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I’ve stocked up on this UK share for 2022

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This year has been a good one for many shares. My top British share pick for the year was S4 Capital (LSE: SFOR). So far this year, it’s up 21% as of Friday. Over 12 months the increase has been 33%. That’s impressive, but some earlier growth was reversed by a recent sharp correction. Towards the end of September, my pick was up 73% since the start of 2021! I’ve been using the current dip to stock up my portfolio with this UK share for 2022. Here’s why.

Why are the shares falling?

Something odd about the fall in the S4 Capital share price over the past few weeks is that it has largely been in response to trading results, which frankly were spectacular. The company again affirmed its commitment to its current three-year plan of doubling revenue and profit. On top of that, the digital advertising company has been continuing to grow fast by acquisition. It has announced 11 such deals so far in 2021.

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As a sign of S4’s performance, consider this line from its trading statement: “Company trading in line with external top-line expectations, surpassing the third guidance revision to 40% from 25% at the beginning of 2021”. That’s right — S4 has blown growth through expectations despite them already being raised on multiple occasions this year. Yet still the third quarter trading statement was met with dissatisfaction among investors. Why?

Share price dynamics

I think, partly, the sell-off reflected investor keenness to take a profit after watching the S4 share price climb over the past couple of years. But I also think it showed real concern about two points. First, given the lack of an expectations upgrade or acquisition announcement with the trading statement, is the S4 growth engine slowing down? Secondly, the company’s plans to invest more in systems and people as it grows will likely hurt reduce profit margins.

I’d rather have good news when it is real than have management engineer it to coincide with each trading statement. I don’t have any doubts that S4 remains committed to urgent growth, so the first market concern doesn’t bother me. As for lower profit margins, I think that is the price to pay to bring the organisational capability in line with its larger size. That’s necessary to service clients at the right level, in my view. 

Why I’ve bought this UK share for 2022

In fact, I believe my bull case on S4 Capital remains intact. I expect its strong growth to continue both organically and through acquisition. The company’s digital focus will allow it to benefit from increasing demand for digital marketing. As it gains further scale like it has done this year, it should be able to win mandates from ever bigger clients.

I expect great things from S4 in 2022. So I see the recent share price pullback as a buying opportunity. That’s why I added to my position in the company this past week when it traded close to £6 per share. There are definitely risks here, including the profit margin dilution and risk that growing too fast could hurt work quality. That might dent revenues if clients are unhappy. But I continue to see upside in the S4 Capital share price and maintain high hopes for this UK share in 2022.

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Christopher Ruane owns shares in S4 Capital. 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.

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