Investing in the stock market right now takes guts. Awful events in Ukraine combined with a huge rise in the cost of living have sent share prices on a downward trajectory for much of 2022.

That’s why I think it pays to tap into the mentality of those who have seen it all before and still managed to thrive. The first person that springs to mind? 91-year-old Warren Buffett.

Why Warren Buffett?

In case you don’t know, the ‘Sage of Omaha’ is one of the wealthiest individuals on the planet. Importantly for private investors like me, his billionaire status has been built on adopting a strategy that anyone can understand.

Put simply, Buffett buys stock in great companies. According to him, these tend to be businesses that resemble castles that are able to fend off invaders (competition) on a consistent basis, thanks to possessing enviable ‘moats’. The latter might include highly-valuable brands or cost advantages or just being a big fish in a small pond.

But there’s another aspect to Buffett’s strategy, namely how he behaves when the chips are down. The master investor regards inevitable market wobbles as opportunities to buy great stocks that are temporarily on sale. It’s a mentality I’ve tried to adopt over the years and particularly in 2022. I’ll never be as wealthy as Buffett, of course! 

So how might I use this approach now with, say, £20,000 — the maximum amount of cash I’m able to deposit in a Stocks and Shares ISA this year — at my disposal?

5 stocks I’d buy today

From the FTSE 100, I reckon Diageo and Unilever are solid choices. Both boast bursting portfolios of ‘sticky’ brands that consumers will willingly pay for. Their ability to pass price increases on should go some way to helping them navigate through these inflationary times. Supermarket giant Tesco also grabs my interest, thanks to its commanding market share.

From the FTSE 250, Games Workshop seems to tick a lot of ‘Buffett boxes’. The Warhammer brand is incredibly popular around the world, making this very financially disciplined company a leader in a (very) niche market. Out of interest, the shares are down nearly 30% in 2022, as I type. That strikes me as an opportunity to “be greedy when others are fearful“, to quote Buffett. 

iPhone maker Apple is the final pick. Since I’m already locked into its ecosystem through owning a number of its devices, I’m highly likely to stick with the tech titan when the time comes to replace them. I sincerely doubt I’m alone. This brings to light another ‘moat’ quality, namely the hassle involved in switching. It should come as no surprise that Buffett owns a huge slice of Apple already. 

Buyer beware

Naturally, adopting the approach of a highly successful investor like Buffett doesn’t guarantee anything. As we’ve seen, the share prices of even the best stocks can still tumble in the face of unexpected global events.

This is why it’s essential to spread my cash around companies in different sectors. Although a big fan of running a concentrated portfolio, you’d never catch Buffett investing in just one small part of the market. This ensures he never needs to sell in a panic — something that Fools like me should also avoid like the plague.  

The post 5 stocks I’d buy before the ISA deadline using the wisdom of Warren Buffett appeared first on The Twelfth Magpie.

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• This 7.5% yielding passive income share is at a 13-year low! Time to consider buying?

Paul Summers has no position in any of the shares mentioned. The Motley Fool UK has recommended Apple, Diageo, Games Workshop, Tesco, and Unilever. 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.

With a good few decades of investing ahead of me, I’m always on the lookout for great growth stocks to buy. Even better if their share prices are going through a period of temporary weakness.

With this in mind, here are three quality companies now trading near 52-week lows.

Fevertree Drinks

Late in January, one-time market darling Fevertree Drinks (LSE: FEVR) announced that cost headwinds would be more significant than expected, meaning that margins at the mixer specialist are likely to “remain broadly flat in 2022“.

This announcement succeeded in taking away most of the gains made in the second half of 2021. Fevertree’s share price now stands close to its 52-week low. So is now the time to buy the stock?

Well, a valuation of almost 49 times forecast earnings suggests not. Anything this high implies/demands a company should deliver perfectly on its strategy. That’s not easy considering the ‘interesting’ economic outlook right now.

Then again, this is not a stock that’s ever likely to trade at a bargain price. Prior to the pandemic, returns on capital — a key metric for star fund manager Terry Smith — were seriously good. Fevertree’s finances also look solid with hardly any debt on the balance sheet. There’s lots of ‘white space’ left for the company to grow into and it already possesses a great brand. 

I think there’s a good chance of this company recovering strongly, in time. For now however, it stays on my watchlist.

