Should I buy high-flying UK growth stock Warpaint London?

Up 940% in five years, Warpaint London’s one of the hottest stocks in the UK market today. Should Edward Sheldon buy it for his portfolio?

| 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.

Smiling white woman holding iPhone with Airpods in ear

Image source: Getty Images

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.

One UK stock that’s done really well recently is Warpaint London (LSE: W7L). Over the last year, the cosmetic company’s share price has risen about 85%. Over the last five, it’s climbed an amazing 940%.

I’m interested in getting some more cosmetics exposure in my portfolio as I reckon the industry has plenty of growth potential in today’s social media-focused world. Should I buy shares in Warpaint London? Let’s discuss.

An introduction to Warpaint London

For those who don’t know anything about this company, Warpaint London’s a beauty business that’s focused on developing products at affordable prices. Its main brands are W7 and Technic, which are sold by a range of retailers including Boots, Superdrug, Amazon, and Tesco.

The company was co-founded by Sam Bazini and Eoin Macleod, who first went into partnership in the early 1990s, buying and selling close-out and excess stock of cosmetics and fragrances. In 2002, Bazini and Macleod decided to create the Group’s first own brand, W7 (named after the company’s postcode in West London).

In 2016, Warpaint came to the Alternative Investment Market (AIM) via an Initial Public Offering (IPO). Since then, the company’s share price has surged, and today it has a market-cap of around £450m.

The bull case

Now, having done some research on the company, my view is that there’s a lot to like about it from an investment perspective. For starters, the company’s growing at an impressive rate. This year, revenues are expected to come in at £106m. That’s up from £49m in 2019.

Second, the company’s level of profitability is on the up. Last year, return on capital came in at a high 36.1% versus 18.6% a year earlier.

Third, there’s a growing dividend. Over the last five years the payout’s more than doubled (the current yield is about 2%).

Finally, the company is founder-led. I like to invest in founder-led businesses as research shows they often generate huge wealth for investors.

The bear case

I do have a few reservations however. One is in relation to the company’s brand power. When I asked my wife – who spends a ton of money on cosmetics – about the W7 and Technic brands, she’d literally never heard of them. I found that a little odd.

And it makes me wonder if the brands could be vulnerable to competition. Cosmetics is a very competitive market and it’s not particularly hard these days for new entrants to capture market share. Given the dynamics of the industry, I’d think I’d rather invest in premium brands than lower-priced brands.

Another issue for me is the company’s gross profit margin. Last year, it was around 40% which is relatively low. For reference, industry leader L’Oreal has gross margins of around 75%. A lower gross margin can make a company more vulnerable to rising costs.

Finally, there’s the valuation. Currently, the forward-looking price-to-earnings (P/E) ratio here is about 25. That’s not a crazy multiple. But it does add some risk.

Should I buy?

Weighing everything up, I’m going to leave Warpaint London shares on my watchlist for now. I don’t think it’s a bad stock. I reckon there’s a good chance it will keep rising.

I’m just not totally convinced it’s the right fit for my portfolio today.

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.

Ed Sheldon has positions in Amazon. The Motley Fool UK has recommended Amazon, Tesco Plc, and Warpaint London Plc. John Mackey, former CEO of Whole Foods Market, an Amazon subsidiary, is a member of The Motley Fool’s board of directors. 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 Growth Shares

Investing Articles

With a P/E ratio of just 10.5 is now a brilliant time to buy a cut-price FTSE 250 tracker?

Harvey Jones says a recent dip in the FTSE 250 leaves the index trading at bargain levels. One stock in…

Read more »

Growth Shares

As the boohoo share price falls, could it become a penny stock in 2025?

Jon Smith outlines some of the recent problems involving the boohoo share price and considers if things could get even…

Read more »

Young Asian woman with head in hands at her desk
Investing Articles

Here are the worst-performing FTSE 100 shares over the last 5 years

These five FTSE 100 shares have been complete duds over the last half decade. But is there potential for a…

Read more »

Investing Articles

Nvidia stock has tripled this year! Can it keep rising?

Nvidia's latest sales update showed strong growth and the stock's been on a tear so far in 2024. So is…

Read more »

Person holding magnifying glass over important document, reading the small print
Investing Articles

This once-great FTSE 250 UK fashion retailer is down 47%, so is it time for me to buy?

A formerly iconic UK fashion brand, this FTSE 250 firm has fallen out of favour. But it has a new…

Read more »

Investing Articles

Where might the Rolls-Royce share price be in 12 months? Here’s what the experts say

The Rolls-Royce share price has more than doubled since November 2023. But analysts have a wide range of opinions as…

Read more »

Long-term vs short-term investing concept on a staircase
Investing Articles

As Shell’s share price continues to drift lower despite strong Q3 results, should I buy more?

Shell’s share price is down 14% from its one-year traded high, despite strong recent results, leaving the shares looking undervalued…

Read more »

Chalkboard representation of risk versus reward on a pair of scales
Growth Shares

10,000 or 6,000? Here’s where I think the stock market is heading in 2025

Jon Smith weighs up both sides of the argument as to where the stock market could head next year, along…

Read more »