I’ve always had a soft spot for online musical instrument and equipment retailer and growth stock Gear4music (LSE: G4M). Unfortunately, today’s interim results from the small-cap have been poorly received by the market and the share price tanked 20% as trading commenced. What’s got investors so spooked?

Bum note

Revenue over the six months to the end of September came in at £64.7m. This was down 8% on the same period in 2020. However, one must remember that G4M benefited hugely from multiple UK lockdowns over that time. As such, beating that haul would always be a challenge. Earnings before interest, tax, depreciation and amortisation (EBITDA) also fell 43% to £4.8m.

On a more positive note, revenue and EBITDA were still 31% and 140% higher respectively than in the same six months in 2019. For me, this is a better gauge of how far the company has come. 

Here’s where things get more problematic. While the dip in sales was inevitable, investors didn’t like the news that revenue over G4M’s third quarter to date has been “slower than expected due to ongoing Brexit supply chain challenges“. Sales in Europe had also been slower than predicted.

This loss of momentum has forced CEO Andrew Wass and co to revise their guidance for the full financial year. EBITDA of “not less than £12m” is now expected — 36% lower than last year. It’s also lower than the £14m projected by analysts.

All this doesn’t look great, especially as the company only upgraded its forecasts back in June following a storming Q1. Nevertheless, G4M does expect the aforementioned challenges to be sorted out by the final quarter as its new distribution hubs in Ireland and Spain get up to speed.

Clearly, a successful pre-Christmas trading period is vital if the shares aren’t to fall further. However, I’m inclined to think that today’s fall is simply a bum note. The unstoppable rise of online shopping, even for very specific items like instruments, should allow G4M to continue grabbing market share. The proposed move into the audio-video space via the acquisition of AV Distribution Ltd is also a sensible move and should help to diversify earnings. 

There’s still much to like about this growth stock and I’d be willing to buy at this level.

On song

G4M is not the only music-related growth stock out there. Another company — audio products supplier Focusrite (LSE: TUNE) — also reported to the market this morning.

In sharp contrast to G4M, TUNE reported a 34% jump in revenue to just under £174m. Adjusted EBITDA also soared 67% higher to £47.5m as musicians and podcasters snapped up Focurite’s products “in record numbers” over lockdowns.

There could be more good news to come. As live events return, CEO Tim Carroll said that demand had “remained strong” into the new financial year. Product launches also make him “cautiously optimistic” on achieving “modest revenue growth“. However, operating costs are expected to rise, partly in light of supply chain pressures.

Of the two growth stocks mentioned, I’d probably snap up G4M over TUNE. I’ve always felt that the latter’s valuation was getting ahead of itself. Even before today’s 8% rise, the stock was trading on 39 times forecast earnings. As good a company as this is, that’s very rich.

For me, G4M probably offers a better margin of safety.

The post The Gear4music (G4M) share price just crashed. I’d buy this growth stock now appeared first on The Twelfth Magpie.

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• How much is needed in an ISA to unlock £1,220 of passive income a year?
• Forget meal deals! Here’s how £8 a day could be worth £357,000
• Up 132% and surging, how is this FTSE 250 share STILL so cheap?

Paul Summers has no position in any of the shares mentioned. The Motley Fool UK has recommended Focusrite and Gear4music. 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.

Earlier today, my Foolish colleague Andy Ross explained why the THG (LSE: THG) share price had tanked yesterday afternoon. In a nutshell, it followed a poorly received presentation during which founder Matthew Moulding failed to give institutional investors clarity on a number of things. He also took a swipe at hedge funds supposedly betting against his business. 

Having fallen an eye-watering 65% in value in just 12 months, is this a golden opportunity for me to snap up the stock on the cheap or a warning to steer clear? I think it’s very much the latter.

THG share price: blame the shorters?

Not providing analysts with what they expect is never likely to impress. Using a platform to publicly blame hedge funds for poor performance instead feels even worse, especially as only one has actually declared a short position against the company (Psquared Asset Management). I somehow doubt it will be the last.

Instead, Moulding should really be addressing concerns that Japanese investment firm SoftBank‘s interest in the company might be waning. Given the cost involved, better justification for wanting to spin off THG’s beauty division so soon would also be ideal. The market’s reaction, while undeniably brutal, is understandable.

