Forget a cash ISA! This stock has turned £1k into £21k since 2009

This stock has returned 35% per annum since 2009, and it looks as if this is just the start, says Rupert Hargreaves.

| 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.

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.

Cash ISAs can be an excellent tool for savers who are looking to shield their income from the tax man. However, as the best interest rate available for cash ISAs at the moment is less than 1.5%, it makes sense to look elsewhere for income.

Personally, my money is on high-quality growth stocks, companies that have a proven track record of creating value for investors, with a substantial competitive advantage and healthy profit margins. Games Workshop (LSE: GAW) ticks all of these boxes.

Outstanding track record

Games Workshop is an exceptional business. You might think that a company specialising in producing miniature figures for tabletop war games would have faded into obscurity over the past 10 years as computer games have taken over. But, thanks to its devoted fans, the group has not only managed to stay in business, but also grow at a rate many other retailers would kill to achieve.

Indeed, since 2013, revenue has grown at a compound annual rate of 10.3% as the company has rolled out new products. Thanks to a tight grip on costs and efficiency savings, profit margins since 2013 have more than doubled. As a result, net profit has grown at a compound annual rate of 29.6% since 2013.

This growth has translated into outstanding returns for investors. Over the past decade, shares in Games Workshop have returned just over 35% per annum, turning every £1,000 invested at the beginning of 2009 into £20,800 today.

Can the gains continue? 

The question is, can the company continue on this trajectory? I think it’s highly probable. As noted above, the group has plenty of hardcore followers who provide a steady stream of income for the group. But at the same time, it’s also chasing new markets and management is always looking for ways to streamline the business.

Game Workshop’s figures for the six months to December 2 unveiled yet another record performance. Revenue jumped 14% year-on-year, and earnings per share increased 5%. Although these figures indicate growth is slowing, when taken in respect of the rest of the retail industry, it’s notable Games Workshop’s sales are still rising when many other retailers are struggling. 

The increase in revenue is no doubt a result of growing customer numbers. According to today’s update, visitor numbers to its flagship Warhammer Community website increased 30% year-on-year to the beginning of December. Considering these figures, it’s no surprise that management is planning to upgrade its warehousing facilities in both Memphis and Nottingham near term, to help cope with growing demand and improve efficiency.

Time to buy 

Put simply, I think Games Workshop looks highly attractive from an investment perspective. 

The one problem I see with the stock at the moment is its valuation. The shares are trading at a forward P/E of 18.2, which is a bit more than I would like to pay for a retail business. That said, considering the group’s niche business, devoted customer base, and exceptional return on capital employed — a measure of profitability for every £1 invested in the business — of 87% for 2018, I think the shares do deserve a premium valuation. 

As long as the company can continue to achieve double-digit sales growth (and I see no reason why it can’t) the stock should also continue to generate double-digit annual returns for shareholders for many years to come. 

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.

Rupert Hargreaves owns no share mentioned. The Motley Fool UK has no position in any of the shares mentioned. 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.

More on Investing Articles

Passive income text with pin graph chart on business table
Investing Articles

Yields of up to 7%! I’d consider boosting my income with these FTSE dividend stocks

The London market has some decent-looking dividend stocks right now, and I’m tempted by these two for growing income streams.

Read more »

Young mixed-race couple sat on the beach looking out over the sea
Investing Articles

I’d put £20K in an ISA now to target a £1,900 monthly second income in future!

Christopher Ruane shares why he thinks a long-term approach to investing and careful selection of shares could help him build…

Read more »

Mature couple at the beach
Investing Articles

6 stocks that Fools have been buying!

Our Foolish freelancers are putting their money where their mouths are and buying these stocks in recent weeks.

Read more »

Black woman using loudspeaker to be heard
Investing Articles

I was right about the Barclays share price! Here’s what I think happens next

Jon Smith explains why he still feels the Barclays share price is undervalued and flags up why updates on its…

Read more »

Investing Articles

Where I’d start investing £8,000 in April 2024

Writer Ben McPoland highlights two areas of the stock market that he would target if he were to start investing…

Read more »

View of Tower Bridge in Autumn
Investing Articles

Ahead of the ISA deadline, here are 3 FTSE 100 stocks I’d consider

Jon Smith notes down some FTSE 100 stocks in sectors ranging from property to retail that he thinks could offer…

Read more »

Young female business analyst looking at a graph chart while working from home
Investing Articles

Why I think Rolls-Royce shares will pay a dividend in 2024

Stephen Wright thinks Rolls-Royce shares are about to pay a dividend again. But he isn’t convinced this is something investors…

Read more »

Investing Articles

1 of the best UK shares to consider buying in April

Higher gold prices and a falling share price have put this FTSE 250 stock on Stephen Wright's list of UK…

Read more »