Last month, I bought a new stock for my UK growth portfolio. The company I invested in was Volex (LSE: VLX), a manufacturer of power cords and cables that serves a range of markets, including the electric vehicle (EV) and the cloud computing industries. Here’s a look at why I bought the shares.
Why I bought Volex shares for my ISA
There are a number of things I like about Volex. For starters, I like the fact that the company serves a range of high-growth markets. Last year, 12% of its revenues came from EV charging components (revenue in the EV segment was up 193% year-on-year). Meanwhile, 10% of revenue came from data centres (cloud computing) and 25% came from the medical industry.
With this mix of end markets, I think Volex is well positioned to generate long-term growth. Between now and 2030, the EV charging market is projected to grow by around 26% per year. Meanwhile, between now and 2026, the data centre market is projected to grow by around 14% per year. The growth of these two industries should provide huge tailwinds for Volex in the years ahead.
As for the medical industry, I’m expecting activity to pick up after a dip during Covid-19. And in the long run, I expect the growth of robotic surgery to boost demand for Volex’s products.
I also like the look of the company’s financials. Between FY18 and FY21, revenue climbed from $322m to $443m. This year (ending 4 April 2022), analysts expect revenue of $528m. Over the FY18 to FY21 period, profitability increased significantly, with the group’s operating margin climbing from 2.7% to 6.9%.
Looking at the balance sheet, the company appears to have financial strength. At the end of the last financial year, total debt was $64m. By contrast, total equity was $184m.
Finally, I like the fact that insiders have been loading up on Volex stock recently.
Last month, Executive Chairman and major shareholder Nat Rothschild (who made a number of well-timed purchases last year) bought 60,000 VLX shares at a price of £4.18 per share, spending around £250k on the stock.
And in late August, COO John Molloy picked up 61,000 shares at £3.90 per share, spending about £240k on the stock.
This insider buying is very encouraging, to my mind. It suggests that those within the company are confident about its future and that they expect the stock to rise.
Of course, there are risks to consider here. Inflation and supply chain challenges are two that come to mind. At its AGM in July, Volex said: “We remain mindful of the potential impact on trading caused by supply chain shortages, material cost inflation and freight challenges, as well as the ongoing operational issues posed by the Covid-19 pandemic.”
Customer risk is also worth keeping an eye on. Last year, one medical customer was responsible for 15% of revenues.
Overall however, I think the long-term risk/reward proposition here looks very attractive. With the forward-looking P/E ratio sitting at a reasonable 24 after a recent share price pullback, I took the opportunity to buy the stock for my portfolio.