I’d invest £1,000 in this quality UK growth stock today!

Businessman leading a chart upwards

Last month, I suggested that Luceco‘s (LSE: LUCE) valuation at the time didn’t feel excessive, despite the superb performance of its share price over the last year. Since then, the latter has climbed 15%. Although one should never take such gains for granted, I think there could be even some upside ahead for this UK growth stock.

Market share gains at this growth stock

Thanks to a “generally favourable” trading environment, the mid-cap announced some very decent interim numbers today. A buoyant residential Repair, Maintenance and Improvements (RMI) market in the UK allowed the lighting manufacturer and distributor to announce a 51.8% rise in revenue over the first half of 2021. Importantly, the £108.2m logged is far higher than that achieved in 2019 (£82.7m). This backs up the company’s belief that it is gaining market share. 

All told, pre-tax profit pretty much doubled to £16.6m over the period. As impressive as this is, the thing that really caught my eye was the 42.5% return on invested capital. In 2020, this was 24.5%. In 2019, this was a little over 18% (which is still impressive). This is great to see. 

Can all this continue?

I suspect it can. New business wins coupled with more people wanting to work from home should do no harm to its chances of continuing to increase revenue and profits. The forthcoming launch of a new EV charger range is another exciting development.

Importantly, Luceco also seems to have the financial firepower to support its growth strategy. Net debt stood at just £24.3m at the end of June.

As a further sign of just how confident management is, there was a 73.3% jump in the interim dividend from 1.5p to 2.6p per share today.

Cost pressures

Given the share price gains over the last year and change, it would be easy for me to assume there’s limited downside with Luceco. However, I certainly don’t think investing here would be risk-free.

As the company itself mentioned today, the pandemic has “brought severe supply chain disruption” and generated “significant cost inflation“. So far, it looks like it’s managed to navigate these choppy waters. However, Luceco did warn that cost pressures would likely continue for a while. This, in turn, could impact margins and may help explain why the share price was flat in early trading. 

Another potential thing for me to be aware of is the possibility that those already invested may decide to bank some profit. This is to be expected. That said, the relative illiquidity of this growth stock (less than 50% is actively traded on the market) could exacerbate any moves downwards. 

Long term winner

The near 150% rise in the Luceco share price over the past year is great evidence to support my belief that snapping up stakes in great businesses for the long term can bring me rich rewards. It certainly feels a lot less stressful than buying a ‘bargain’ stock with weak fundamentals and crossing my fingers!

Speaking of valuation, I’ll need to shell out 24 times forecast earnings for the current year to buy Luceco today. That’s high but not excessive, in my opinion, especially for such a quality operator.

There’s arguably (far) more risk to investing now than last year. However, I do think there are plenty of worse options for my portfolio than this growth stock. 

The post I’d invest £1,000 in this quality UK growth stock today! appeared first on The Motley Fool UK.

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Paul Summers has no position in any of the shares 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.

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