Is this growth stock a falling knife to catch after dropping 45% today?

Should you buy, sell or hold this growth stock?

| 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.

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.

Up Global Sourcing (LSE: UPGS) flies under the radar of most investors, despite the fact that this obscure business has grown revenue by around 40% per annum over the past three years. That said, the company only went public at the beginning of March this year, so investors haven’t had much time to evaluate the opportunity. 

Today shares in the company have been almost cut in half after it released a strong trading update but warned on its outlook. 

For the year ended 31 July, group revenue increased by 39.1% to £110m and off the back of this performance management now expects to report “underlying EBITDA and underlying PBT performances that are above market expectations” when official full-year figures are published. 

However, despite this upbeat statement, the results have been overshadowed by a warning regarding the company’s outlook. Specifically, today’s release noted that thanks to growing consumer caution and pull-back in orders from customers, “revenue growth for FY18 is unlikely.

Does the business offer value? 

Up Global owns, manages and designs “an extensive range of value-focused consumer goods brands.” The group’s range of products currently consists of 3,000 product lines in 12 categories and brands such as Russell Hobbs. 

Up Global’s position reflects the wider view of the UK consumer, so it could be said that investors should have seen today’s warning coming. As inflation has picked up and wage growth has remained elusive, the UK consumer is being squeezed — that’s without considering the uncertainty provided by Brexit.  To help try and reduce its reliance on the UK, management has inked deals to open major retail accounts in Germany and so far, demand in this region appears healthy. According to today’s release, “given the group’s promising early progress there and the positive consumer data that is emerging from the region, the board sees significant potential for long term growth in this market.”  So, it looks as if this diversification will pay off over the long term. 

The big question is, how should investors react to today’s cautious trading statement? Shares in the company have fallen by 45% in early deals, which seems to be an overreaction, although, before the announcement, the shares were trading at a premium growth multiple of around 21 times forward earnings. Now that growth has evaporated, it makes sense that the shares should re-rate lower, but the market’s reaction seems to be overdone. 

After losing half their value, the shares now trade at a historic P/E of 11.1. As of yet, City analysts have not reconfigured their forecasts to reflect the lower growth expectations of management, so a historic P/E is the best way of valuing the business. This valuation seems to undervalue the business. 

The rest of the Household Goods Industry trades at a median P/E of 14.6, so Up Global is trading at a discount to the wider sector of 24%. Also, after recent declines, the dividend yield has spiked to 4.4%. The payout is covered twice by earnings per share. 

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.

Rupert Hargreaves does not own shares in any company mentioned. 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.

More on Investing Articles

Investing Articles

Surely, the Rolls-Royce share price can’t go any higher in 2025?

The Rolls-Royce share price was the best performer on the FTSE 100 in 2023 and so far in 2024. Dr…

Read more »

A young woman sitting on a couch looking at a book in a quiet library space.
Investing Articles

Here’s how an investor could start buying shares with £100 in January

Our writer explains some of the things he thinks investors on a limited budget should consider before they start buying…

Read more »

Investing Articles

Forget FTSE 100 airlines! I think shares in this company offer better value to consider

Stephen Wright thinks value investors looking for shares to buy should include aircraft leasing company Aercap. But is now the…

Read more »

Investing Articles

Are Rolls-Royce shares undervalued heading into 2025?

As the new year approaches, Rolls-Royce shares are the top holding of a US fund recommended by Warren Buffett. But…

Read more »

Investing Articles

£20k in a high-interest savings account? It could be earning more passive income in stocks

Millions of us want a passive income, but a high-interest savings account might not be the best way to do…

Read more »

Investing Articles

3 tried and tested ways to earn passive income in 2025

Our writer examines the latest market trends and economic forecasts to uncover three great ways to earn passive income in…

Read more »

Investing Articles

Here’s what £10k invested in the FTSE 100 at the start of 2024 would be worth today

Last week's dip gives the wrong impression of the FTSE 100, which has had a pretty solid year once dividends…

Read more »

Investing Articles

UK REITs: a once-in-a-decade passive income opportunity?

As dividend yields hit 10-year highs, Stephen Wright thinks real estate investment trusts could be a great place to consider…

Read more »