Softcat

IT solutions provider Softcat (LSE: SCT) is next up. The FTSE 250 member’s share price is also getting close to its 52-week low (1,419p, set last April). Considering its stellar track record, this selling pressure grabs my attention.

Like Fevertree, Softcat has a history of generating seriously good returns on the money it invests in the business. It’s clearly benefited hugely from the increased demand for support from clients over the pandemic too. 

That’s not to say Softcat is without risk. Margins, while decent for its industry, are average relative to the rest of the market. The stock also trades on a P/E of 33. That’s pricey, considering that earnings aren’t expected to grow much at all this year. 

Given that the stock could fall further if the rotation into value stocks continues in 2022, Softcat only makes it to my watchlist, for now. 

Games Workshop

A final growth share that’s let off steam has been the fantasy figurine-maker Games Workshop (LSE: GAW). The shares are now down over 20% year-to-date and only slightly above the 52-week low. Product release delays and increasing costs are partly to blame.

Of the three mentioned here, this is the stock I’d be most likely to buy today. While fixating on valuation is never a good idea, a forward P/E of 22 looks very reasonable, considering its dominance of this niche market. Again, its finances are robust compared to many other companies.

Yes, there’s a risk the share price could dip lower if margins continue to be squeezed. As such, it may pay for me to buy in tranches if I end up pulling the trigger.

There was a time when Games Workshop was knocking on the door of the FTSE 100. Assuming it is able to successfully push its Warhammer franchise over the next few years via games and films, I’m confident this could still happen. 

The post 3 top growth stocks near 52-week lows appeared first on The Twelfth Magpie.

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• Is a passive global index fund all I need for my SIPP?
• How big does an ISA need to be to generate a £1,000-a-month second income?

Paul Summers has no position in any of the shares mentioned. The Motley Fool UK has recommended Fevertree Drinks, Games Workshop, and Softcat. 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.

Fantastic returns

FTSE 250 fantasy figurine maker Games Workshop (LSE: GAW) would be a near-automatic buy for me if its share price were to be dragged down by a market-wide correction. The company screams quality, from high margins and returns on capital to a wonderfully robust financial position.  

Looking ahead, I also think there’s a lot to be positive about. The move into China and Japan via the opening of Warhammer stores/cafes should ensure that GAW keeps gaining new fans from ‘white space’ markets. The forthcoming launch of video games and live action shows also bodes well. 

As things stand, the stock commands a valuation of 31 times forecast earnings. That’s not surprising given that the company was a huge beneficiary of the multiple lockdowns since March 2020. At £4bn, however, it’s a very different proposition than it was a few years ago. So, the biggest risk I see here is the cost of not investing in a faster-growing (smaller) company elsewhere. This is why, for me, GAW is more of an opportunistic buy in troubled times.

Waiting to for the right time

Luxury watch seller Watches of Switzerland (LSE: WOSG) goes down as a classic example of a stock I’ve admired for quite a while but never actually pulled the trigger on. This reluctance has cost me dearly. The share price is up 220% in the last 12 months.

Based on recent updates, I see this continuing. In August, the FTSE 250 member revealed that Q1 revenue had pretty much doubled from that achieved in 2020. It was also 46% higher than in the same period in 2019. Throw in new store openings both here and abroad and WOSG could keep ticking higher.

Of course, all investments carry risk. Having done so well, many early owners may begin banking profits. On top of this, there might come a time when the post-lockdown spending flurry runs out and buying a posh watch isn’t a priority treat. 

Overall, I remain very positive on WOSG. Nevertheless, I’d rather buy it for less than the 30 times earnings that the shares are currently changing hands for. 

FTSE 250 power play

A third stock I’d buy if share prices fell across the board would be XP Power (LSE: XPP). As a one-time owner of the stock, I banked some good profits a while back and maintain a soft spot for the critical power control components manufacturer.

Like the other stocks, XP has shown itself to be resilient since the pandemic first struck. This performance has continued into 2021 with the company delivering “another period of significant revenue and profit growth”. Backed by a strong order book, the company now expects its exposure to trends such as AI and the Internet of Things to allow it to grow in the future. 

At 28 times earnings, XPP is the cheapest stock mentioned. That’s clearly still not a bargain though, especially as the company is exposed to “price and availability pressures within the component supply chain“. As such, I’m happy to delay buying back in for now.

