This year, a lot of UK-listed growth stocks have been crushed. This is particularly true in the small-cap arena, where many shares are down 20%, or more. AIM-listed power cords and cables company Volex (LSE: VLX) – which I hold in my own portfolio – is a great example here. Year to date, it’s down about 26%. As a result of this fall, it’s nearly 50% off its highs.
After this big share price fall, Volex shares now look very cheap. So I plan to buy more of them for my portfolio. Here’s why I’m bullish.
Why I invested in this growth stock
What I like about Volex, from an investment point of view, is that it has exposure to a number of growth industries. Volex’s products are used to power and operate electric vehicles (EVs), medical equipment, data centres, and more. So there’s a long-term growth story here. It’s the EV segment I’m most excited about. Last financial year, revenue in this segment nearly doubled.
I also like the fact that management has ‘skin in the game’. The company is run by executive chairmen Nat Rothschild, and he owns around 39m VLX shares. Meanwhile, COO John Molloy owns around 2.3m shares. So it’s in their interests to get revenues, profits, and the share price up.
Positive trading update
A recent trading update from Volex, posted on 19 August, was quite encouraging, in my view. In this update, management said that the group had made a “strong start” to FY2023, and made continued progress across the business.
It said that revenues grew organically by 4.9% in the quarter ended 30 June, driven by positive customer demand and the company’s ability to deliver against the backdrop of a challenging supply chain environment.
Volex noted that its end markets (EVs, medical, data centre, etc) provide the group with a high degree of resilience. It added that next-generation high speed cable volumes are expected to increase in future periods as customers accelerate their technology replacement programmes.
Low valuation
Turning to the valuation, analysts expect Volex to generate earnings per share of $0.27 this year. This means that, at the current share price and exchange rate, the stock has a forward-looking P/E ratio of around 11. I think there’s a lot of value on offer at that multiple, given the rate at which the company is growing.
Risks
Of course, there are risks to consider here. The main one, to my mind, is inventory issues. Recently, a lot of companies have experienced issues with excess inventory. Semiconductor companies are a good example.
There have been no signs of this issue here yet. But we can’t rule it out. It’s worth noting that the company recently said it had “higher inventory levels than the previous year” in order to support the timely delivery of complex products to customers.
The other main risk is debt. Recently, Volex has made a few acquisitions and this has increased its leverage. With interest rates rising, this debt is going to be more expensive to pay off.
I’ll be buying more
With the stock now trading on a P/E of around 11 though, I think the risk/reward for a long-term investor like myself is appealing. That’s why I plan to buy more shares for my portfolio.
