The business in question is AIM-listed Supreme (LSE: SUP). This £150m company manufactures and distributes consumer goods such as batteries and vapes. Supreme’s share price has slumped this year, but I’m starting to think the shares look too cheap for me to ignore.

Why I like Supreme

Supreme only floated on London’s AIM market at the start of 2021, but this company was founded in 1975 and has a forty-year heritage of family ownership and management.

Since 1990, annual sales have grown from a few million pounds to more than £120m. Supreme’s customers now include most of the UK’s supermarkets, convenience stores and discount retailers. Other customers include HM Prison & Probation Service and Harrods.

Current boss Sandy Chadha is the son of Supreme’s founder. He owns 57% of the company’s shares and has been with Supreme since he left school 30 years ago.

In that time, he’s transformed the business into a major distributor of batteries and lighting. Long-term suppliers include Duracell, Energizer, Panasonic, Philips and JCB.

In 2015, Mr Chadha spotted a niche in the market and launched an in-house vaping brand, 88vape. More recently, he’s led the business into the fast-growing sports nutrition sector, with brands including Millions & Millions, Sealions and Sci-MX.

Supreme’s products all have one thing in common – they’re affordable, repeat purchases that appeal to a broad range of customers. I reckon this growth stock could also be a good defensive investment during a recession.

Sales have doubled since 2019

Supreme’s recent results have not showed much sign of a slowdown. Annual sales have risen from £62m in 2019 to £127m over the 12 months to 30 September.

Vaping sales rose by 13% during the half year to 30 September, while sports nutrition sales tripled to £6.4m – helped by some acquisitions.

I’m attracted to the group’s strong profitability. Supreme reported an operating margin of 12% last year with a return on capital employed of 51%.

Of course, there are some risks. Battery sales are fairly flat these days. Supreme depends heavily on its vaping products, which generate around half the group’s profits.

One risk I can see here is that vapes could face tougher sales rules. For example, retailers might have to move them from open store shelving to behind a counter, next to the cigarettes.

I suspect that independent vaping manufacturers will also face growing competition from the vape brands run by the big tobacco companies.

Is this growth stock a buy for me?

All stock market investments come with some risk. But I think Supreme looks like a well-run business with a sensible growth strategy.

This year’s share price slump has left this business trading on just 10 times forecast earnings, with a potential 5% dividend yield.

That seems too cheap to me. I’m definitely tempted to buy some Supreme shares for my portfolio today.

The post One growth stock I’d buy right now appeared first on The Motley Fool UK.

My top three have a market capitalisation of just £200m to £300m. This is pretty small compared to the relative giants of the FTSE 100. But smaller companies can offer great potential. I frequently see shares of small firms double or triple over a few years. That would be difficult for a large company like BP, in my opinion.

Granted, investing in smaller growth stocks can be riskier. Often their share prices can be more volatile. Sometimes their shares are more illiquid. This can amplify movements up and down. Also, small companies are still growing and can often face short-term hurdles and hiccups.

Overall, I hold a diversified selection of companies in my Stocks and Shares ISA. As I have a reasonably long investment time frame, I own several growth stocks. But I also own shares that have styles spanning value, defensive, income, and momentum.

A supreme leader

Often, companies have characteristics that share multiple styles. For instance, a growth share could also demonstrate defensive qualities. One such share I’d consider buying for 2022 is a relatively small company called Supreme (LSE:SUP). Supreme is a manufacturer and brand owner of several consumer goods. Its main business areas are batteries, lighting, vaping, and sports nutrition.

There is much to like about Supreme. It’s run by competent management, in my opinion. CEO Sandy Chadha offers an owner’s mindset. I’m also encouraged that he has ‘skin in the game’ and owns 57% of the shares. Sandy started in the company from school and grew the business from £1m to over £90m of revenues over a few decades. Starting with batteries, Supreme became a major supplier to the big discounters including B&M and Home Bargains. Using these customer relationships, Supreme was able to expand into the lighting business, then into the fast-growing vaping space.

I’d say it benefits from a great business model. By creating brands from scratch and manufacturing in-house, it can keep its costs low and profit margin high. This allows it to sell particularly good value products that are popular with customers. The plan seems to be working. Sales have grown by 14% per year on average over the past three years. All while achieving an impressive gross profit margin of 30%.

I do have to bear in mind that Supreme’s largest 10 customers account for over half of the group’s sales. If any of these customers decide to stop or reduce orders, it could have a material impact. That said, many of the brands are only sold by Supreme and some of its relationships span over 30 years.

Overall, I reckon the future looks bright for Supreme. It’s expanding into new areas and doing so at low cost. I’d be happy to buy shares in this British growth stock for my portfolio.