For me, the capitulation of the THG share price only serves to reinforce a few rules I have about IPOs, namely ‘don’t believe the hype’ and ‘wait for things to settle’. This is particularly true for unprofitable companies.

Personally, I can think of many other UK-listed growth stocks with an online focus that I’d rather invest in right now. One such candidate — musical instrument retailer Gear4music (LSE: G4M) — reported to the market this morning. 

Back on song

I’ve been a fan of this company way before the word ‘coronavirus’ entered our lexicon. Of course, we now know that multiple UK lockdowns turned out to be a boon for the York-based business. Its shares duly rose from around 150p in March 2020 to over the 1,000p mark by this July.

Since then, the volume of chatter around the stock has inevitably declined and profit-taking has commenced. Notwithstanding this, today’s update on trading over the six months to the end of September read well to me. 

At £64.7m, total sales may have been 8% below that achieved over the same period last year. However, this was always going to be a tough comparative to beat. Personally, I prefer to focus on this figure being 31% above that achieved in pre-Covid 2019. For me, this shows just how well management is executing its growth strategy. 

As one might expect, G4M hasn’t been immune to headwinds. A 16% fall in sales in Europe was attributed to “post-Brexit challenges“. On a more positive note, two new distribution centres in Ireland and Spain are now operational and should help address this going forward.

Perhaps most encouragingly, CEO Andrew Wass stated that the company was “well placed” to deal with the ongoing supply chain crisis after “deliberately” increasing inventory in advance to the tune of £30.4m. As such, G4M’s founder is confident that full-year numbers will meet analyst expectations.

With its peak trading period fast approaching and a home cinema and hifi-focused site launching in January (AV.com), I’m bullish on the outlook for G4M stock.

But quite where the THG share price goes from here is anyone’s guess. Over to you, Mr Moulding.

The post Forget the THG share price! I’d buy this growth stock instead appeared first on The Twelfth Magpie.

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• Forget meal deals! Here’s how £8 a day could be worth £357,000
• Up 132% and surging, how is this FTSE 250 share STILL so cheap?

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.

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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• Forget meal deals! Here’s how £8 a day could be worth £357,000
• Up 132% and surging, how is this FTSE 250 share STILL so cheap?

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.

“Exceptional financial performance”

Today, G4M said the company had delivered an “exceptional financial performance” despite the hurdles caused by Covid-19 and our exit from the EU.

Thanks, in part, to high street retailers being forced to shut up shop, revenue jumped 31% to £157.5m in the 12 months to the end of March. The number of active customers served by G4M’s multilingual, multicurrency websites grew by almost the same percentage, to 1.06 million.

It gets better. Earnings before interest, tax depreciation and amortisation (EBITDA) soared 154% to £19.8m. The latter was ahead of what analysts were expecting the AIM-listed firm to deliver.

So, what does the future hold for Gear4music? Well, here’s where things get interesting.

Beating expectations

Since more UK lockdowns look very unlikely, G4M’s management doesn’t expect trading in the first six months of FY22 to match that seen in FY21. As a consequence, profits will likely be lower. 

Taken on its own, this might be enough to generate a drop in the share price. After all, the company is effectively saying it’s hit a high note and all the good news is now priced in. However, the opposite has actually happened this morning. I think there are three reasons for this.

First, the UK growth stock had already flagged the possibility that trading would moderate, helping to cushion the blow as/when it happens.

Second, it was announced today that trading in the first quarter had been “stronger than the Board previously expected.” As a result, the company went on to say that financial results for the FY22 would now be better than first thought. 

Third, G4M’s growth strategy remains compelling. It is now preparing to launch two new distribution hubs in Ireland and Spain. These will complement those it already has in North Yorkshire, Sweden and Germany.

On top of organic growth, the company has also begun making acquisitions. Drum brand Premier and bass amp brand Eden have already been snapped up. I wouldn’t be surprised if the company continues adding to its portfolio over the next 12 months. Finances are certainly solid enough to allow this (it held net cash of £2.7m in March).

Risks

G4M’s shares were up over 4% in early trading. The question is, will these gains stick? I’m bullish for the reasons mentioned above. However, the shares are certainly not devoid of risk.

