Finding stocks to buy when markets feel stretched isn’t easy — but one valuation ratio I always note is the price-to-earnings-to-growth (PEG) ratio.

The idea is simple: divide a company’s forward price-to-earnings multiple by its forecast earnings growth rate (ideally the medium-term average). A reading below one suggests you’re getting more growth than you’re paying for — a signal that a stock might be cheap relative to its prospects.

The US market feels particularly hot, which has thinned my interest a little. But these are stocks with a low PEG that I’m watching and considering (in some cases buying more of).

Melrose Industries — PEG 0.9

If you missed the Rolls-Royce recovery story, Melrose Industries (LSE:MRO) may deserve your attention today. This FTSE 100 aerospace supplier has quietly delivered an impressive turnaround, taking its operating margin from -8% in 2022 to nearly 17% in its most recent full-year results.

The business makes advanced structural components and electrical systems for Boeing, Airbus, GE and Safran. Crucially, it holds sole-source positions across much of its portfolio — meaning it’s often the only qualified supplier for specific parts on specific aircraft. Those contracts typically run for 25 to 30 years, making the revenue stream unusually durable.

Analysts forecast double-digit annual EPS growth going forward, with a consensus price target of 693p — more than 30% above where the shares sit today. Melrose is available at around 13 times and has a PEG ratio of 0.9.

The main risk is the balance sheet. Net debt stands at £1.74bn and free cash flow is only just turning positive.

US names with sub-1 PEGs

Several US-listed stocks on my watchlist screen well on the same measure, though each carries its own complexity.

• STMicroelectronics, a European semiconductor giant — sits deep in a cyclical earnings trough with a PEG of 0.91. Analysts expect earnings to more than double over the next two years as silicon carbide chip demand accelerates across electric vehicles and AI data centres.

• Arrow Electronics, a global electronic components distributor, trades at a PEG of 0.88 on 25% forecast EPS growth, as the inventory cycle turns and AI-driven demand picks up across industrial and defence end markets.

• Shoals Technologies, holding an estimated 45%–50% share of the US solar infrastructure market and backed by a $748m order book — is at 0.88 too, with data centre solar demand emerging as a second growth driver alongside its core utility business.

• VEON, an emerging market telecoms operator with digital revenue growing at 63% year-on-year, offers 52% forecast EPS growth and a PEG of just 0.22.

• Synaptics, a fabless chip designer pivoting towards AI edge computing and IoT connectivity. PEG at 0.97, with five consecutive quarters of double-digit revenue growth behind it.

• Daktronics, transforming into a high-margin MicroLED display manufacturer and riding a wave of global sports venue upgrades. The PEG sits at 0.71 with a $342m backlog.

All the stocks on this list carry risk to varying degrees. Shoals, for example, faces margin pressure due to tariffs. VEON, headquartered in Dubai, faces significant geopolitical risks.

The bottom line

PEG ratios are a starting point, not a conclusion, and every name on this list carries risk. But when markets are running hot (as it is in the US) finding companies where growth looks under-appreciated is worth the effort. All of these are worth a closer look.

The post PEGs under 1: are these the stocks to buy in May? appeared first on The Twelfth Magpie.

More reading

• £503 buys 14 shares in this FTSE 250 stock that returned 23.9% annually for the last 15 years
• £1,000 buys 25 shares in this FTSE 100 stock that’s returned 29.2% annually for the last 10 years
• Down 47%, is this growth stock finally worth buying in May?
• 2 REITs yielding 7%+ to consider for passive income in 2026
• Just 97 shares of this UK dividend stock generate £238 in passive income

James Fox has positions in Airbus and Melrose Industries Plc. The Motley Fool UK has recommended Melrose Industries Plc. 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.

There’s an estimated 10,000 Stocks and Shares ISA millionaires in the UK. There may be more, there may be less. But out of the millions of adults who hold an ISA, I don’t think that’s a lot.

Now consider this: if you want to generate a genuinely life-changing passive income from your Stocks and Shares ISA — enough to actually live on, cover your bills, and stop trading your time for money — you probably need somewhere in the region of £1m in there.

At a 5% yield, that delivers £50,000 a year, or just over £4,000 a month. And it’s tax free, because it’s inside the Stocks and Shares ISA wrapper. It’s the equivalent of a £65,000 salary.

