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Why this growth stock is an overlooked bargain for me

Young female analyst working at her desk in the office
Young female analyst working at her desk in the office

Shares don’t always go down. Many of mine have been shooting higher recently, including growth stock Watches of Switzerland (LSE: WOSG). And I’m beginning to believe the company is an overlooked bargain that’s been unfairly driven down by the recent bear market.

Should I buy more?

City analysts predict double-digit earnings increases ahead. But with the share price near 904p, the forward-looking earnings multiple is running at just 15. And that’s below some of the hefty valuations I’ve seen for solid growth businesses.

Today’s half-year report contains good news about recent trading. And now I face a dilemma. Should I add to my winning investment in Watches of Switzerland, or stick with my original stake?

And there’s no easy answer. But in the past, I’ve added to winners as they’ve proved themselves. As long as operational progress continued in a business and the valuation remained fair, I’d kept on buying. And one notable success was my stake in ARM Holdings.

I’d held it for several months and the share price progress remained slow. But the value was building up in the business because of operational progress. So I kept buying the shares when spare cash became available. Then, one day, SoftBank acquired ARM at a premium price. My shares shot higher and delivered a hefty percentage return in my portfolio. And because of the increased size of my position, the absolute return in pound notes was significant for me.

However, I’ve experienced failures with the topping-up technique as well. And that’s been particularly true during the difficult markets of the past two or three years. Sometimes I’ve topped up a winning position only to see the gains reverse in short order because of market volatility. So, instead of simply returning to breakeven, the effect of topping up was to turn a once-winning stock into a loser in my portfolio.

Strong trading momentum

Meanwhile, Watches of Switzerland said it saw “strong broad-based trading momentum through Q2”. And the luxury watch retailer scored “ongoing market share gains in the UK and US”. On top of that, the business experienced currency tailwinds. And the directors upgraded their guidance.

Things seem to be working out for my investment in the company. Although continued success is never guaranteed. But I saw the share price pummelled down by the market. And my theory was the firm’s wealthy clients would likely be less affected by an economic downturn. So why would they stop buying trinkets such as watches that cost mere thousands?

And chief executive Brian Duffy said demand remained strong through the most recent quarter and “continues to exceed supply.” Furthermore, he said the company opened several new showrooms in the first half of its trading year. For example, there are now five new showrooms at the “iconic” Battersea Power Station in London. And additional mono-brand boutiques in the UK and US with a push into mainland Europe as well.

There’s no doubt growth is on the agenda. However, operational setbacks can affect any business at any time. So, on balance, in this uncertain general economic environment, I’m sticking with my original stake rather than topping up.

The post Why this growth stock is an overlooked bargain for me appeared first on The Motley Fool UK.

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Kevin Godbold owns shares in Watches of Switzerland Group PLC. 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 2022