The post 3 ‘no brainer’ FTSE 250 stocks I’d buy on the next market correction appeared first on The Twelfth Magpie.

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Paul Summers has no position in any of the shares mentioned. The Motley Fool UK owns shares of and has recommended Games Workshop. The Motley Fool UK has recommended XP Power. 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.

How’s it been doing?

It’s doing very well. Revenue moved 19% higher over the 12 months to the end of May, supported by many/most of us being confined to our homes. The £90.7m logged was a record for the company. A maiden contribution from Frontier Foundry — its label for third-party publishing — was another positive. 

All told, earnings before interest, tax, depreciation and amortisation (EBITDA) jumped 21% to £38.1m, lending great support for Frontier’s ‘launch and nurture’ strategy. This is where it releases a game and then updates it over time; the idea being that a player will become increasingly invested in a game and continue playing the title for years to come. To date, FDEV has four such franchises: Elite Dangerous, Planet Coaster, Jurassic World Evolution and Planet Zoo.

Can all this continue?

This growth stock’s next game — Jurassic World Evolution 2 — is due for release in early November in time for Christmas. Frontier Foundry will also release three titles in the current financial year (Lemnis Gate, FAR: Changing Tides and Warhammer 40,000: Chaos Gate — Daemonhunters). As a result, the mid-cap thinks revenue will come in somewhere between £130m to £150m. That’s a huge jump on today’s already great numbers.

It potentially gets even better the following year. In FY23, between £160m and £180m is expected thanks to contributions from its hotly-anticipated first Formula 1 management game and its Warhammer Age of Sigmar IP real-time strategy title. The latter is licenced from market darling and FTSE 250 constituent Games Workshop.

So, what are the risks?

One potential issue is that more casual gamers will want to do other things with their time post-pandemic. In this way, Frontier is no different from other lockdown winners such as Bloomsbury Publishing and musical instrument seller Gear4music. This is inevitable to some degree but its impact should not be discounted.

Another potential drawback is that earnings at any developer can fluctuate from year to year. This is usually due to the irregular release of games. Even if release dates were consistent, there’s a chance that a particular game won’t be popular. Moreover, a competitor could release something that generates higher interest. In this way, gaming is no different from the music or movie industries.

Even nailed-on winners can suffer teething issues. Frontier experienced this itself in the last year following the release of a bug-laden Elite Dangerous: Odyssey. Although things now seem to be fixed, the episode certainly did its reputation with gamers no favours. It might also explain why this growth stock has been quite volatile in recent months.

Considering these potential headwinds, Frontier’s forward P/E of 38 feels punchy, to say the least. Then again, I wouldn’t be surprised if a deep-pocketed suitor submitted a generous bid for the whole company at some point anyway. That’s exactly what happened to one of FDEV’s highly-rated peers earlier this year.

Cash rich

Potential obstacles aside, I remain positive about this UK growth stock. Backed with over £42m in net cash on the balance sheet, I reckon this is a cautious buy for my own portfolio. 

The post 1 UK growth stock I’d buy following today’s record results! appeared first on The Twelfth Magpie.

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Paul Summers has no position in any of the shares mentioned. The Motley Fool UK has recommended Frontier Developments. 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.

Warren Buffett’s words of wisdom

Buffett bought his first stock when he was 11 years old. Although barely making any money, undeterred, he continued to increase his investing knowledge and buy stocks. This precociousness helps explain why he amassed a fortune. It’s also why he once remarked that “a wise man once said invest young.” A quick bit of (simple) maths bears this out.

Let’s say I invested £1,000 in the stock market when I was 20 years old. Let’s also say I managed to achieve an annualised return of 10% (including any dividends). By the age of 60, I’d have a little over £45,000!

To be clear, this didn’t involve adding any additional funds over that 40-year period. It’s simply a great example of the power of compounding. All other things being equal, the outcome would be even better if I had invested more over time.

However, let’s say I didn’t get to invest that money until I was 30. By 60, I’d have a little under £17,500. If I waited until I was 40 (only giving me 20 years for the money to grow), I’d have even less. By my calculations, I’d have just $6,727.50 in my coffers.

Own the best stocks

Of course, this is all hypothetical. I’ve not deducted any costs associated with investing, such as broker fees. We also don’t know how the market will behave over a 40-year period. While equities have been shown to be the best asset class to own over time, that 10% annualised return could be quite a bit lower. Then again, it could be higher!

