That said, it doesn’t mean I should go out and buy every beaten-down stock. Plenty of companies are being sold off for good reasons.

But for the high-quality businesses capable of enduring short-term disruptions and thriving for the next decade, I see only opportunity. And there are two stocks already in my portfolio that I’m planning on buying more of in my next round of capital injection.

One of the best?

Volatility in foreign currency exchange rates creates a lot of headaches. But for Alpha FX (LSE:AFX), it breeds opportunity. The financial services group provides currency risk management and alternative banking solutions.

With all the volatility seen in 2022, demand for its services is rising. As a result, the group has increased its FX client base from 881 at the end of 2021 to 975 today. Meanwhile, its alternative banking division is seeing a surge in popularity, with total customers jumping from 1,746 to 3,061 in the last six months.

As such, its latest interim results reported revenue and pre-tax profits growing by 35% and 16% respectively, versus a year ago. Yet despite this impressive performance, the stock is down around 15% in the last 12 months. Why?

Profit margins have taken a hit due to increased internal investments that have yet to deliver value. Meanwhile, the surge in FX volatility, especially concerning the US dollar, does open the door to higher operating risks for this business. If its traders fail to correctly predict trends, it could significantly harm client relationships.

Nevertheless, Alpha FX’s track record of navigating volatility seems solid, in my eyes. And while its P/E ratio of 26 is certainly not cheap, it looks like a fair price to pay given the long-term potential of this rapidly expanding enterprise.

A potential return to glory?

The video game sector experienced some immense growth during the pandemic, as lockdowns provided a nice tailwind for demand. That helped propel the Frontier Developments (LSE:FDEV) share price to impressive heights.

Unfortunately, following the poorly-received Odyssey expansion to its Elite Dangerous franchise and lower-than-anticipated early sales for its Jurassic World Evolution 2 title, its market capitalisation was pounded into oblivion, falling by 50% in the last 12 months.

However, looking at its latest results, things seem to be improving. Sales of Jurassic World have caught up, delivering more than £60m in revenue since launch. Its other IPs continue to retain high popularity following the release of additional paid content. And its highly anticipated Formula 1 title was released to critical acclaim along with strong sales.

So it’s not surprising that overall top-line sales have hit an all-time high of £114m. Impairment charges relating to Odyssey have sent profits down the drain, elevating the investment risk. Even more so now that rising interest rates are making raising external capital more expensive.

Yet this is a one-time charge. And Frontier’s pipeline of upcoming titles looks impressive, in my opinion. That’s why I feel the drop in stock price makes it potentially a bargain right now.

And here are two on my radar today.

Frontier Developments

The video games industry has ballooned in size over the past decade and today it’s worth more than the film and music industries combined.

And thanks to rapid technological improvements — which have given birth to the e-sports craze — it looks poised for further explosive growth during the next 10 years.

That’s why I’ve invested in technical and creative services business Keywords Studios. And it’s why I’m thinking about buying games studio Frontier Developments (LSE: FDEV) shares for my portfolio as well.

Frontier has a number of ultra-popular games franchises under its belt. These include the Jurassic World, F1 Manager and Elite Dangerous titles. And right now they’re in extremely high demand. They powered revenues at the business 26% higher in the 12 months to May to record levels of £114m.

The games industry is hugely competitive. And costly game development problems can be common, so success here isn’t guaranteed. But Frontier’s impressive momentum and the huge investment it’s making in software development are very encouraging. The business raised its headcount by as much as a quarter last year.

I also think the tech company’s low valuation bakes in the threat posed by rival developers. Today, it trades on a price-to-earnings growth (PEG) ratio of just 0.4. A reading below 1 suggests that a stock is undervalued.

Glencore

I think Glencore’s (LSE: GLEN) a great share to buy to exploit the upcoming commodities supercycle.

Some of the raw materials it mines and trades include copper, which is a key component in electric vehicles (EVs) and renewable energy technology, plus nickel and zinc. These materials are used in the manufacture of EV batteries. 

It also mines iron ore and ferroalloys, demand for which should soar amid global construction activity, plus aluminium, whose applications include power lines, consumer electronics and skyscrapers.