Unlike some retailers, G4M doesn’t strike me as one that most people will visit on a weekly basis. More generally, shoppers will be wanting to spend their cash on things they’ve not been able to do. Both need to be borne in mind by prospective investors. This is even more important given the frothy-looking valuation (44 times forecast earnings, before markets opened).

I also suspect a few investors will decide to bank some profit. After all, the stock has climbed over 200% in just one year! The fact that G4M’s stock is less liquid than those higher up the market spectrum might exacerbate any downward pressure as well.

On balance however, I think G4M remains a very promising UK growth stock and one I’d be happy to hold for the long term.

The post If I had £1,000 to invest, here’s a top UK growth stock I’d buy now appeared first on The Twelfth Magpie.

More reading

• The £15bn defence splurge that could send UK shares soaring in July
• Up 446% in 12 months! What’s next for the Ceres Power share price?
• How much is needed in an ISA to unlock £1,220 of passive income a year?
• Forget meal deals! Here’s how £8 a day could be worth £357,000
• Up 132% and surging, how is this FTSE 250 share STILL so cheap?

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.

Halfords

Bike and car parts retailer Halfords (LSE: HFD) was a huge beneficiary of the push to exercise during lockdowns. With movement restricted and most shops and all leisure facilities closed, what could be better than peddling the misery away? Sales duly rocketed, followed by its share price.

The company, which also operates auto repair centres, releases its latest set of full-year numbers next month. While the inevitably good numbers should push the shares higher, a cautious outlook could do the opposite. After all, trading may be about to get tougher as the UK prepares to fully unlock.

Halfords faces two problems: those with bikes won’t be in a hurry to replace them and people now want to spend their money on things they’ve been itching to do. On top of this, it still presents as a pretty unexceptional company without last year’s unexpected tailwind. Margins are low. Returns on capital — what it makes on the money it invests in itself — are also very average.

I wouldn’t buy and might even sell some if I needed cash to invest in what I see as a better growth pick.

AO World

Another company that’s done well out of the pandemic has been online domestic appliance seller AO World (LSE: AO). In fact, it was one of the best-performing UK shares last year. The share price rocketed from 57p a pop in April 2020 to 411p a share by 31 December.

Since then, however, we’ve seen sentiment turn. I don’t think this is surprising. CEO John Roberts is confident that AO will “continue to be a double-digit growth business in the year ahead,” but the market seems to think otherwise. On 29 times earnings, the stock also looks pretty expensive for a company with no discernible moat or market-leading position. Will customers remain loyal? I’m sceptical.  

Prior to Covid-19, AO was a loss-making, ‘jam tomorrow’ stock. Without evidence that it can continue to thrive in normal market conditions, I’d be taking some profit here if I hadn’t already started doing so.

Gear4music

Multiple UK lockdowns have also been kind to online musical instrument seller Gear4music (LSE: G4M). Over the last year, the share price has leapt 225%! The question now is whether this momentum can be sustained after the company reports to the market on 22 June.

Like Halfords, Gear4music faces some tough comparisons going forward. While playing music can be a lifelong pursuit, one has to wonder whether people have all the guitars, drums and trumpets they need for now. G4M’s small-cap status also means it’s more susceptible to big share price moves compared to the average FTSE 100 juggernaut. If investors get nervous, the party could be (temporarily) over.

But the long-term growth prospects are surely excellent thanks to the gradual reduction of independent musical instrument retailers on the high street. For this reason, I’d be happy to hold this UK share. If the shares fall back next month, I’d back up the truck and buy too.

The post Would I buy or sell these top-performing UK shares? appeared first on The Twelfth Magpie.

More reading

• The £15bn defence splurge that could send UK shares soaring in July
• Up 446% in 12 months! What’s next for the Ceres Power share price?
• How much is needed in an ISA to unlock £1,220 of passive income a year?
• Forget meal deals! Here’s how £8 a day could be worth £357,000
• Up 132% and surging, how is this FTSE 250 share STILL so cheap?

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.

Tumbling demand

Play on!

Of course, if I’m looking for a beneficiary rather than a victim of the multiple lockdowns, I can look no further than online musical instrument retailer Gear4music (LSE: G4M).

Back in November, I said that the company would continue to benefit from more people spending time at home and that has proved to be the case. 

