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This UK share gained 158% in 2020. Should I buy it for 2021?

Roland Head
·3-min read
The UK national flag in front of Canary Wharf skyscrapers where professionals trade shares for a living.
The UK national flag in front of Canary Wharf skyscrapers where professionals trade shares for a living.

A share that’s doubled in price can still be cheap. Some of the best growth stocks double many times. They often end up rising to levels which would have seemed impossible a few years earlier. One UK share that might fall into this category is digital marketing firm S4 Capital (LSE: SFOR).

S4 was founded by Sir Martin Sorrell, who made his name by building advertising group WPP (LSE: WPP) into a FTSE 100 firm. After leaving WPP in 2018, Sir Martin wasted no time in starting this rival business.

Up by 150% in 12 months

Equity investors have backed S4 with new funds to support expansion and acquisitions have been flowing thick and fast. S4 Capital’s share price rose by more than 150% last year, giving the group a market-cap of £2.7bn.

By that measure, S4 is already nearly one third the size of WPP. In a recent interview in the Financial Times, S4’s founder said he had “limitless ambition” and believes that “you build the best and you become the biggest”.

If the 76-year-old ad man’s right and can build S4 into another world-beating company, the shares could easily double again over the coming years.

I’ve been invested in WPP for a while, but the company has been going through a tough period. Would I be better backing Sir Martin’s vision of an all-digital future and buying S4 Capital shares?

A long way to go

S4’s growth strategy is aggressive, to say the least. The company is buying up successful digital marketing firms and then expanding them rapidly. So far, progress has been good. Revenue rose 61% to £141m during the first half of 2020 and the group reported its first operating profit – albeit a slim £2.5m.

However, I think it’s fair to say a lot of this good news is already reflected in the valuation of this increasingly popular UK share. S4 shares now trade on 47 times 2021 forecast earnings.

This multiple falls to 35 times forecast earnings for 2022. But, to me, that still looks expensive when I can buy WPP shares for just 10 times 2022 forecast earnings. WPP shares also provide a useful dividend yield, estimated to be around 4.7% next year.

Advertising: the UK share I’d buy

S4 Capital’s business is certainly growing much faster than that of WPP. But the larger firm has taken big steps to improve its performance I think these should pay off over the next year or two.

When I’m buying shares, I try and look at the balance of risk and reward. For me, WPP looks fairly low risk. Investors are already cautious about this business, so if performance improves the shares could do well.

On the other hand, the market is already excited about S4 Capital. The stock’s current valuation reflects strong growth forecasts. In my view, this could limit potential gains over the next year or two. On the other hand, any disappointment could see S4’s share price fall sharply.

I may be wrong about S4 Capital and WPP. But the UK ad share I’d buy today is the one I already own — WPP.

The post This UK share gained 158% in 2020. Should I buy it for 2021? appeared first on The Motley Fool UK.

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Roland Head owns shares of WPP. 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.

Motley Fool UK 2021