Over the past few days and weeks, UK stocks have been bouncing up off their lows all over the place. And it’s starting to look like the market is bottoming after the bear run of the past few months.
Retreating commodity prices
Other positive signs include the retreat of many commodity prices such as oil, copper, iron ore, lumber and wheat. Many had spiked up fuelling the inflation misery we’ve been experiencing. So I see an easing back of commodity prices as a positive. And the situation could be an early indicator of lower inflation later.
However, I am just trying to read the economic tea leaves. A better approach is to focus on the news flowing from the companies I’m interested in owning. And, in many cases, news has been positive for businesses.
Meanwhile, valuations have become attractive. The consumer-facing cyclical stocks have been particularly bombed-out in the bear market. But they’ve been bouncing back into life, and I’ve bought a few of them. Is now the time to invest in stocks? For me, the answer is, yes!
One of my recent purchases was Frontier Developments (LSE: FDEV). The company develops and publishes video games for the interactive entertainment sector. And with the share price near 1,416p, it’s down around 57% from its 2021 high. Over the past year, the decline has been about 46%.
Growth at a price
However, the company still has a racy valuation. City analysts expect earnings to surge back in the current trading year to May 2023 with a rise of about 135%. They could always be wrong. But the market has assigned a forward-looking price-to-earnings ratio of around 31 for that year. So, even after the plunge, FDEV isn’t in the bargain basement.
Nevertheless, I see the business as a high-growth proposition despite its history of lumpy earnings. The compound annual growth rate for earnings is running just below an impressive 70%. And, rightly or wrongly, I see the current slump in the share price as an opportunity.
Good news in the bag
One of the rules in my investment strategy requires businesses to have a recent positive trading update. And FDEV delivered one on 14 June, trumpeting a “strong” second half and “record” annual revenue growth of 26%.
Looking ahead, the directors said they expect Frontier to grow revenue by around 20% on average per annum over the medium term. And variations in the rate of growth will likely be driven by “the number and scale of new [product] releases in each year”. And I reckon that outlook statement goes some way towards explaining the volatile earnings history of the business.
There are no guarantees of a positive long-term investment outcome for me with Frontier Developments. And all companies can experience operational setbacks from time to time. Nevertheless, I’ve been buying stocks like FDEV now to hold for years as operational progress unfolds.