Many popular growth stocks of the past year were found in the US. But so many have lost their shine in recent months. Growth stocks don’t have to be high-octane and popular. The UK is home to several reasonably priced and relatively unknown companies that are demonstrating great potential, in my opinion.
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.