Nowhere near

The uncomfortable truth is this: the vast majority of ISA holders are nowhere near where they need to be. Not because the vehicle doesn’t work — it’s one of the most powerful wealth-building tools available to UK investors — but because most people haven’t approached it with the focus and aggression it requires.

I’m 33, and I think I’m well on my way to that seven-figure target. Not through luck or inheritance, but through years of prioritising growth over income, and investing when others are fearful.

Running some maths

Ok, let’s run some maths. An investor could reach £1.13m by investing £500 a month and achieving an annualised growth rate of 10% over the course of 30 years. This would be a slightly above average growth rate, but more than achievable.

And with £1.13m invested in stocks or bonds yielding 5% annually, the portfolio could deliver £56,500 a year. That works out as £4,708 a month.

The stocks for growth

As the data tells us, most investors will still be in the growth phase. So where to invest?

While my US-listed investments are surging for the sky, my UK-listed investments, such as Melrose Industries (LSE:MRO), are struggling. However, this is where the value appears to be right now.

The stock trades at just 11.9 times forward earnings. That’s a fraction of its industry peers such as Rolls-Royce, GE, and even Safran. This is a great sign of relative valuation.

It’s also occupies a really strong position in the sector with its components featuring on 90% of engines globally — both civilian and military — and a sole supplier position for 70% of its product range. This gives it excellent pricing power.

The business is coming towards the end of a transformation programme that has left it solely focused on the aerospace sector. There appears to be meaningful re-rating potential as the market catches up with the fundamental reality of what Melrose has become.

Risks remain however. This includes the supply chain constraints that have slowed deliveries at Airbus and its peers, and reducing the after-sales component of revenue.

Nonetheless, it’s a great company with strong margins. Well worth considering.

The post How much is needed in a Stocks & Shares ISA to target a £4,708 monthly passive income? appeared first on The Twelfth Magpie.

More reading

• £503 buys 14 shares in this FTSE 250 stock that returned 23.9% annually for the last 15 years
• £1,000 buys 25 shares in this FTSE 100 stock that’s returned 29.2% annually for the last 10 years
• Down 47%, is this growth stock finally worth buying in May?
• 2 REITs yielding 7%+ to consider for passive income in 2026
• Just 97 shares of this UK dividend stock generate £238 in passive income

James Fox has positions in Airbus SE, Melrose Industries Plc, and Rolls-Royce Plc. The Motley Fool UK has recommended Melrose Industries Plc and Rolls-Royce Plc. 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.

Passive income is the holy grail for many investors. The idea of waking up each morning to find money has landed in your account — without lifting a finger — is a compelling one. And with a Stocks and Shares ISA, it’s entirely achievable.

But here’s my honest take: most investors ask the passive income question too early.

Before thinking about how to extract money from a portfolio, the priority should be growing that portfolio as aggressively as possible.

That means hunting for undervalued opportunities — companies trading below their fair worth, with the kind of durable competitive advantages that can compound returns over years and decades.

And I can say I’m absolutely putting my money where my mouth is. A data-backed approach to growth investing has seen my stock portfolio increase in value by 75% since the start of the year.

This isn’t magic and it’s not an overly concentrated portfolio.

Compounding to glory

The wealth-building phase is where the real magic happens, and cutting it short by pivoting to income too soon is one of the most common — and costly — mistakes I see investors make.

The larger the pot you build, the more effortless the income becomes later. A portfolio of £100,000 generating a 5% yield produces £5,000 a year. Double that pot to £200,000 and the same yield delivers £10,000 — without any extra effort or risk-taking.

Running some maths

Here’s one example.

An investor starts with nothing and chooses to invest £500 of their salary every month — using a Stocks and Shares ISA wrapper (this is just a vehicle to shield gains from tax). For this example, the long-term growth rate of the investments (the stocks) is 10% — that’s just a little above the long-term average of indexes.

Please note that tax treatment depends on the individual circumstances of each client and may be subject to change in future. The content in this article is provided for information purposes only. It is not intended to be, neither does it constitute, any form of tax advice. Readers are responsible for carrying out their own due diligence and for obtaining professional advice before making any investment decisions.

