While the FTSE 100 index is trading near record highs at the moment, there are lots of UK stocks that still look really cheap. Recently, I ran a screen on the market to identify stocks trading 30% or more below their average price targets and tons of names came up.
Here, I’m going to highlight a stock that is currently trading 46% below its average analyst price target. If its target price was to be achieved, a £2,000 investment today could potentially grow to £3,760.
A small-cap stock with potential
The stock in focus here is Warpaint London (LSE: W7L). It’s a small AIM-listed cosmetics company that makes products at affordable prices and is a member of the FTSE AIM 100 index.
Its main brands are W7 and Technic. These are sold by a range of retailers including Boots, Superdrug, Amazon, and Tesco.
City analysts are bullish
Currently, this stock trades for 359p. Yet the average price target is 667p.
That target is a whopping 88% higher than the current share price. In other words, analysts see the potential for significant gains in the medium term.
Too optimistic?
Now, analysts’ forecasts always need to be taken with a pinch of salt. Often, they don’t come to fruition.
So, there’s no guarantee that this stock will hit 667p. I personally think that price target could be a stretch in the near term as sentiment towards the stock is not great right now.
Long-term appeal
That said, I do think the stock looks interesting at the moment. And I can see potential for gains in the long run.
This is a company that’s growing at an impressive rate. This year, analysts expect top-line growth of about 19% (after 13% growth last year).
Meanwhile, after a big share price drop, the valuation is quite low. Currently, the forward-looking price-to-earnings (P/E) ratio is only 13.3, falling to 11.6 using next year’s earnings forecast.
That valuation strikes me as attractive relative to the growth being generated and the company’s level of profitability. Last year, return on capital employed (ROCE) – a key measure of profitability – was a high 31%.
It’s worth noting that last time I covered the stock (in 2024), the P/E ratio was in the mid-20s. So, the valuation has come down a lot and is now at a far more attractive level.
Two key risks
It’s worth pointing out that US tariffs are a risk here. The US isn’t a huge part of the overall business but tariffs still add some uncertainty in terms of future profitability.
Competition is another risk to consider. Cosmetics is a very competitive market and it’s not hard these days for new entrants to capture market share from existing players.
Overall though, I like the risk-reward proposition at the current share price. I think this stock is worth considering today.