Laser-focused growth stocks

Next on my list of growth stocks for 2022 is an AIM-listed company called Somero Enterprises (LSE:SOM). This £280m business manufactures laser-guided equipment that’s used to make perfectly level concrete floors. Yes, it might seem quite random. But I’d say that this niche business is a high-quality growth share with some remarkable characteristics.

It offers a return on capital employed of almost 60% and an operating margin of over 30%. These are some of the best quality metrics that I’ve come across recently. But it doesn’t end there. Usually these factors result in a more expensive share. But I can buy Somero for a price-to-earnings-ratio of just 11 times. I reckon that’s cheap.

Earnings are growing steadily and it recently noted strong trading momentum. It also seems to be well-placed in growing markets. For instance, its equipment is used to create flat floors for large warehouses and multi-storey data centres. I reckon demand for these could continue for some time.

Somero does operate in a cyclical market. There’s ample business when the economy is strong, but this can potentially reverse in a recession. The shares could be volatile at times too so that’s something I should consider. That said, it currently has a forecasted dividend yield of 7%. This should provide some buffer to share price turbulence. All in all, I’m a buyer.

Small but mighty

My third British growth stock is the smallest of the three. It’s called SDI (LSE:SDI) and it has a market capitalisation of just under £200m. SDI (formally known as Scientific Digital Imaging) designs and manufactures scientific and technology products. It focuses on two main areas, digital imaging and sensors.

SDI has demonstrated strong financial growth for several years. It has shown average annual sales growth of 33% over the past five years. That’s impressive. Its profits have been equally as impressive. So what’s driving the great performance? Well, SDI has a buy-and-build strategy. What I mean by this is it looks to purchase profitable companies within its niche areas of expertise. It then creates an environment for these typically smaller companies to flourish.

Business is growing nicely at this AIM listed group. It recently reported “another strong set of results and solid operational progress for the six months to 31 October 2021”.

Acquiring companies does come with risk. There is much that can go wrong. That said, SDI seems to have a decent track record. This somewhat mitigates acquisition risk. One more thing. With a price-to-earnings ratio of 34, the shares do not look particularly cheap. But I’d say that’s not unusual for quality growth stocks.

Overall, I like what I see. A good-quality small business with a proven model of successfully buying smaller companies. If it can continue doing so for at the least the next few years, I reckon its share price could potentially double.

The post 3 incredible British growth stocks I’d buy for 2022 appeared first on The Motley Fool UK.

I think the wider fast-moving consumer goods (FMCG) sector has attractive economics. And the smoking products industry is a big part of that. But those old tobacco companies are out of favour with investors. And their operations attract a lot of regulatory scrutiny. Perhaps a better way to invest in the fast-growing vaping sub-sector is via a company like Supreme. At least the distributor comes without much of the negative baggage carried by the old tobacco stalwarts.

Why I think Supreme is a UK share to buy now

Supreme arrived on the FTSE AIM market on 1 February. The initial share price was 134p. But now it’s near 199p. And I think the progress reflects the emerging growth prospects of the business.

Today’s full-year results report shows that in the trading year to 31 March, around 51% of gross profit came from vaping. And that category produced revenue growth of 36% compared to the prior year.

The firm reckons vaping is one of its two highest-margin categories. The second is Sports Nutrition & Wellness, which accounted for almost 9% of overall gross profit in the period. And revenue from the category grew by an impressive 38%.

But as well as distributing products to wholesalers and retailers, Supreme has a growing manufacturing operation within its business. And much of the progress in the vaping category was driven by its own 88vape brand. I think that’s exciting and underlines the potential for it to develop as a diversified FMCG company in the years ahead. Meanwhile, in addition to the categories already mentioned, the firm also distributes lighting, batteries and branded consumer products.

And today’s overall figures were good. Revenue grew by 33%. And adjusted earnings per share moved 17% higher. There was also a 24% increase in gross profit. And the directors said economies of scale and efficiency improvements drove that progress as manufacturing output ramped up.

Growth anticipated ahead

Looking ahead, chief executive Sandy Chadha thinks there are “clear and very exciting” opportunities to grow the business. And he said that’s particularly true in the categories of Sports Nutrition & Wellness and Vaping that are performing well.

Meanwhile, City analysts have pencilled in an advance in earnings of around 16% for the current trading year to March 2022. And with the shares near 199p, the forward-looking earnings multiple is just below 15.

I think the valuation looks fair, but there are risks. For example, the company lists one major customer responsible for around 16% of overall revenue. And another gave the firm 14% of overall revenue. Loss of either or both would hurt Supreme’s performance and likely damage the share price.

Nevertheless, I think Supreme is a UK share for me to buy. And I’m likely to hold for at least five years as the growth story develops.

The post Best UK shares to buy: why I’d snap up Supreme now appeared first on The Motley Fool UK.