Now, after 25 years, the value of the portfolio will be £663,416. That’s a sizeable portfolio.

At this sage, in my head I’d be moving from growth-oriented investments to dividend-focused ones. A 5% yield here would generate £33,170 per year or £2,764 per month.

Of course, nothing is guaranteed. But this is how the theory works.

Where to invest?

My shares in Credo, Sandisk, Micron, Marvell, Alphabet etc have all surged recently and may be near fair value. But some of my UK holdings have underperformed in recent months.

One of these is Melrose Industries (LSE:MRO). This aerospace manufacturer combines a cheap valuation and positive long-term trends in civil aviation and defence.

Melrose, following the pullback, now trades at 11.9 times forward earnings and has a price-to-earnings-to-growth (PEG) ratio of 0.8. Not only is this a discount to the FTSE 100, it’s a huge discount to the wider aerospace sector.

And relative valuation discounts are where I’m most interested.

This is just a handful of peers, but Melrose stands out. What’s more, it offers that largest dividend of the lot at 4.5%.

Supply chain constraints, impacting aircraft production, leading to lower deliveries and aftermarket sales is a concern.

However, I certainly believe investors should consider this one. Especially given its sole source supplier position on 70% of its sales.

The post How much is needed in an ISA to target a £2,764 monthly passive income? appeared first on The Twelfth Magpie.

More reading

• £503 buys 14 shares in this FTSE 250 stock that returned 23.9% annually for the last 15 years
• £1,000 buys 25 shares in this FTSE 100 stock that’s returned 29.2% annually for the last 10 years
• Down 47%, is this growth stock finally worth buying in May?
• 2 REITs yielding 7%+ to consider for passive income in 2026
• Just 97 shares of this UK dividend stock generate £238 in passive income

James Fox has positions in Airbus SE, Melrose Industries Plc, and Rolls-Royce Plc. The Motley Fool UK has recommended Melrose Industries Plc and Rolls-Royce Plc. 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.

Marks & Spencer (LSE:MKS) shares are down 13% over 12 months.

That means £10,000 invested in the FTSE 100 retailer a year ago would be worth around £8,700 today. Not the result investors were hoping for from one of Britain’s most beloved high street names.

The hack

The culprit? A devastating cyberattack that sent shockwaves through the business and the broader retail sector.

The hack — which disrupted M&S’s online operations, paused contactless payments, and forced the company to pull its click-and-collect service — was one of the most significant cyber incidents to hit a UK retailer in recent memory.

At its peak, the disruption was costing the company an estimated £43m a week in lost online sales.

The market reacted accordingly.

Shares that had been riding high on the back of a genuine operational turnaround — strong food sales, a resurgent clothing division, improving margins — suddenly found themselves under pressure from a threat that had nothing to do with M&S’s underlying business fundamentals.

A Gulf crisis

More recently, the conflict in the Gulf has held the shares back despite the company trading at some of the lowest multiples we’ve seen in the last decade.

What’s the Gulf link? It’s because higher natural gas prices feed directly into fertiliser costs — natural gas is the primary feedstock for nitrogen fertiliser production — and that upstream pressure inevitably works its way through the supply chain, squeezing supermarket margins at exactly the wrong moment.

A protracted conflict remains one of the biggest risks to the business.

An opportune moment

Sometimes the best time to invest is when the chips are down.

For M&S, the cyberattack disruption is behind it. The Gulf crisis is a live risk, but geopolitical shocks of this nature tend to have a shorter shelf life than markets initially price in — and energy prices have a well-documented habit of retreating sharply from their peaks. The 2008 oil spike and subsequent collapse is the textbook example.

Neither issue looks permanent.

The interesting part of the equation is the valuation. Personally, I don’t believe there has been a more attractive time to buy Marks & Spencer shares over the past decade.

It’s currently trading at just 10 times forward earnings. But earnings growth remains really strong over the medium term. The forward dividend yield sits around 2% — covered five times by earnings — and net debt is manageable around £2.5bn.

Forecasts point to the price-to-earnings (P/E) ratio falling to around 9.3 times in 2028 and this represents a huge discount to peers in the grocery segment. Tesco is currently around 15.4 times forward earnings, moderating sightly into 2028.

