All stock market bubbles pop eventually and I suspect there’s a decent chance this will happen ‘across the pond’ in 2021. Since indexes tend to move in tandem, this may affect share prices here and provide me with a perfect opportunity to buy some of the best UK growth shares at a discount. Here are three I’d definitely be interested in snapping up.
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.
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.
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.
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.