One way of increasing my chances of the latter is to only buy the best company stocks I can find at reasonable prices. This is essentially what Buffett did when he bought Coca-Cola in the 80s. He recognised the business was going through a temporary sticky patch and that its brand and competitive strengths would see it through.

As he predicted, Coca-Cola went on to recover and make him significantly rich(er). This isn’t to say I necessarily need to look abroad for quality compounders. Just look at the share price performance of UK quality stocks like Games Workshop over the last five years.

Not just for kids

There’s a possibility that some people may not embrace Buffett’s tip/belief for fear that they’re now too old. I respectfully disagree. As the last year has shown, stock markets have the potential to deliver great gains over a short period of time. So I suggest a slight modification to Buffett’s suggestion. A wise person starts investing as soon as they can.

This isn’t to say however, that a 60-year-old ‘me’ would necessarily buy the same things as a 20-year-old me. With far less time until retirement, it’s vital to match my investments to my risk tolerance.

With more years ahead of them, younger investors have the benefit of being able to recover from setbacks.

The post 1 outrageously simple tip from Warren Buffett I wish I’d known sooner appeared first on The Twelfth Magpie.

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• Is there any value left in Lloyds shares now they’re over £1?
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• After huge new nuclear deals, are Rolls-Royce’s sub-£15 shares set to power higher?
• This 7.5% yielding passive income share is at a 13-year low! Time to consider buying?

Paul Summers has no position in any of the shares mentioned. The Motley Fool UK owns shares of and has recommended Games Workshop. 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.

If anyone asks me for an example of how stock-picking can generate life-changing wealth, I usually direct them to FTSE 250 fantasy figurine maker Games Workshop (LSE: GAW). In five years, the company’s share price has climbed over 2,300%.

Hindsight’s a wonderful thing, of course. Moreover, what happened in the past is no guarantee of what will happen in the future.

So, the question is, would I buy now? Based on the numbers released by the company today, the answer would likely be in the affirmative.

Profits rocket at this FTSE 250 stock

Stuck indoors due to multiple UK lockdowns, it was only natural fans of GAW would turn to their games to pass the time. As a result, revenue climbed 31% to a little above £353m over the year to 30 May. That’s impressive considering Games Workshop had to close its physical stores for a hefty proportion of those 12 months.

As you might expect, GAW’s online offering took up the slack. Sales via this channel increased 70%, ultimately helping pre-tax profit to rock almost 69% higher to £150.9m. 

Strong growth ambitions

So can GAW keep growing? Management certainly thinks so. Looking ahead, the company said it would aim to increase its presence “in every major country in the world” and “search for customers everywhere.“

Hyperbole aside, China and Japan look to be key targets with the FTSE 250 firm planning to open Warhammer store/cafes in Shanghai and Tokyo in 2021/22. These should lead to greater customer engagement and, consequently, sales. GAW also said today it was committed to opening 10 Warhammer stores per year in North America.

Combine all this with the launch of several video games, live action/animation shows and a fresh online store and I think the future looks very positive indeed.

Have we seen the top?

Even so, there are a few arguments for searching elsewhere in the market for promising investment opportunities. First, there’s the near-term outlook.

Having benefitted from more people spending time indoors over 2020/21, sales may now begin to moderate as people spend their cash on outdoor pursuits. This — combined with today’s weakness in the FTSE 250 as a whole — may help explain why Games Workshop shares were down more than 4% in early trading.

Second, there’s the price. Before markets opened this morning, GAW shares were trading at an analyst consensus of 31 times forecast earnings. That’s certainly isn’t cheap. If markets were to sour over the rest of 2021, it’s arguably the highly-priced stocks — where expectations are highest — that’ll suffer the most. 

Third, investors need to consider just how big Games Workshop has now become. A market capitalisation of £4bn is approaching FTSE 100 territory. If I were seeking companies that were capable of doubling their share prices over a short period of time, I’d likely need to look lower down the market spectrum.

Long-term hold

To his credit, CEO Kevin Rountree reflected today that the company isn’t concerned with “any short-term share price volatility or the weather.” As a Foolish, long-term investor, I know I should adopt the same approach. So, on balance, I’d be happy to buy the shares for my own portfolio today.