The bottom line

UK businesses can take a lot longer than their US counterparts to reach fair value. This is even the case outside of tech. For example, I bought an overlooked defence stock in November (ISSC), it was up 200% in three months.

In the UK, I spent years waiting for Barclays and Lloyds to come good. Eventually I was rewarded, but it took time.

I believe Marks & Spencer might be another example. So I’m building my holding and hoping the market will realise the value proposition here sooner rather than later.

It’s certainly worth considering.

The post £10,000 invested in Marks & Spencer shares 1 year ago is now worth… appeared first on The Twelfth Magpie.

More reading

• £503 buys 14 shares in this FTSE 250 stock that returned 23.9% annually for the last 15 years
• £1,000 buys 25 shares in this FTSE 100 stock that’s returned 29.2% annually for the last 10 years
• Down 47%, is this growth stock finally worth buying in May?
• 2 REITs yielding 7%+ to consider for passive income in 2026
• Just 97 shares of this UK dividend stock generate £238 in passive income

James Fox has positions in Marks And Spencer Group Plc. The Motley Fool UK has recommended Marks And Spencer Group Plc and Tesco Plc. 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.

Just imagine £5,000 a month in passive income. That’s £60,000 a year, which is not far off double the UK median salary — sounds like the kind of thing reserved for people who already have money.

It isn’t. For anyone with a Stocks and Shares ISA and a long enough runway, it’s a realistic destination.

The maths is straightforward. A £1m portfolio yielding 6% annually produces £60,000 in income — £5,000 a month, tax-free inside an ISA. The 6% is achievable; plenty of high-quality UK dividend stocks yield at or above that level right now — however, it does introduce a level of risk that you may not experience closer to 4%.

Please note that tax treatment depends on the individual circumstances of each client and may be subject to change in future. The content in this article is provided for information purposes only. It is not intended to be, neither does it constitute, any form of tax advice. Readers are responsible for carrying out their own due diligence and for obtaining professional advice before making any investment decisions.

The £1m is the harder part — but not as hard as it sounds.

There are currently around 4,000 Stocks and Shares ISA millionaires in the UK. That’s a small number relative to the millions of ISA holders, but it’s growing, and there’s nothing especially unusual about the people who get there. They started early, contributed regularly, and let compounding do the work.

How long does it take? At £1,000 a month, assuming 10% annualised returns (roughly in line with long-run equity averages), a portfolio crosses the £1m mark in around 25 years. Contribute £1,500 a month and that falls to around 20.

These aren’t aggressive assumptions — personally, for instance, my portfolio is almost three times larger today than it was two years ago when we moved house (when I needed to dip into my ISA for the first time).

However, 10% is the kind of returns a broad equity portfolio has historically delivered over long periods. The enemy is starting late, stopping early, or keeping the money in cash.

In short, the path to £5,000 a month in passive income starts now. It’s about accumulation. Build the pot first. Deploy it into income-generating assets second.

Where to invest?

So what should investors actually buy?

A winning portfolio is often a diversified one. My portfolio has been successful in recent years with 20 investments plus bond holdings.

And one stock I continue to have faith in is Melrose Industries (LSE:MRO).

Melrose supplies advanced components to every major aerospace original equipment manufacturer in both civil and defence markets — and crucially, many of those positions are sole source (roughly 70%).

When an engine or airframe is certified with a Melrose part, that part stays in for the product cycle. That means decades of recurring revenue as the installed base flies on.

That’s the same structural advantage that commands a premium multiple at Rolls-Royce. Yet Melrose trades on a forward price-to-earnings of around 13.5 times — less than half what the market awards Rolls. I think that gap is too wide, and as Melrose’s earnings trajectory becomes clearer to the market, I expect it to narrow.

The risk worth acknowledging is tariff exposure. Melrose has significant US manufacturing and supply chain activity, and any escalation in trade policy could pressure margins or complicate customer relationships.

That said, I certainly believe this stock is worth considering.

The post Fancy £5,000 of monthly passive income? It’s possible… appeared first on The Twelfth Magpie.

