Finding the perfect growth stock is not an easy task. There are many potential options out there but one I am currently focusing on is Avon Protection (LSE:AVON). Should I buy the shares for my holdings or avoid them? Let’s take a closer look.
Defence products
As a quick introduction, Avon is a technology business that designs, manufactures, and produces life-critical personal protection systems and products for the defence sector. Some of its best-known products include body armour and masks that many armies, security services, and police forces use around the world.
So what’s the current situation with Avon shares? Well, as I write, they’re trading for 948p. At this time last year, the stock was trading for 1,937p, which is a 51% decline over a 12-month period. The shares took a hit at the end of last year when an acquisition went badly wrong as well as the fact that one of its key armour products failed a US army test.
A growth stock with risks
Firstly, I can see Avon has a fair amount of debt on its balance sheet. This can hinder the growth of a business and Avon has had to pull back on research and development (R&D) spending due to this. R&D is a pivotal ingredient for growing any business. This is especially the case in the defence sector.
Next, defence spending is key for many governments throughout the world. However, when the state of the global economy is uncertain and a potential recession is looming like now, demand may temporarily drop. Furthermore, pre-agreed contracts can be delayed and this is a common occurrence in the defence industry. All of these issues could affect Avon’s short-term balance sheet and levels of returns.
The investment case
I always view any growth stock as a long-term investment so I’m willing to accept some shorter-term headwinds. The longer term is where I believe Avon could thrive and provide me consistent returns through growth. Here’s why.
Firstly, Avon has an excellent relationship and ties with the US Department of Defense. This relationship provides lucrative opportunities as the US government is one of the biggest defence spenders in the world.
Next, the defence landscape is changing and this should benefit Avon, in my opinion. Research indicates that global defence spending rose to record annual levels in 2021. Avon also recently confirmed that since the tragic events in Ukraine began, it has experienced heightened demand for its products.
Finally, Avon shares currently pay a dividend that would boost my passive income stream with a current dividend yield of 3.5%. I am buoyed by this but viewing it as a growth stock, I would expect this rate of return to continue to grow. Dividends are never guaranteed and can be cancelled at any time, however.
I do believe Avon could be a great growth stock to buy for my holdings. Analysts believe the future could be lucrative although I am aware forecasts don’t always come to fruition. The recent share price drop has only made it a more attractive prospect for me.
