo and widen the company’s overall readership to increase advertising revenues.
Future also stumped up around £600m to buy moustachioed comparison site GoCompare, which adds an ability to lead readers straight from article to price comparison to sale. That’s a digital advertiser’s dream.
A massive hike in 2021’s operating profit to £115.3m from £50.7m, excluding costs associated with acquisitions, and operating margins of 19% aren’t to be sniffed at.
2022 will be all about maintaining a cadence of high-quality acquisitions and using even greater scale to get eyeballs reading and comparing, then boosting revenues.
As the technological backbone behind crypto and NFTs, blockchain got a lot more eyeballs last year. So too did any company that seemingly had even the slightest link with the technology.
In fairness, it’s the driving force behind a lot more than a digital JPEG of a cat flying to the moon on a lollipop. According to the International Data Corporation, global spending on blockchain solutions will hit $19bn by 2024. That’s an annual compound growth rate of a staggering 48% although we should remember this is still a developing industry so those stats should come with a pinch of salt.
Businesses rely on blockchain for identity management (to store and verify information about employee and customer data) and other cybersecurity functions.
Google parent Alphabet might sound like a somewhat dusty play for a burgeoning industry, but just because it’s an oldie (it’s a sign of the times when Google isn’t the new kid on the block) doesn’t mean it can’t be a goodie too.
The firm’s new blockchain division is pushing full steam ahead with the goal of soon offering its own financial services, including cryptocurrency.
Suffice to say, Alphabet has a lot of irons in the fire. Its diversified range of revenue streams means if you’re looking for exposure to the blockchain without jumping into crypto, this could be a much less volatile play.
As an investor, your financial goals will help you determine the range of stocks suitable for your needs.
While last year's most popular stocks with Freetrade investors can provide you with some ideas to guide your research, it's by no means a list of what shares to buy now. These are not necessarily the best stocks to invest in. They’re simply the top 10 most bought ISA investments on Freetrade for 2021.
This list is inherently backwards-looking, and none of this should be taken as a recommendation to buy or sell shares. Still, they can provide inspiration for your stock pick ideas toolbox.
As investors, we crave certainty. We don’t want to admit to ourselves it’s the risk and uncertainty that provides opportunity.
We’re a tremendously fickle lot.
There's no single golden rule of thumb for building the perfect portfolio. But that's not necessarily bad news - it can be good news too.
Because it's less about pinpointing the perfect individual stocks for the year. It's a lot more about the big picture, the prevailing themes, and the firms that could benefit.
When you see your portfolio through this lens, it feels a lot more fruitful a task than just crystal ball gazing.
That's one of many reasons it's never a good idea to rely on one individual stock. Your goals, investment timeline and tolerance for investment risk should guide the mix of assets in your portfolio. These considerations help you determine the range of stocks suitable for your needs. When considered carefully, you’ll also protect yourself from overpaying for shares, while making sure you stay diversified.
Remember that when you invest, you're putting your capital at risk.
Download the Freetrade investment app and join over 1 million UK retail investors that trust us already. See the most popular investments with a breakdown of the most traded stocks and most popular ETFs on Freetrade. Follow the IPO calendar and keep an eye on exciting new investment opportunities.
Important Information
This should not be read as personal investment advice and individual investors should make their own decisions or seek independent advice.
When you invest, your capital is at risk. The value of your portfolio, and any income you receive, can go down as well as up and you may get back less than you invest. Past performance is not a reliable indicator of future results.
Eligibility to invest into an ISA and the value of tax savings depends on personal circumstances and all tax rules may change.
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