More reading

• £503 buys 14 shares in this FTSE 250 stock that returned 23.9% annually for the last 15 years
• £1,000 buys 25 shares in this FTSE 100 stock that’s returned 29.2% annually for the last 10 years
• Down 47%, is this growth stock finally worth buying in May?
• 2 REITs yielding 7%+ to consider for passive income in 2026
• Just 97 shares of this UK dividend stock generate £238 in passive income

James Fox has positions in Melrose Industries Plc and Rolls-Royce Plc. The Motley Fool UK has recommended Melrose Industries Plc and Rolls-Royce Plc. 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.

Greggs (LSE:GRG) shares have had a torrid 24 months. Those who invested at the peak have now lost half of their original investment. The sausage roll institution of the British high street has gone from stock market darling to something investors scroll past.

But the big question is whether it’s now being overlooked. Many investors won’t consider stocks that have poor momentum — consistently moving in the wrong direction — however, this can be where the best value stocks are found.

So, has the fall finally created a buying opportunity? My honest opinion is: not yet.

Not as cheap as it looks

On a forward price-to-earnings ratio of 12.9 times, Greggs looks reasonable. But headline multiples can flatter a stock. The analyst consensus is forecasting earnings per share (EPS) of 125p for 2026 — lower than the 133p delivered in 2025 and well below the 144p earned in 2024.

This isn’t a growth stock temporarily on a trough multiple. It’s a company whose earnings are still heading in the wrong direction.

The price-to-earnings-to-growth (PEG) ratio isn’t available because you can’t calculate it when forecast EPS growth is negative. This can be a sign of a value trap.

What’s more, price-to-free cash flow sits at 32 times. For a mature UK bakery retailer, that requires a justification I haven’t found.

It might be time for investors to stop thinking about Greggs as a fast-growing chain, and more like those slow-moving tobacco stocks that are doing well to tread water.

And then there’s the balance sheet

Net debt has ballooned from £85m in 2021 to £404m today — nearly a fivefold increase in four years. Cash on the balance sheet has fallen from £199m to just £71m. Working capital has swung from a positive £59m to negative £152m.

When we factor this into the earnings metrics above, it confirms my belief that the stock really isn’t that cheap at all. Net debt is equal to around three years of next profit. It’s not a worrying amount of debt, it’s just noteworthy relative to earnings and market cap.

Capital expenditure has exploded from 53p per share in 2021 to 278p last year as Greggs pushes into evening trading, delivery, and new store formats. The consequence is that free cash flow has collapsed from 225p per share to around 50p.

The bottom line

Some investors will undoubtedly be attracted to the 4.3% dividend yield. It’s a little better than the yield you’d get on a Gilt, but I’m still not sure it’s worth the risk.

That’s because there’s also a structural issue that doesn’t show up in any spreadsheet. Greggs built its brand on cheap, indulgent, calorie-dense food. That’s a harder sell in a world slowly moving toward healthier eating habits. It may not matter this quarter. Over a five-year investment horizon, I think it matters more.

Greggs is a fine business with genuine brand loyalty. But I just don’t believe the numbers add up, and I don’t believe it’s well positioned for the future. I don’t believe it’s worth considering.

The post At 12.9x, are Greggs shares cheap enough yet? appeared first on The Twelfth Magpie.

More reading

• Greggs shares are the FTSE 250’s biggest risers. How did that happen?!
• How to turn a £20k Stocks and Shares ISA into a £1k monthly second income!
• Thank goodness I didn’t buy Greggs shares in 2025
• Are Greggs shares 50.3% undervalued?

James Fox has no position in any of the shares mentioned. The Motley Fool UK has recommended Greggs Plc. 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.

Jet2 (LSE:JET2) is one of the standout value opportunities on the UK stock market — at least, that’s my take.

To be fair, my opinion’s based in data. So let’s allow the data to do the talking.

The valuation today

On the surface, Jet2 looks decent value. It trades at 6.5 times forward earnings and many data sites will report it having a massive £2bn net cash position — that would be a lot for a company worth £2.2bn.

Delve a little deeper, subtract the deferred revenue, and it’s clear that net cash is actually closer to £800m. But that’s still substantial.

What it means is we’re looking at a company trading at around 3.5 times net income. Even by airline standards, that’s super-cheap. In fact, my calculations suggest that the industry average is around double that.

The difference is even more stark compared to Ryanair — I’m sitting on one of its planes as I write. The Irish firm is almost three times more expensive.