At £52.2m, total sales were up 30% over the three months to the end of 2020. Overseas sales were a particular highlight, rocketing 51% higher than in 2019. UK sales rose 10% to £23m. What a contrast to Whitbread and other battered FTSE 100 stocks!

All told, gross profit rose 47% to £15.6m, leading the company to predict that earnings for FY21 would now be ahead of recently upgraded market expectations “and not less than £16.5m“. To put that in perspective, earnings for the last financial year came in at £7.8m.

Yes, this was a peak trading period and, yes, the shares are up over 500% since the dark days of March 2020. However, as CEO Andrew Wass suggested this morning, the lifting of restrictions should see other parts of the business — relating to rehearsing and performance — doing well. 

There could be some profit-taking ahead but I’d still back Gear4music to perform for investors over the medium-to-long term.

The post FTSE 100 stock Whitbread still looks a great recovery play to me! appeared first on The Twelfth Magpie.

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• Up 446% in 12 months! What’s next for the Ceres Power share price?
• How much is needed in an ISA to unlock £1,220 of passive income a year?
• Forget meal deals! Here’s how £8 a day could be worth £357,000
• Up 132% and surging, how is this FTSE 250 share STILL so cheap?

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.

Even so, this return is nothing compared to what investors could have made through careful stock-picking. Unsurprisingly, some of the biggest winners since March’s market crash have been in the small-cap arena.

Today, I’m looking at a personal favourite — online musical instrument seller Gear4music (LSE: G4M). Shares in the business are up a stunning 400% in the last eight months. Based on today’s set of interim results, it’s not hard to see why. 

Lockdown beneficiary

At £70.2m, revenue was 42% higher over the six months to the end of September than that achieved over the same period in 2019. Gross profit also soared — by 61% — to £20.1m. 

This isn’t exactly a surprise. When lockdowns were enforced in March, many of us were forced to entertain ourselves in the comfort of our own homes — a perfect scenario for companies selling products such as video games, books and, yes, musical instruments. As a consequence, Gear4music had 403,000 new customers making purchases over the six months — a 52% improvement on the previous year. 

All told, a record net profit of £4.9m for the period was reported. This compares favourably to the £0.1m loss over the same period in 2019. 

But will this form continue?

Will these impressive gains be maintained? I think so. In fact, I remain bullish on Gear4music from both a near-term and long-term perspective.

While one would suppose that many budding musicians will already have most of what they need during the second UK lockdown, news that trading in November “continues to be very strong” would suggest otherwise.

Of course, it could be that people are simply cautious on lockdown restrictions actually being lifted and are getting their Christmas shopping done online instead. Regardless, those already owning the shares will likely be encouraged by news that results for the full year are now predicted to be ahead of market expectations, which were only recently upgraded. Not many FTSE 100 constituents are saying this right now!

On a longer time horizon, the signs look equally positive. As CEO Andrew Wass commented today, more people now “appreciate the benefits that playing and creating music can bring.” Moreover, the fact that mastery of an instrument takes a long time could play into the company’s hands.

The ongoing growth in online shopping should also be good news, albeit at the expense of independent retailers on the high street. I suspect many of the latter will become casualties of 2020 and shut up shop for good.

With European hubs and distribution networks already up and running, negotiating Brexit shouldn’t be an issue either.

FTSE 100 beater

There’s certainly nothing wrong with owning a FTSE 100 tracker or exchange-traded fund. This is particularly the case for those who have little interest in the stock market. Over the long term, anyone adopting this strategy should do well so long as they reinvest the dividends they receive.

But I remain a huge advocate of buying shares in promising small-cap UK companies that can grow revenue and profits far quicker than your typical FTSE 100 giant.

For me, Gear4music continues to hit all the right notes. 

The post Forget the FTSE 100. This UK small-cap share is up 400% since markets crashed! appeared first on The Twelfth Magpie.

More reading

• The £15bn defence splurge that could send UK shares soaring in July
• Up 446% in 12 months! What’s next for the Ceres Power share price?
• How much is needed in an ISA to unlock £1,220 of passive income a year?
• Forget meal deals! Here’s how £8 a day could be worth £357,000
• Up 132% and surging, how is this FTSE 250 share STILL so cheap?

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.

