Some choose to focus on short-term price movements on UK stocks. This can be profitable, but also high risk. When expanding the time horizon to a few years, it allows an investor to have a more strategic view.
Here are two ideas I think could offer very strong share price returns over the next three years.
Banking on further gains
Virgin Money (LSE:VMUK) is a fully fledged bank in the UK, offering everything from mortgages to business accounts. Over the past year, the share price has jumped 12%.
The latest half-year report through to the end of March showed that total underlying operating income was up 10% from the same time last year, supported by strong net interest income. This is the revenue derived from the difference in the interest rate paid out on deposits versus the rate charged on loans.
Thanks to the higher base rate, the margin has been rising. In fact, for the six month period it was 1.91%. Given the lag in the margin increasing versus the base interest rate, I’d expect to see this margin grow well above current levels over the next year. This should enable profits (and the share price) to substantially increase.
Overall deposits grew by 2.6% to £67bn, showing the confidence that consumers have in the bank.
A risk is the higher impairment charges the business is allocating to loans. Bad defaults could be a thorn in the side of the business going forward.
I feel the overall upward momentum can continue in coming years. Three years ago, it made a loss after tax of £232m. Last year, it made a profit of £595m. In this three-year period, the share price has jumped 102%. With revenue and deposits climbing, the runway to achieve a similar performance in the coming three years is definitely there.
Doing a simple job very well
Another company with serious potential is 4imprint (LSE:FOUR). The promotional merchandiser has grown revenue by over 30% in the past three years and almost doubled the profit after tax figure. As for the share price, it has risen by 70% in the past year and 123% in the past three years.
I think that a similar feat can be achieved in the period through to 2026. The business has grown well due to the scalable nature of the goods supplied. Once the large machinery and printing expenses are accounted for, economies of scale are achieved.
Further, the company hasn’t been materially impacted by inflation. This point, noted in several updates, puts it in a very strong position going forward.
It generates most of its revenue from the US and Canada. There’s huge scope to grow existing or enter new markets in coming years.
For example, the UK accounts for just 2% of revenue with 45 employees. This could grow exponentially in coming years. Or what about tapping into Asia or Europe? The upside for the share price is large when considering this.
I’m conscious that the large special dividend on the back of the 2022 results might be cheered by investors, but I would have rather seen it reinvested into further growth.
Overall, I think both UK stocks have the potential to perform very well in the coming few years.