With its disciplined finances, high-profit margins and incredible returns on capital, I suspect this is one FTSE 250 stock that’ll go on delivering the goods.

The post 1 FTSE 250 growth stock I’d buy today appeared first on The Twelfth Magpie.

More reading

• Forget SpaceX shares! I’d rather buy these FTSE 100 growth heroes
• Just 103 shares of this FTSE 100 stock unlocks a £500 passive income!
• Turning a £20k ISA into a £12,508 second income
• Is a passive global index fund all I need for my SIPP?
• How big does an ISA need to be to generate a £1,000-a-month second income?

Paul Summers has no position in any of the shares mentioned. The Motley Fool UK owns shares of and has recommended Games Workshop. 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.

Record sales!

According to Frontier, strong sales of games and downloadable content in what remained of the previous financial year (to 31 May) has helped bring revenue to roughly £91m. This is impressive for two reasons. First, it’s a record figure. Second, the company has managed this feat without any new franchise announcements. 

It gets even better for those invested. Today, CEO David Braben said Frontier plans to grow sales over the next financial year “by 50% above the record revenue just achieved.” This may sound fanciful. However, based on recent news, I think this target might actually be achieved. 

New games announced

Yesterday, Frontier announced it was working on a sequel to its immensely popular 2018 game, Jurassic World Evolution. The dinosaur park management simulation is currently scheduled for release this year. Featuring the voices of actors from the related Hollywood movies, the game will be available on all major platforms.

But Frontier’s line-up for FY22 doesn’t end there. Having been launched on PC, the mid-cap will also bring its space simulation game Elite Dangerous: Odyssey to Playstation and Xbox consoles also this year. On top of this, “at least three new titles” from partner studios will be released via the firm’s publishing label Frontier Foundry. These include Warhammer: Chaos Gate – Daemonhunters, based on the franchise owned by Games Workshop.

Naturally, all this should do no harm to the UK growth stock’s top line. Revenue projections for FY23 now range £130m-£150m. This rises again to £160m-£180m, based on additional titles hitting the shelves.

Not all rosy

Despite this impressive schedule, today’s statement also served as a reminder that Frontier isn’t immune to setbacks. The need for staff to work from home over the last year delayed the release of the aforementioned Elite Dangerous: Odyssey. Unfortunately, this isn’t an isolated case. The release of the F1 management game had now been put back to after 1 June 2022.

There are other potential headaches. Games encounter problems even after they’ve been let loose. Back in May, the company had to spend 36 hours fixing a fault on its latest title that prevented some players from getting their gaming fix. At such a pivotal point in a game’s lifecycle, that’s clearly not ideal.

Factor in ongoing competition and an already-rich valuation and it’s perhaps no surprise that some investors were banking profit today. Despite sales and news on a highly-anticipated title, Frontier’s share price is down nearly 8%, as I type. 

Bottom line

Personally, I see this as an opportunity for me to climb on board. Gaming is already worth more than the music and movie sectors combined and I can’t see this popularity flagging in the years ahead. Indeed, along with automation, clean energy and electric vehicles, I suspect this sector will prove one of the key investing megatrends over the next decade.

As such, I’d be comfortable taking a stake in this UK growth stock now. Should the reversal in the share price continue, I’ll back up the truck.

The post 1 UK growth stock to buy now appeared first on The Twelfth Magpie.

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• Back below 500p, is it time to consider BP shares again?
• Is there any value left in Lloyds shares now they’re over £1?
• How much would I need in a Stocks and Shares ISA to target £19,036 a year in second income?
• After huge new nuclear deals, are Rolls-Royce’s sub-£15 shares set to power higher?
• This 7.5% yielding passive income share is at a 13-year low! Time to consider buying?

Paul Summers has no position in any of the shares mentioned. The Motley Fool UK owns shares of and has recommended Games Workshop. The Motley Fool UK has recommended Frontier Developments. 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.

On song

Last Friday’s trading update from music software specialist Focusrite (LSE: TUNE) was more good news for existing holders. 

A trusted brand among amateurs and professionals, Focusrite’s products continue to fly out of warehouses. Trading has been so good that revenue, profits and cash are ahead of where management predicted they would be at this stage of the financial year. As a result, the £600m cap suspects it will exceed current market expectations. It also confirmed it has cleared all bank debt.