Of course, there are no guarantees when it comes to investing. Here, however, are three minnows that I suspect will have rewarded investors by the time they’re ready to swap the office for the beach.

Future ISA star

As I predicted almost two months ago, online instrument supplier Gear4music (LSE: G4M) released some cracking numbers this week. The business has benefitted hugely from the lockdown with more people than ever learning and practicing music to pass the time. 

Naturally, the share price has reacted positively to news that profits have exceeded management expectations. Whether this momentum will remain near-term is hard to say. The lifting of restrictions could mean earnings have peaked for a while. 

On the other hand, the likelihood that many independent retailers on the UK’s high street will find the going tough could play into the £90m-cap’s hands. Indeed, CEO Andrew Wass has said Gear4music is “confident of continued financial improvements during FY21.“

Regardless of what happens in the rest of 2020, I remain confident this stock could prove a real winner for long-term investors.

Move fast

Another small-cap stock that could reward patient ISA investors is software company Oxford Metrics (LSE: OMG).

Already operating in over 70 countries, Oxford assists firms in measuring and capturing motion. It does this via its infrastructure management-focused Yotta division or movement analysis Vicon business.

What I particularly like about this company is the diversity of its clients. These range from highways authorities needing help to manage road networks to film studios wanting support in creating visual effects. 

Perhaps unsurprisingly, Oxford’s share price hasn’t really recovered from March’s sell-off. It’s still 33% below the all-time high hit back in February.

While recent trading is unlikely to be good, I sense now might be an opportunity for ISA holders to acquire a slice of the business whose fundamentals have been steadily improving. The balance sheet also shows no signs of distress, boasting net cash of almost £11m.

Expensive…but worth it

Last on my list of small-cap opportunities is US-focused software firm Craneware (LSE: CRW). Its tech is designed to highlight operational and financial risks to hospital managers and how they can make things more efficient.

The thing to realise about Craneware is that its valuation has always been high. Despite the recent market crash, shares still trade on a forecast price-to-earnings (P/E) ratio of 31 for FY 21 (beginning in July).

Before dismissing the company, however, it’s worth mentioning that the five-year average P/E is 36. Moreover, Craneware has consistently shown why it deserves its premium rating. Margins and returns on capital are seriously high. It also dominates its niche and carries very little debt. This all piques my interest, even if the adoption of its new analytics platform is taking longer than expected. 

Craneware’s share price could remain under pressure if we get a second Covid wave/market crash. However, I’m having trouble finding reasons to see why it won’t reward ISA investors over the long term.

The post £3k to invest? I’d buy these small-cap stocks in an ISA to retire in comfort appeared first on The Twelfth Magpie.

More reading

• The £15bn defence splurge that could send UK shares soaring in July
• Up 446% in 12 months! What’s next for the Ceres Power share price?
• How much is needed in an ISA to unlock £1,220 of passive income a year?
• Forget meal deals! Here’s how £8 a day could be worth £357,000
• Up 132% and surging, how is this FTSE 250 share STILL so cheap?

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

Cheap thrills

Video gaming has been one of the most popular activities for many during the lockdown. This should be great news for UK-listed developers, such as Frontier Developments, Sumo and Team 17. My personal choice in this space, however, is Codemasters (LSE: CDM). 

An expert in the lucrative niche that’s driving games, the firm holds the coveted Formula 1 franchise. It’s also the brains behind the popular DiRT series.

Buying an individual developer arguably takes more guts than buying a ‘picks and shovels’ stock like services provider Keywords Studios. That said, the current valuation of Codemasters surely helps mitigate this risk. Changing hands for 15 times earnings, the stock is also considerably cheaper to acquire than its aforementioned peers.

Aside from the great outlook for the games industry in general, the company has net cash in its balance sheet and will launch the much-anticipated Fast and Furious Crossroads game in 2021.  

Growth play

As both a small-cap investor and customer, I think online musical instrument and equipment retailer Gear4music (LSE: G4M) is another great selection for those with long investing horizons.

Like the video games industry, Gear4music has been a beneficiary of the lockdown. CEO Andrew Wass recently said the company had seen high demand for its products since late March “as an increasing number of people recognise the benefits that playing musical instruments can bring during these difficult times.”