Looking ahead

Of course, there’s a danger of looking at near-term valuations and thinking something is cheap. That’s how investors find value traps.

Instead, we need to consider where the company’s going and make assumptions or forecasts. In the near term, earnings are actually forecast to stand still as Jet2 invests in new facilities at Gatwick as well as a continuing fleet renewal.

So where will the business be in five years? Well, we can’t know where jet fuel prices are going to be — that’s up to 35% of operating costs — and we don’t know what’s going to happen to travel demand.

The first thing to consider is that the company should have many more seats on sale by FY30 — as much as 25% more with the fleet reaching 150 aircraft and the seat gauge increasing around 7%.

The business also expects the fleet overhaul to deliver a 20% fuel saving per seat — equal to £10 per seat. However, not all of those savings will be realised by the end of the decade.

One scenario

I put all the data I had into AI chatbot Claude and asked it to produce a forecast through to FY30. It took a mightily long time, and it became evident that it took it very seriously.

Now, this forecast turned out to be quite optimistic, mainly around costs. It has fuel, marketing, and landing costs remaining consistent across the period. It’s possible. Fuel could be materially lower if the Iran and Ukraine conflicts conclude for good. Marketing costs could fall with AI. But I wouldn’t bank on it.

So what did the headline numbers say? Well, it’s got revenue moving from £7.2bn last year to £10.5bn in FY30. And after two years of stagnation, it sees earnings per share move from around 206p to 355p as EBITDA almost doubles.

The bottom line

Of course, there are risks. If oil stays elevated, the thesis is blown apart. And that’s why it pays to stay diversified. However, it’s clear that there’s huge potential at Jet2. So much so, I believe it could be one of the biggest winners when UK investors regain their confidence.

Personally, I believe it’s well worth considering.

The post Trading at 3.5x net income, I think Jet2 could lead the next stock market recovery appeared first on The Twelfth Magpie.

More reading

• £503 buys 14 shares in this FTSE 250 stock that returned 23.9% annually for the last 15 years
• £1,000 buys 25 shares in this FTSE 100 stock that’s returned 29.2% annually for the last 10 years
• Down 47%, is this growth stock finally worth buying in May?
• 2 REITs yielding 7%+ to consider for passive income in 2026
• Just 97 shares of this UK dividend stock generate £238 in passive income

James Fox has positions in Jet2 Plc. The Motley Fool UK has recommended Jet2 Plc. Views expressed on the companies mentioned in this article are those of the writer and therefore may differ from the official recommendations we make in our subscription services such as Share Advisor, Hidden Winners and Pro. Here at The Motley Fool we believe that considering a diverse range of insights makes us better investors.

My Stocks and Shares ISA has one speculative slot, and I recently filled it with a name most people haven’t heard of yet.

But first, let me give you some context.

I’ve largely missed the surge in optical networking (the fibre and laser components that carry data between servers inside data centres). Applied Optoelectronics had a monster run — I saw it, shortlisted it, missed a 500% run up in six months.

Lumentum surged after Nvidia put $2bn into it — I owned it but sold too soon. It’s up 800% over six months.

Don’t get me wrong… I’ve done well, but these misses hurt more than losses for me.

I have caught some of the surge indirectly. I own Marvell, which sits at the intersection of custom silicon and optical connectivity. I also have copper cable exposure (typically short-reach within server racks) through Credo.

The really sharp gains have been in the pure-play photonics names.

The great thing about this AI revolution is that the next opportunity is just around the corner. And this got me interested in POET Technologies (NASDAQ:POET).

What is it?

POET isn’t trying to be the new Lumentum. It’s doing something that could be more interesting — rethinking how optical components are assembled in the first place.

Traditional transceivers (modules that send and receive data across fibre networks) stack components with wire bonds, which creates heat, signal loss, and manufacturing complexity.

POET’s optical interposer platform integrates everything onto a single panel. The result is that its Teralight engine reaches 1.6 terabit speeds using just four laser chips, versus the eight or sixteen required by conventional approaches.

There are lots of reasons why this matter.

For one, indium phosphide — the material high-speed lasers depend on — is facing a real global supply crunch. Demand runs at roughly 2m substrates a year; production capacity is around 600,000. Nvidia has already moved to lock up future laser supply from Coherent and Lumentum.