Glencore’s more recent push into lithium adds extra appeal too. It’s inked deals to become involved in the recycling of lithium-ion batteries. And according to reports it’s looking to begin trading the battery metal to exploit soaring EV demand.

I’m a little concerned about the company’s huge exposure to fossil fuels. For example, 24% of group earnings are generated from coal production. This is a risk as the world transitions from dirtier fuels towards other sources like renewables.

Having said that, I believe the bright demand outlook for Glencore’s other commodities makes up for this.

Today the FTSE 100 firm trades on a forward price-to-earnings (P/E) ratio of 3.8 times. On top of this it boasts a gigantic 10.2% dividend yield. I think it’s a top value stock to buy right now.

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.

For instance, British games maker Frontier Developments (LSE:FDEV) expects sales to grow by 20% per year on average. And it’s by no means a wild forecast. It recently reported record revenue of £114m. That’s 26% higher than the previous year.

So what does Frontier do and could this growth stock beat the market? Let’s take a further look.

Founder-led growth stocks

For almost 30 years, Frontier has been developing innovative games. At the helm is David Braben, CEO and founder of the business.

Some of the best companies in the world are founder-led, and with Frontier, Braben owns almost a third of the shares. That’s exactly the kind of skin-in-the-game that I like to see.

Its internally-developed games are driving material sales for the business. And several upcoming releases should build on that growth.

Making good progress

In addition to self-publishing games, Frontier partners with selected studios under its new games label Frontier Foundry. This part of the business looks promising and could drive future growth over the coming years.

There are risks if Frontier isn’t able to find and retain the talent that it needs to grow. Skilled staffing is a key component of the business model.

Sales for the coming years could also be hit by the rising cost of living. I’d question if consumers will be willing to spend more on games if they have less disposable income in their pockets.

Overall, Frontier has a healthy balance sheet, a solid strategy and innovative ideas. With a share price sitting 40% lower than this time last year, I reckon it has a decent chance to beat the market over the next three years.

Crunching data

Often the best growth stocks already have a successful track record. One such share is data and analytics company YouGov (LSE:YOU). Sales have doubled since five years ago and profits are up six-fold.

Its share price has fallen by 22% over the past year. But let me take a step back. If I’d bought these shares a decade ago, I would have achieved an annual return of 30%.

Could the recent share price tumble be an opportunity to beat the market? I reckon so.

Data is the new oil

It’s often said that data is the new oil. Companies that can successfully provide insights from mountains of data points could be the biggest winners of the future.

YouGov aims to do just that. Its unique panel of 17m members can capture thousands of data points on consumer attitudes and behaviour.

That being said, competition looks like the largest risk. It will need to keep up with emerging technologies that could provide superior data analytics in the future.

With technology-based businesses, competition from much larger players can often appear quickly and can have a material impact on future earnings.

All things considered, I would describe YouGov as a high-quality growth stock. I reckon the recent dip in share price is an opportunity and I wouldn’t hesitate to buy the shares today.

Buying when stocks are falling is a scary prospect. But it’s something I’ve been doing in my Stocks and Shares ISA since the start of the year. And while I may be taking a loss today, I feel I’ll be able to generate significant returns in the future. Let’s explore two UK shares that are on my portfolio buy list.

Best UK shares to buy for a comeback?

Investing in gaming stocks is a risky move. And, recently, Frontier Developments (LSE:FDEV) perfectly demonstrated why. The poorly-received launch of its Elite Dangerous: Odyssey title, combined with underwhelming pre-order sales of its Jurassic World Evolution 2 project, resulted in a sharp cut in revenue guidance. And that translated into the stock price plummeting.

With a lot of capital invested into single projects, any duds can have enormous financial consequences. That’s something I feel every investor ought to know before entering this stock market sector. However, Frontier has a reputation for continually improving its games even after release. And it seems this reputation continues to be well-founded.

Sales of Jurassic World Evolution 2 have picked up and reached 1.3 million units. Player reviews for Odyssey have been improving steadily as bugs and performance issues are addressed. And its publishing arm saw huge success with the launch of Warhammer 40,000: Chaos Gate Deamonhunters in May.