Regardless of the recent boost to business, the company was already growing nicely. Total sales for the year to the end of March came in at £120.3m. Almost half of this (£58.5m) was from outside the UK, giving a good amount of geographical diversification to earnings. In line with the company’s objective, gross margin also recovered over the last year.

Gear4music’s small-cap status means its share price is likely to remain volatile, but the long-term outlook looks very promising. The relentless rise in online retail, coupled with the struggles many independent bricks and mortar instrument sellers are likely to experience going forward, could play right into the minnow’s hands. 

Reassuringly expensive

My final growth pick for today is IT re-seller and services provider Softcat (LSE: SCT). Demand for cloud-based, datacenter and networking and security solutions from organisations will surely only increase post-pandemic.

The FTSE 250 member could be the ideal way of playing this trend. Softcat already generates exceptional returns on the money it invests in itself and, again, boasts very sound finances.

Of course, the fact that the business already trades at a punchy valuation (30 times earnings) could mean it’s hit harder than most if — and that’s a mighty ‘if‘ — markets eventually resume the downward trajectory witnessed in March.

So long as you’re in for years rather than weeks, I can only see the share price going in one direction in time. Perhaps this may be one to buy into regularly, rather than in one fell swoop.

The post Have £3,000? Here are 3 top growth stocks I’d buy for my ISA appeared first on The Twelfth Magpie.

More reading

• The £15bn defence splurge that could send UK shares soaring in July
• Up 446% in 12 months! What’s next for the Ceres Power share price?
• How much is needed in an ISA to unlock £1,220 of passive income a year?
• Forget meal deals! Here’s how £8 a day could be worth £357,000
• Up 132% and surging, how is this FTSE 250 share STILL so cheap?

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

Here, I’ll discuss their turnaround prospects and give my view on whether they’re now bargains of the year, or stocks to avoid like the plague.

Back to heritage

Floated on the stock market at 185p in 2014, Saga has slumped over the last 18 months to little more than 33p (market-cap £370m). It was formally demoted from the mid-cap FTSE 250 index to the FTSE SmallCap index yesterday.

The key to Saga’s future success rests on overcoming the challenges it faces from the commoditisation of the markets in which it operates, especially in insurance. Outgoing chief executive Lance Batchelor set out a fundamental change to the group’s strategy earlier this year: “To return the whole business to its heritage as an organisation that offers differentiated products and services.”

I think this is the right approach. It is, of course, early days. But there were encouraging signs of progress in the company’s trading update at last week’s AGM, where management also confirmed the company was trading “broadly in line with expectations.” 

City consensus forecasts put the stock on a price-to-earnings ratio of just 4.4 with a prospective dividend yield of 11.4%. This looks good value to me for a potentially high-reward turnaround proposition.

And because the stock is so cheap, I also see potential for a bid from private equity or for activist investors to come in and push for a break-up of the group. I think this may limit further downside for the shares. As such, I’m inclined to rate Saga a ‘buy’ at the current level.

Missed a beat

Gear4music floated on AIM at 139p in 2015 and reached a high of over 850p in autumn 2017. The shares had already retreated to nearer 500p, before plunging 50% on a profit warning in January this year. Annual results this morning saw the price fall as much as 16%. But it’s since regained some ground, trading 8% down on the day at 212.5p (market-cap £45m), as I’m writing.

Gear4music hasn’t had the fundamental identity crisis suffered by Saga. Instead, what we’ve seen is something rather common with young, fast-growing companies. An excited market pushing the valuation of the stock up to a grossly over-exuberant level, followed by a crash when the company stumbles operationally due to its galloping growth.

In today’s results, the company said it’s confident the actions it’s taking will address the operational issues that impacted profitability last year. These issues included insufficient capacity at its York distribution centre over the peak Christmas trading period, resulting in margin-sapping, higher-than-anticipated labour and distribution costs.

While the company also noted today a “challenging retail environment,” and that “the on-going Brexit uncertainty and its impact on consumer confidence is unhelpful,” the question for investors is whether the market has overdone it in hammering down the company’s shares to the extent it has.

A valuation of less than 0.3 times forecast sales suggests so to me, and I rate the stock a ‘buy’.

The post Could the Saga share price be the bargain of the year? appeared first on The Twelfth Magpie.

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G A Chester 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.