POET’s lower chip count could make it the natural supplier for the tier 2 manufacturers who need to keep building without access to that locked-up supply.

Eyes on commercial signs

The issue is, it’s essentially a pre-revenue company. Revenue projections are for $10m this year and then $80m next year. But it needs to scale even faster to justify the valuation. Investors need to keep their eyes on commercial developments and partnerships.

Currently, the valuation isn’t comfortable. Forward price-to-sales sits around 107 times, against a sector median closer to three times. Market cap is $1.08bn. There’s a cash pile of over $300m and annual burn of around $40m-$50m, which means the company can keep operating for several years without needing to raise more money.

The risk is execution. This story relies on a small number of partnerships hitting their milestones. A slip into 2028 wouldn’t sink the company, but it would hurt the share price badly at these multiples.

The bottom line

POET is genuinely novel technology, in exactly the right place at exactly the right moment in the photonics supply chain. It’s not cheap and it’s not certain. That’s why it’s speculative. It’s worth considering, but the risks are sizeable.

The post A millionaire maker? Introducing the 1 speculative pick in my Stocks & Shares ISA appeared first on The Twelfth Magpie.

More reading

• £503 buys 14 shares in this FTSE 250 stock that returned 23.9% annually for the last 15 years
• £1,000 buys 25 shares in this FTSE 100 stock that’s returned 29.2% annually for the last 10 years
• Down 47%, is this growth stock finally worth buying in May?
• 2 REITs yielding 7%+ to consider for passive income in 2026
• Just 97 shares of this UK dividend stock generate £238 in passive income

James Fox has positions in Credo Technology Group Holding Ltd, POET Technologies, Nvidia, and Marvell Technology Group Ltd. The Motley Fool UK has recommended Marvell Technology and Nvidia. 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.

A penny stock trading at 58.5p with deep exposure to the global defence boom isn’t the kind of thing that stays hidden for long. It’s has, unsurprisingly given the recent context, been performing rather well. The stock’s up around 40% over the past six months.

But could it go further? Let’s explore.

Who is it?

MTI Wireless Edge (LSE:MWE) has the hallmarks of a quality stock. It’s an Israel-based specialist in military antennas, 5G backhaul, and water solutions — and a confluence of catalysts may be aligning in its favour.

The company just posted record full-year results for 2025. Revenue rose 13% to $51.5m with profit from operations up 29% and earnings per share climbing 18% to 5.83 cents.

All three divisions — antennas, distribution and consulting, and water solutions — delivered double-digit revenue growth, with the antenna division leading at 23%, driven by surging demand for military-grade hardware and 5G infrastructure.

It also appears well diversified and benefits from long-term contract lock-ins.

What’s more, the balance sheet’s clean. MTI sits on $9.55m in cash with no meaningful debt, giving it a net cash position. Return on capital is 17.1%, return on equity 17%, and the stock trades on a forward price-to-earnings of just 13.3 with a forecast dividend yield of 4.66%.

More wins

This week, the company announced multiple new defence contract wins worth around $6m. That’s more more than 10% of its entire 2025 revenue. The deal includes a $2.2m communications infrastructure contract for the Israeli Ministry of Defence (MoD) and $1.9m in military antenna orders from an international defence contractor.

All orders are scheduled for delivery across 2026 and 2027.

2 bullish analysts and positive signs

When it comes to penny stocks, there isn’t much institutional coverage. In other words, there aren’t many analysts covering the stock. However, the two that do cover MTI are very bullish. Collectively, their price target’s 62% above the current share price.

Moreover, consensus forecasts point to net profit of $5m in 2026 and $5.21m in 2027. Notably, the Beer family — substantial shareholders — bought 600,000 shares at 53.5p as recently as 26 March, a vote of confidence from insiders.

Then there’s the geopolitical backdrop. The Iran-US ceasefire agreement reached on 7 April could materially re-rate Israeli equities. Throughout the conflict, Israeli-listed and Israel-based stocks traded at a persistent-risk discount.

A sustained ceasefire — and the permanent reopening of the Strait of Hormuz — may unlock institutional capital that has been sitting on the sidelines.

