This stock has made 231pc returns – and there's plenty more money in it
Questor is The Telegraph's stockpicking column, helping you decode the markets and offering insights on where to invest.
The abysmal performance of UK smaller companies has prompted widespread disillusion among investors. Indeed, it is difficult to retain a positive outlook on the prospects for small-cap stocks when the FTSE Aim All-Share index has declined by 26pc over the past five years. Even the perennially underachieving FTSE 100 index has risen by 17pc over the same period.
However, there have been some success stories among the deluge of underperforming UK-listed smaller companies. Volex, for example, has surged by 97pc in the past five years. It is up by 231pc since being added to our Aim portfolio in August 2018, with shares in the manufacturer of power cords and cable assemblies outperforming the FTSE Aim All-Share index by 265 percentage points.
The company's recently released trading update showed that sales rose by over 21pc in the first nine months of its current financial year. This figure was boosted by the impact of acquisitions, which made up the bulk of the increase in revenue, while the firm's organic sales growth (which excludes the impact of acquisitions) was roughly 10pc.
Encouragingly, the company reported that profit margins in the nine-month period had been maintained year on year due to successful cost management and price increases. As a result, it is on track to report financial performance for the full year that is in line with previous guidance.
Given the company has a net gearing ratio of 58pc, it would be unsurprising if additional acquisitions lie ahead. It doesn't, however, intend to make an offer for TT Electronics after its initial proposals were rejected. As a result, it has sold its holding in the business.
Volex's modest debt levels also mean it is well placed to overcome potential challenges amid an uncertain period for the world economy. The firm's presence across a diverse range of geographical locations further reduces overall risk, while providing a potential catalyst for top and bottom-line growth over the coming years due to its exposure to faster-growing economies.
Indeed, around 42pc of the company's sales in the first half of the year were generated in North America. Given that the IMF currently forecasts the US economy will expand at an annualised rate of 2.4pc over the next two years, versus 1.6pc for the UK economy, this could boost the company's chances of outperforming the domestically-focused FTSE Aim All-Share Index.
Despite its strong past performance, Volex continues to trade on a relatively attractive market valuation. It has a forward price-to-earnings (p/e) ratio of 9.6, for instance, which suggests it offers a wide margin of safety and scope for further capital gains.
Clearly, the stock's price could prove to be volatile as geopolitical and economic risks remain elevated, but with a solid financial position and growth potential, it remains a worthwhile long-term holding.
Questor says: hold
Ticker: VLX
Share price: 273p
Update: SDI
While Volex's share price has soared over recent years, our holding in SDI has proved to be a major disappointment. The company, which acquires businesses that design and manufacture industrial and scientific products, has recorded a 63pc share price decline since being added to our Aim portfolio in January 2023. This compares with a 18pc fall for the FTSE Aim All-Share index over the same period.
The company's latest interim results showed that it is experiencing challenging trading conditions in the life sciences and biomedical markets. This caused a 4pc decline in sales during the six-month period, although the company was able to increase its gross profit margin by 2.4 percentage points to 65.4pc. As a result, it remains on track to meet financial guidance for the full year.
The company completed the acquisition of InspecVision for £6.1m during the first half of the year. Given that its net gearing ratio amounted to 51pc at the time of its interim results in October, it appears to have the financial capacity to make further acquisitions over the medium term.
Trading on a p/e ratio of 10.6, shares in SDI offer a margin of safety. Although further stock price weakness cannot be ruled out in the short run, the company continues to merit its place in our portfolio on a long-term view.
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