If I had known five years ago that buying a UK growth stock and holding it until now would have more than tripled my investment already, I would have purchased it! But what if I bought it today?
Nobody knows what will happen in future. But in the case of this particular growth stock, I do see continued grounds for optimism about its business prospects. I would consider buying it for my portfolio to hold for the next five years — or even longer.
Warren Buffett-style moat
The company in question is Judges Scientific (LSE: JDG).
Many may not even have heard of it, as it is a niche business-to-business manufacturer specialising in scientific instruments. That may not sound very exciting – but from an investment perspective, I think that it is.
Here is why. Judges applies strict criteria to buying small makers of instruments that come up for sale, for example when the founder retires. So while the firm skips overpriced deals, it is able to buy some quality companies at competitive valuations.
By bringing them into a wider organisation, Judges can supply capital and management expertise to help accelerate growth in a cost-effective way.
But why are scientific instruments an attractive industry to start with? The reason is that precision (and therefore quality) matters. That gives a manufacturer like Judges a Warren Buffett-style moat, plus pricing power.
Impressive financial performance
The proof of the pudding is in the eating.
While the Judges Scientific share price has performed well over the past five years, that simply reflects the impressive business performance over that time. In the five years to 2021, revenues grew 59%, adjusted operating profit was up 154% and the dividend increased by 140%.
There is a lot to like there, in my opinion. The revenue growth was solid. But I think what is more interesting is the way in which profit growth outpaced the increase in revenues. That suggests the Judges model of providing centralised services that can help subsidiaries grow, without increasing their cost base at the same pace, is delivering.
Not only do I think Judges’ model has delivered well, I think it could continue to do so. Demand for scientific instruments from users like industrial labs and universities is likely to be resilient even in an economic downturn.
But there are still risks. Inflation could eat into profit margins. Ongoing travel restrictions for some markets like China could also hurt sales as engineers may not be able to do site visits and install instruments.
Why I’d still buy this growth stock
Still, Judges has seen its share price increase by 272% in the past five years. Although the past year’s increase of 9% was far more modest, Judges has clearly rewarded long-term shareholders handsomely.
It now trades on a price-to-earnings ratio of 38. That is quite a bit pricier than I would normally consider when buying shares for my portfolio. Yet I would be willing to buy. Why? I think it has the hallmarks of a classic growth stock. It benefits from a focused, smart business model meeting real customer needs in a way that gives it pricing power. Unlike some growth shares, though, Judges is consistently profitable. I believe its distinctive business model can deliver more earnings growth in future.