Naturally, this good news hasn’t gone unnoticed. The valuation is now 28 times forecast earnings. That’s punchy given the global shortage of semiconductors (of which it uses a lot) and the impact this could have on trading. Another thing to consider is whether Focusrite’s existing holders will begin banking profits as restrictions are lifted. So I’m watching from the sidelines for now.  

Purple patch

It’s hard to talk about quality stocks and not mention Games Workshop (LSE: GAW). After all, the FTSE 250 member has been one of the best performing UK growth shares over the last five years. 

Based on recent trading, it looks like this purple patch can continue. January’s half-year report revealed a 26% rise in revenue and 56% increase in pre-tax profit compared to the same period in the previous year. 

I feel GAW possesses many of the hallmarks of a stonking business. It generates high margins and returns on capital. It’s also cash-rich and the clear leader in a niche market. Once again, however, the valuation is far from cheap at 29 times forecast earnings. Like Focusrite, there’s also a chance trading could normalise once restrictions are lifted. In such circumstances, one might expect food and beverage firms, holiday companies and airlines to make the biggest gains. Fantasy figurine makers? Perhaps not.

Again, I’m not inclined to buy right now but I will be backing up the truck in the event of a sustained fall in the wider market.

Outperforming

The last of the UK growth shares I’d be interested in buying would be ingredients provider Treatt (LSE: TET). Similar to Focusrite and Games Workshop, its shares have been on a tear since the market crash. They’re up 200% in just eleven months.

There’s no shortage of reasons for staying bullish either. Trading in FY21 to date has been “significantly better than expected” and supported by new business wins in the fast-growing global alcoholic seltzer category. This has, in turn, led Treatt’s management to predict that pre-tax profit is now likely to “materially exceed” the £15.1m currently pencilled in by analysts. 

Even so, none of this can be guaranteed. After all, parts of Treatt’s portfolio continue to be affected by the ongoing closure of hospitality venues around the world. A valuation of 38 times forecast earnings also suggests a lot of good news is already priced in. 

It stays on the watchlist for now but if UK growth shares see their prices falling, I’ll jump in.

The post Top UK growth shares to buy if this market bubble bursts appeared first on The Twelfth Magpie.

More reading

• Forget SpaceX shares! I’d rather buy these FTSE 100 growth heroes
• Just 103 shares of this FTSE 100 stock unlocks a £500 passive income!
• Turning a £20k ISA into a £12,508 second income
• Is a passive global index fund all I need for my SIPP?
• How big does an ISA need to be to generate a £1,000-a-month second income?

Paul Summers has no position in any of the shares mentioned. The Motley Fool UK owns shares of Games Workshop. The Motley Fool UK has recommended Focusrite and Treatt. 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.

With the shares hitting a fresh record high this morning following the release of its latest set of full-year results, is now a good time for new investors to get involved? Yes and no.  

Record results

When the CEO of a company includes the words, “Wow, what a year!” in his report, you get an inkling of just how positive trading has been.

Despite the coronavirus forcing it to close for business on 24 March, Games still managed to grow sales by 5.1% to 269.7m in the year to the end of May. At £89.4m, pre-tax profit was 10% higher. This was, in short, the best year of trading in the company’s history.  

This is not to say that the Games hasn’t been forced to adapt. In response to the pandemic, it took advantage of the government’s furlough scheme, which the Nottingham-based business is now in the process of repaying. To further mitigate the impact of the virus, Games has also paused shop openings “for the foreseeable future” to concentrate on supporting existing stores back to health.

Having said this, the company did say that it would continue to invest in its IT systems, warehouses and online offering. Sales from the latter “continue to go from strength to strength“, according to management. 

Quality UK stock 

In a market stuffed with companies that overpromise and underperform, Games Workshop is the stuff investors dream of. It boasts stonkingly high margins and a very strong financial position. It’s a clear leader in a niche market and has an exceptionally loyal following.

Importantly, the company also generates superb returns on capital. In other words, it makes great money on what it invests in itself. As Warren Buffett, Terry Smith and Nick Train have all said, this is one of the best ways of identifying businesses that could potentially change your life. 

There’s just one problem: the price you must pay to acquire firms with these characteristics is usually high. Games is no exception.

Punchy valuation

A forecast price-to-earnings (P/E) ratio of 47 for the new (current) year is undeniably punchy. This is also before taking into account the near-10% rise in the share price in early trading this morning. 

