The stock market is currently littered with growth stocks that have taken a battering over the past year. I believe now is a great time to try and unearth gems unfairly caught up in the carnage. One FTSE 250 company stands out to me, and its shares are right at the top of my shopping list this month.
A cheap gem
Games Workshop (LSE:GAW) continues to grow healthily as a business, yet its share price has still taken a haircut this year. The shares are down 30% so far in 2022.
However, the crafter of fantasy worlds and figurines is consistently profitable, which means the stock actually has a price-to-earnings (P/E) ratio. That ratio is currently 18. I see this as a very reasonable price to pay for an established company still growing.
Successful strategy
”Our ambitions remain clear: to make the best fantasy miniatures in the world, to engage and inspire our customers, and to sell our products globally at a profit. We intend to do this forever. Our decisions are focused on long-term success, not short-term gains.”
This comes from the company’s annual report. As a long-term investor, these words are like music to my ears. Games Workshop is a true leader in what it does. Its customers are engaged and loyal. It is a global business that operates profitably (and pays a nice 3.6% dividend too!). And it is genuinely long term in its strategy.
This strategy has worked marvellously, it should be said. Operating profit has risen around 10-fold in five years! The shares are up 300% over the same time frame despite the recent market pullback.
A mini-Disney
“We intend to do this forever.” I don’t see this as an exaggeration from management. The owner of the Warhammer franchise creates stories and characters that resonate powerfully with its devoted customers. In this respect, it reminds me of the Marvel Universe, which is owned by Disney. I view both as forever-type franchises.
Like Disney, Games Workshop successfully monetises its fan base with a never-ending variety of books, video games, merchandise, and a subscription TV channel. The company also jointly publishes comic books with Marvel. And all of this – like every individual figurine character – is bolstered by robust intellectual property (IP).
International expansion with risk
From its humble first store in London in 1978, the company today has 5,000 stores in dozens of countries, as well as its digital platform. One region with serious growth potential is Asia, where Warhammer is gaining a small but growing cult-like following.
Which brings me onto one risk I see, which is that of fake figurine replicas. Those plastic Warhammer miniatures aren’t cheap and this has created a market for illicit ”recasts”, particularly in China. This could hurt the company’s ability to raise prices moving forward.
Fortunately, though, there is a strong taboo in China around players using fake models. It’s cheating and violates the spirit of the game (as well as Games Workshop’s IP).
I wouldn’t be surprised to see Games Workshop ascend into the FTSE 100 one day. I intend to still own shares if and when that happens.