So it’s not surprising to hear that the company hit record revenues, growing by 26%. And yet shares of this UK game developer are still down 40% over the last 12 months, due of the stock market correction, among other factors. Pairing that with an impressive line-up of new game releases over the next two years makes this stock look like a bargain buy for my portfolio. At least, that’s what I think.

Constructing profitability

While the pandemic created quite a few disruptions to the construction industry, most of those headwinds have largely evaporated. Just looking at the latest results from Somero Enterprises (LSE:SOM) shows clear evidence of this. Why? Because revenue and pre-tax profits surged by 51% and 81% respectively.

As a reminder, the group designs, develops, and sells concrete-laying screed machines, drastically reducing the manpower and time required to complete industrial construction projects. And with operations based in the United States, Somero has been successfully capitalising on the $1trn infrastructure government spending plan.

Yet shares of this UK-listed enterprise are still down 12% over the last year. There are looming concerns that a recession will significantly impact operations. And these fears are not entirely unfounded.

However, while a recession may cause short-term disruption, I believe the long-term strategy remains untainted. And with $42m of cash on its books to weather the potential storm, I’m willing to take the risk and buy this business at a double-digit discount.

That being said, Frontier is still almost 40% cheaper than it was a year ago. So is now a good time for me to buy the gaming stock?

Investor confidence rebounds

The release of strong trading numbers has lifted the games company in recent weeks. This is a welcome change as previous statements had prompted bouts of heavy selling by investors.

Frontier’s share price slumped in November as it announced poor sales of its Jurassic World: Evolution 2 title. It fell again in January as it declared soaring costs pushed it into recording a first-half operating loss.

But as I say, news more recently has been far more encouraging. Last week Frontier said that revenues had surged to an annual record of £114m in the financial year to May 2022.

This was up 26% year-on-year, driven by solid sales of its dinosaur game and better-than-expected demand for its Warhammer 40,000: Chaos Gate – Daemonhunters title.

Games sales to explode?

Soaring inflation poses a clear threat to Frontier in the near-to-medium term. Rising pressure on consumer spending power could weigh heavily on sales of its video games.

However, the business has a string of popular titles in the pipeline that could help it continue growing revenues. F1 Manager 2022 for example is set to hit the market in August. The company also launched an expansion pack for Jurassic World: Evolution 2 last week.

Sales of Frontier could grow strongly over the next decade in fact if analyst projections are to be believed. Grand View Research thinks hardware and software innovations will drive the video games market from $220.8bn today to a whopping $583.7bn by 2030.

An exciting new Frontier

I’m quite tempted to buy Frontier Developments shares given these exciting projections. I already own software development services provider Keywords Studios in my portfolio. I think Frontier could be another great way for me to exploit the booming games market.

I’m also very tempted to buy because of the exceptional value for money Frontier’s share price offers today.

City analysts think earnings will soar 167% year-on-year in this financial year. This means the business trades on a forward price-to-earnings growth (PEG) ratio of just 0.2. Remember that anything below 1 suggests that a stock is undervalued.

I think Frontier could be one of the best-priced growth shares out there, in fact. The number crunchers think company earnings will soar an extra 47% in fiscal 2024 as well. This could be the precursor to strong and sustained profits growth over the next decade.

Further market choppiness could be on the cards as concerns over rocketing inflation worsen. But this doesn’t put me off from buying British stocks. I’m happy to endure some discomfort in the near term if there’s a good chance the shares I buy will deliver solid long-term returns.

Here are two top stocks I’m considering buying right now. I think they could be too cheap for me to miss.

Software star

Around a year ago, I bought Keywords Studios shares for my portfolio. I thought the technical and creative services it provides to the video games industry made it a top growth share to buy.

I think now’s the time to boost my exposure to the fast-growing games sector. It’s why I’m thinking of investing in games developer Frontier Developments (LSE: FDEV).

The company’s share price has slumped in 2022 as higher costs have pushed it into the red. Frontier reported an operating loss of £1.3m in the six months to November because of higher licensing royalties and more disc sales (margins on physical formats are lower than they are on digital sales).

Buying on the dip

It’s my opinion though that recent weakness represents a great dip buying opportunity. City analysts think Frontier Developments’ earnings will soar 125% year on year in the upcoming financial year (to May 2023).

Consequently, the software designer trades on a forward price-to-earnings growth (PEG) ratio of just 0.2. A reading below 1 suggests that a stock could be undervalued.