To be willing to pay such a price you need to be very confident that the company will continue to grow at a very fast rate. Although I’m bullish on the potential for it to exploit its intellectual property in a number of ways (video games, films) and grow the Warhammer brand in markets such as China and North America, it does feel like quite a bit of this is already priced in.  

Factor in concerns surrounding the possibility of a second coronavirus wave and the ongoing saga that is Brexit and I’d be wary of going ‘all-in’ on this top UK stock right now.

Should markets crash again like they did in March, however, I’ll be backing the truck up. 

The post Wow! £5,000 invested in this top UK stock in 2016 would be worth this much today appeared first on The Twelfth Magpie.

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Paul Summers has no position in any of the shares mentioned. The Motley Fool UK has no position in any of the shares mentioned. Views expressed on the companies mentioned in this article are those of the writer and therefore may differ from the official recommendations we make in our subscription services such as Share Advisor, Hidden Winners and Pro. Here at The Motley Fool we believe that considering a diverse range of insights makes us better investors.

Today, I’m looking at two such examples, one of which has just released its latest set of results to the market.

Overseas growth

I last looked at global identity data intelligence business GB Group (LSE: GBG) in July. Since then, investors have continued to bid the share price up another 12%, demonstrating why buying pricey stocks with great momentum can still be a winning strategy.

This gain is nothing, however, compared to what some long-term investors will have achieved. Had you purchased the stock five years ago and done nothing, you’d be sitting on a gain of around 350%. Based on today’s numbers for the six months to the end of September, I wouldn’t be surprised if those invested for years rather than months continued to benefit. 

Thanks to “strong organic performance” in all of its solutions (Location, Identity and Fraud) and a boost from recent acquisitions, revenue increased 62% to £94.3m over the period. Interestingly, overseas sales represented a larger proportion of total business (57%) compared to revenues from the UK for the first time. That’s encouraging, especially for those who have concerns about the state of the UK economy in the aftermath of Brexit (assuming it happens). Post-tax profit doubled to £5.7m. 

Importantly, this kind of performance looks set to continue. According to CEO Chris Clark, GB has performed in line with expectations so far in the second half of the year and management suspects the company will hit analyst expectations.   

Once again, however, I would caution anyone interested in only holding the shares temporarily to consider the valuation first. A great company isn’t necessarily a great investment if the price tag is too high. At almost 39 times earnings before markets opened this morning, a lot of positive news looks priced in. Upward momentum is all very well but it can quickly reverse if there’s a lack of buyers. 

Fantasy stock

Another stock whose share price has grown considerably over the last few years is fantasy figure maker Games Workshop (LSE: GAW). Actually, that’s something of an understatement. Go back five years, and the stock was trading around 500p. Today, the very same shares are priced at a staggering 5,800p!

Can this kind of growth be sustained? Quite possibly. The company still has a lot of what it labels “green field territory” to infiltrate around the world (particularly in Asia) and ways of exploiting its brand and intellectual property. And, as my Foolish colleague Roland Head reported earlier this month, recent trading has been nothing short of superb. 

Valuation-wise, Games Workshop now trades on 25 times earnings. That’s clearly not cheap, but I do think it’s justified based on the aforementioned growth potential and the fact the £1.9bn-cap makes the sort of operating margins and returns on invested capital that most businesses would kill for, including GB Group. It also has zero debt.

There’ll be some inevitable volatility on the way but, for me, Games Workshop continues to be a high-quality stock that deserves to be owned for the long term. 

The post I think these multi-bagging growth stocks show the power of buying small appeared first on The Twelfth Magpie.

More reading

• Forget SpaceX shares! I’d rather buy these FTSE 100 growth heroes
• Just 103 shares of this FTSE 100 stock unlocks a £500 passive income!
• Turning a £20k ISA into a £12,508 second income
• Is a passive global index fund all I need for my SIPP?
• How big does an ISA need to be to generate a £1,000-a-month second income?

Paul Summers owns shares of Games Workshop. The Motley Fool UK has no position in any of the shares mentioned. Views expressed on the companies mentioned in this article are those of the writer and therefore may differ from the official recommendations we make in our subscription services such as Share Advisor, Hidden Winners and Pro. Here at The Motley Fool we believe that considering a diverse range of insights makes us better investors.