Buying and holding UK growth stocks with enormous potential is a strategy I like to employ for my own portfolio. Searching for these companies is a time-consuming process, but I think I may have found what I’m looking for in Volex (LSE:VLX).
A UK growth stock with the potential to explode
Volex designs, manufactures, and supplies power-related products to numerous industries, including the medical, data networking, and more interestingly, electric vehicle sectors.
The company has been around since 1892 and has spent over a century establishing itself as an internationally recognised brand. What started out as a small business in Manchester has become a worldwide leader for power products across North America, Europe, and Asia.
The business has two segments. Its integrated manufacturing services focus on designing and producing a broad range of branded products. These include cable assemblies and connectors that allow the transfer of electronic, radiofrequency, and optical data. These are essential components for medical equipment, data networking infrastructure, and vehicle telematics.
The second segment focuses on the mass production of electrical products such as power cords and adapters. These are sold directly to manufacturers who use them to build their own electronic products such as laptops, power tools, and more recently electric vehicles.
Rising demand creates growth opportunities
Like many other manufacturing businesses, Covid-19 has caused plenty of disruptions for Volex. At the height of the pandemic, it closed its Chinese facilities to protect employee safety.
Yet despite these interruptions in manufacturing, Volex still slightly increased top-line revenue by 3%. The primary catalyst appears to be a 78% boost in demand for power products used in electric vehicles. Given that most of the factories are now back to near full capacity, I would expect to see a significant boost in revenue for 2021.
Personally, I’m quite excited about the potential for this business, especially its electronic vehicle components. But I have spotted a few areas of concern.
Specialised products need specialised components
In order for Volex to manufacture its products, specific components are needed — some of which are not easy to come by. Certain products are reliant upon a single third-party supplier. Therefore, if the supply line gets cut, Volex will likely be unable to deliver products on time.
The manufacturing sector heavily relies upon just-in-time delivery (the automotive industry even more so). Any delays could significantly damage the firm’s reputation, and cause customers to source components elsewhere. Volex has begun diversifying its supply chain to mitigate this risk. However, it remains a prominent issue.
Another potential risk arises from the components themselves. The technology used by Volex’s customers is constantly evolving. As such, components become obsolete relatively quickly. So, continuous research & development is needed to stay in the game. If the company cannot keep up or predict the shifting needs of its customers, competitors could begin stealing market share.
Am I buying this UK growth stock?
As exciting as the business is, I think I will wait for now. The over-reliance on a single supplier exposes the firm to a risk level that I don’t want to take on. However, the company does have a lot of the traits I like to see in a growth stock. If it successfully diversifies its supply chain, then I will reconsider adding it to my portfolio.
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Zaven Boyrazian does not own shares in Volex. 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.