The bottom line

That said, there are risks to bear in mind. MTI’s a tiny company and the free float (51%) is limited. What’s more, liquidity may be limited and the the bid-ask spread sits at 513 basis points.

And while the business is diversified across segments, the company’s reliance on Israeli MoD contracts introduces concentration risk.

However, for investors willing to accept that risk, it may be worth considering.

The post This penny stock could be one of the best defence plays on the AIM appeared first on The Twelfth Magpie.

More reading

• £503 buys 14 shares in this FTSE 250 stock that returned 23.9% annually for the last 15 years
• £1,000 buys 25 shares in this FTSE 100 stock that’s returned 29.2% annually for the last 10 years
• Down 47%, is this growth stock finally worth buying in May?
• 2 REITs yielding 7%+ to consider for passive income in 2026
• Just 97 shares of this UK dividend stock generate £238 in passive income

James Fox has no position in any of the shares mentioned. The Motley Fool UK has recommended M.t.i Wireless Edge. 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.

Cast your mind back four years and Rolls-Royce, today one of the FTSE 100‘s most celebrated turnaround stories, was a company in serious trouble. It was burning cash, drowning in debt — largely because of the pandemic — and its shares were slumping. Today, it carries a market-cap approaching £100bn and an operating margin close to 25%.

The thing is, everyone knows Rolls-Royce. And that’s probably down to the car brand they don’t own.

But not everyone knows Melrose Industries (LSE:MRO). It’s a different company, same script.

Pure-play aerospace

Melrose has spent recent years shedding automotive and other non-core divisions to emerge as a focused aerospace supplier, making advanced components and systems for all major original equipment manufacturers. These include Boeing, Airbus, GE, and Safran. That’s a great list of customers.

The business spans civil and defence markets. Crucially, it holds sole source positions across much of its business — around 70%.

What’s more, these are long-term, often exclusive supply agreements for specific parts on specific aircraft. Once embedded on a programme, Melrose is typically there for the life of that aircraft — often 25-30 years.

The revenue is recurring — the switching costs are enormous, and the barriers to entry are high. It’s exactly the kind of quality business with an embedded structural competitive advantage that made Rolls-Royce so rewarding for patient investors.

The turnaround in numbers

In 2022, Melrose reported an operating loss of £246m on a margin of -8.33%. Full-year 2025 results showed operating profit of £600m and an operating margin of 16.72%. Normalised EPS hit 33.1p last year — up 70% — pointing to the company trading at 16 times earnings.

The dividend’s growing at 20% a year. And the 16 analysts covering the stock have a consensus price target of 693p — more than 30% above today’s price of around 515p.

On an earnings basis, there’s cause to argue it’s still undervalued. Rolls trades at more than double Melrose’s forward price-to-earnings (P/E) of just 13.2 times. The price-to-eanrings-to-growth (PEG) ratio of 0.9 is vastly discounted versus many other aerospace/industrial stocks.

The bottom line

Of course, there are risks and concerns. Net debt’s risen to £1.74bn and free cashflow’s only just turning positive. The balance sheet leaves limited room for error if civil aviation demand softens or defence programme timing slips. This is a genuine risk and worth watching closely.

However, the shares are down 22% from their 52-week high, caught in the broader turbulence of the year. For long-term investors, the combination of sole source positions, a transformed margin profile, and the prospect of strong earnings growth from this valuation makes it well worth considering.

And honestly, I wouldn’t be surprised to see it push towards all-time highs later this year, especially if the conflict in the Gulf comes to an end and interest rates continue to push downward.

The post The next Rolls-Royce? This FTSE 100 turnaround story appears overlooked appeared first on The Twelfth Magpie.

More reading

• £503 buys 14 shares in this FTSE 250 stock that returned 23.9% annually for the last 15 years
• £1,000 buys 25 shares in this FTSE 100 stock that’s returned 29.2% annually for the last 10 years
• Down 47%, is this growth stock finally worth buying in May?
• 2 REITs yielding 7%+ to consider for passive income in 2026
• Just 97 shares of this UK dividend stock generate £238 in passive income

James Fox has positions in Melrose Industries Plc and Rolls-Royce Plc. The Motley Fool UK has recommended Melrose Industries Plc and Rolls-Royce Plc. 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.