Premium content from Motley Fool Hidden Winners UK
Our monthly Best Buys Now are designed to highlight our team’s three favourite, most timely Buys from our growing list of small-cap recommendations, to help Fools build out their stock portfolios.
“Best Buys Now” Pick #1:
Focusrite (LSE:TUNE)
Why we like it: “Focusrite (LSE: TUNE) is dedicated to using high-end technology in its goal to ‘make music easy to make’, building on former Led Zeppelin sound engineer, and the company’s executive chairman, Phil Dudderidge’s vision for the business. Focusrite produces state-of-the-art audio hardware and software for both influential artists and devoted hobbyists. It has an enviable track record of revenue growth, margin expansion and high returns on investment.
“It has spent decades building up its product line to reach everyone, from professional musicians to would-be Led Zeppelins in their parents’ garages and everyone in between. We believe this focus on providing high-end equipment at a variety of price points for customers all over the globe is a solid base upon which the firm can continue to grow organically and via selective acquisitions.”
Why we like it now: After losing over half its market value in the last 12-months, Focusrite is currently trading at a P/E ratio of 13.5. Net debt increased to £14m at the end of its first half, reflecting a rise in inventory. However, debt remains manageable with a bank credit line totalling £40m in place. Management anticipates gross margin improvements in the second half, driven by new product launches and a strengthened supply chain resulting from last year’s acquisition of Linea Research. By capitalising on the reduced share price, investors could have the potential to enjoy significant gains as the company’s performance recovers. This recovery is expected due to the growing demand for high-quality audio equipment across various sectors, including music production, podcasting, and live streaming.
