A lot of smaller UK stocks have been crushed recently. So there could be some lucrative opportunities in the years ahead for those willing to take an active approach to investing.
One stock that has grabbed my attention recently is Sir Martin Sorrell’s digital marketing business S4 Capital (LSE: SFOR). According to analysts at Citi, it has the potential to rise more than 300% from here.
The potential for huge gains
In a research note published earlier this month, Citi’s analysts put a 230p price target on S4 Capital.
That’s 314% higher than the current share price.
Their view is that the growth stock – which has fallen more than 90% from its highs – is now offering a high-risk-yet-potentially rewarding investment opportunity.
In the research note, the analysts noted that the digital marketing company is facing some challenges right now.
However, they said that they see the potential for a medium-term business rebound.
It’s worth pointing out that if Citi’s share price target comes to pass, an investment of £2,000 in S4 Capital today could grow to around £8,300. That would obviously be a nice windfall.
I need to take brokers’ share price targets with a grain of salt though. From my experience, they’re often a little off the mark.
A turnaround play?
Now, S4 is certainly facing some challenges at the moment.
In its recent results for 2023, the company posted a 2% year-on-year fall in revenue along with a 25% drop in operational earnings before tax, interest, depreciation, and amortisation (EBITDA).
It blamed this performance on a reluctance from its tech-heavy client base to spend and a slowdown in new business wins.
As for near-term guidance, it wasn’t great. For 2024, the company expects like-for-like net revenue to be down year on year, and operational earnings to be broadly similar to 2023 levels.
The company noted that the challenging economic conditions and client caution are likely to persist in the short term, despite the fact that lower interest rates are on the horizon.
However, taking a longer-term view, S4 was optimistic that business performance will pick up.
“We remain confident that our talent, business model, strategy, and scaled client relationships position us well for above average growth in the longer term, with an emphasis on deploying free cash flow to boost shareowner returns,” said Sir Martin Sorrell.
So, for patient long-term investors, there could be an opportunity to consider here.
Currently, the company’s price-to-earnings (P/E) ratio is just 10, so there’s definitely room for a valuation re-rating if business performance improves.
A high-risk stock
That said, this stock is risky.
For starters, net debt was sitting at £181m at the end of 2023. That’s high given that operating profit was just £20m.
Secondly, artificial intelligence (AI) could be a threat to the business in the future. This could potentially have a negative impact on the company’s content business.
It’s also worth noting that last year, the company performed poorly when large technology businesses were generally doing well. This raises some questions about S4’s business model.
Given these issues, I won’t be buying S4 shares right now. For me, they’re just a bit too risky.
However, for those with a high tolerance for risk, they could be worth considering as a high-risk, high-reward play.
