I reckon this growth stock has untold potential!

Sumayya Mansoor explains why this growth stock caught her eye, and breaks down its defensive ability no matter the outlook.

| More on:

The content of this article was relevant at the time of publishing. Circumstances change continuously and caution should therefore be exercised when relying upon any content contained within this article.

Image source: Getty Images

When investing, your capital is at risk. The value of your investments can go down as well as up and you may get back less than you put in.

Read More

The content of this article is provided for information purposes only and is not intended to be, nor does it constitute, any form of personal advice. Investments in a currency other than sterling are exposed to currency exchange risk. Currency exchange rates are constantly changing, which may affect the value of the investment in sterling terms. You could lose money in sterling even if the stock price rises in the currency of origin. Stocks listed on overseas exchanges may be subject to additional dealing and exchange rate charges, and may have other tax implications, and may not provide the same, or any, regulatory protection as in the UK.

You’re reading a free article with opinions that may differ from The Motley Fool’s Premium Investing Services. Become a Motley Fool member today to get instant access to our top analyst recommendations, in-depth research, investing resources, and more. Learn More.

Finding a growth stock to add to my holdings doesn’t always involve looking for the next big thing. I reckon there are plenty of established firms that possess tremendous growth potential, as well as sound fundamentals.

One pick that I came across recently is Coats Group (LSE: COA).

Let’s pick apart the business and break down my investment case.

Should you invest £1,000 in Coats right now?

When investing expert Mark Rogers has a stock tip, it can pay to listen. After all, the flagship Motley Fool Share Advisor newsletter he has run for nearly a decade has provided thousands of paying members with top stock recommendations from the UK and US markets. And right now, Mark thinks there are 6 standout stocks that investors should consider buying. Want to see if Coats made the list?

See the 6 stocks

Laying the threads bare

Coats Group is one of the leading thread manufacturers in the world with a presence in over 100 countries. It supplies thread as well as other sewing supplies to its customers that are mainly in the apparel and footwear industry.

The shares have had a good 12-month period, rising 27%. At this time last year, they were trading for 76p, compared to current levels of 96p.

Created with Highcharts 11.4.3Coats Group Plc PriceZoom1M3M6MYTD1Y5Y10YALLwww.fool.co.uk

To buy or not to buy?

Starting with the bull case, there’s lots to like about Coats Group, in my view. Firstly, I reckon the business has defensive traits. This is because no matter the economic outlook, or consumer budgets, clothes are an essential purchase for all. We all need to wear them, as much as this heat makes me want to wear much less. In addition to this, the firm’s vast presence and experience are also plus points.

Next, Coats’ most recent update, a half-year report released at the beginning of August for the six months ended 30 June 2024, made for good reading. From a financial view, revenue increased by 7% compared to the same period last year. Also, earnings per share, margin levels, its dividend, and free cash flow were all up. Net debt was down, which is also a good sign. From a strategic view, cost-cutting and streamlining operations has helped the firm save millions.

Speaking of dividends, a yield of 2.3% helps my investment case. However, it is worth mentioning that dividends are never guaranteed.

Moving to the other side of the coin, Coats shares could have some growth priced in already. They trade on a price-to-earnings ratio of 18. This could be seen as high, and if earnings or trading took a dent, the share price could fall.

Another worry for me is inflationary impact on costs and margins due to global economic volatility. Increasing costs could dent profitability and returns.

Finally, I’ll keep an eye on its balance sheet and debt levels. Although it looks to have come down recently, it still stands close to $350m. Even if it’s manageable, this is a sizable amount to service and manage, especially in a high interest environment.

My verdict

In my view, Coats’ market position, experience, recent trading, and future outlook are all favourable. The current value of the shares is a bit of a downer. However, the firm’s defensive ability is hard to ignore, as well as the passive income opportunity.

When I next have some investing funds, I’d be willing to buy some Coats shares for returns and growth.

Like buying £1 for 31p

This seems ridiculous, but we almost never see shares looking this cheap. Yet this Share Advisor pick has a price/book ratio of 0.31. In plain English, this means that investors effectively get in on a business that holds £1 of assets for every 31p they invest!

Of course, this is the stock market where money is always at risk — these valuations can change and there are no guarantees. But some risks are a LOT more interesting than others, and at The Motley Fool we believe this company is amongst them.

What’s more, it currently boasts a stellar dividend yield of around 10%, and right now it’s possible for investors to jump aboard at near-historic lows. Want to get the name for yourself?

See the full investment case

Should you invest, the value of your investment may rise or fall and your capital is at risk. Before investing, your individual circumstances should be assessed. Consider taking independent financial advice.

Sumayya Mansoor has no position in any of the shares mentioned. The Motley Fool UK has recommended Coats Group Plc. Views expressed on the companies mentioned in this article are those of the writer and therefore may differ from the official recommendations we make in our subscription services such as Share Advisor, Hidden Winners and Pro. Here at The Motley Fool we believe that considering a diverse range of insights makes us better investors.

We think earning passive income has never been easier

Do you like the idea of dividend income?

The prospect of investing in a company just once, then sitting back and watching as it potentially pays a dividend out over and over?

If you’re excited by the thought of regular passive income payments, as well as the potential for significant growth on your initial investment…

Then we think you’ll want to see this report inside Motley Fool Share Advisor — ‘5 Essential Stocks For Passive Income Seekers’.

What’s more, today we’re giving away one of these stock picks, absolutely free!

Get your free passive income stock pick

More on Investing Articles

Investing Articles

10% dividend yield! Here’s a FTSE 100 share to consider in April for passive income

This FTSE 100 stock just soared past the 10% yield mark, making it a potentially lucrative option for investors targeting…

Read more »

Young black woman using a mobile phone in a transport facility
Investing Articles

3 FTSE 100 safe haven stocks to consider as trade wars bite

I'm confident in the long-term outlook for the FTSE index of stocks. But these blue chips may protect investors from…

Read more »

Investing Articles

Here’s how Trump tariffs could hand us some top passive income bargains

As tariff terror grips the stock market, it's time for passive income investors to steel our nerves and look for…

Read more »

Investing Articles

These FTSE shares may offer some safety as Trump slaps tariffs on trading partners

FTSE shares moved lower on 3 April, after US President Donald Trump introduced hefty tariffs on its trading partners. These…

Read more »

Investing Articles

6.8% dividend yield! Consider these 2 ‘secret’ passive income stocks to target a £1,360 payday in 2025

Looking for ways to generate above-average dividend income? These lesser-bought income stocks are worth a close look.

Read more »

Elevated view over city of London skyline
Investing Articles

The M&G dividend yields over 10% — and could get higher!

Christopher Ruane explains why he's upbeat about the long-term outlook for the M&G dividend yield and would happily buy the…

Read more »

Young Caucasian man making doubtful face at camera
Investing Articles

2 popular UK growth stocks I wouldn’t touch with a bargepole in today’s market

Buying growth stocks can deliver market-beating returns, but this FTSE 250 pair doesn't look like a convincing investment for our…

Read more »

The flag of the United States of America flying in front of the Capitol building
Investing Articles

10 FTSE shares falling today after President Trump’s tariffs bombshell!

Our writer explains why JD Sports Fashion from the FTSE 100 and a diverse bunch of other UK stocks are…

Read more »