I think Frontier’s profits could soar this year and well beyond as the games industry — which is already worth more than the music and movie sectors combined — grows rapidly.

Analysts at Mordor Intelligence for instance think the global games business will be worth a whopping $340bn by 2027. That compares with the $198bn that’s it was valued at last year.

Takeover talk

Investing in games studios can be dangerous given how competitive the marketplace can be. There are thousands of software developers across the globe jostling to produce the next winning title.

This is why I like Frontier Developments in particular. I’m not saying the company is immune to the threat from rival developers. But it already has a range of ultra-popular games franchises on its books, like Jurassic World and Elite Dangerous, that already have large and established fanbases.

I also think buying a game developer like Frontier Developments could be a good idea as industry consolidation heats up. Latest action this week saw Japanese developer Square Enix sell several Western studios to Embracer Group for a cool $300m.

The sale also includes the rights to popular franchises like Tomb Raider and Deus Ex. I think Frontier (like Codemasters and Sumo Group before it) could be the latest London-listed software business to attract takeover attention.

A penny stock on my radar

I’d also use recent price weakness at Sylvania Platinum (LSE: SLP) to grab a brilliant bargain. The business has fallen back into penny stock territory below £1 as fears over the global economy have grown.

This means that Sylvania shares trade on a forward price-to-earnings (P/E) ratio of 4.1 times, well inside bargain-basement territory of 10 times.

On top of this, Sylvania Platinum now boasts a mighty dividend yield of 5.6% following these falls. And this year’s predicted dividend is covered 4.3 times by anticipated earnings, too, meaning there’s a good chance that payouts could meet broker expectations.

Safe-haven metals

I like South African mining stock Sylvania Platinum for a couple of reasons. Firstly, the platinum group metals (PGMs) it produces are safe-haven investment metals like gold and silver. This means that they often rise in value when inflationary pressures increase and doubts over global growth intensify (otherwise known as a ‘stagflationary’ environment).

This makes them ideal commodities for the here and now, then. What’s more, platinum and palladium prices could experience sustained strength if the ban on Russian metal exports carries on. Russia is the second-largest platinum producer on the planet.

There’s good reason then to expect Sylvania Platinum’s profits to impress in the current environment. Indeed, platinum has moved back towards $1,000 per ounce in recent days as concerns over stagflation have grown.

Cleaning up the environment

I also think Sylvania’s a good stock for me to buy as the fight against climate change intensifies. The material it produces is used in massive quantities to reduce the emissions that car exhaust systems create.

Legislation has tightened in recent years (and especially in China) in order to cut car pollution, meaning that greater loadings of platinum-like metals are needed in cars. I think the rules could become even stricter too as worries over global warming reach fever pitch.

Platinum’s extra role in the green revolution

It’s also important to note platinum’s critical role in the production of green hydrogen. Demand for this low-carbon power source is also tipped to balloon as the world moves away from fossil fuels.

Platinum is able to handle excessive temperatures and complex chemical changes, making it an ideal fuel cell catalyst in the electrolysis process. It’s why the World Platinum Investment Council believes that platinum demand for use in green hydrogen production could total 600,000 ounces between now and 2032.

It’s possible that the adoption of green hydrogen could pick up even further following the war in Ukraine, too, as the world turns its back on Russian oil and gas exports.

I am concerned about what impact subdued car-building activity will have on Sylvania in the immediate future. Auto production has slumped across the globe due to huge semiconductor shortages. But on balance I think the benefits of owning this cheap UK share over the long term outweigh these risks.

As someone willing to look beyond short-term wobbles and build my wealth over many years, is the UK’s largest game developer and publisher now a screaming buy?

Well, recent trading has hardly been awful.

Rising revenue

Back at the start of 2022, the AIM-listed company reported a 33% rise in revenue in the six months to the end of November. At least part of this was attributed to the release of its latest game: Jurassic World Evolution 2. However, older titles such as Planet Coaster and Planet Zoo were still selling well.

Despite the presence of Omicron, this momentum continued into the important pre-Christmas shopping season. Frontier delivered its highest-ever December revenue in 2021.

So, what gives?

Scratch the surface, however, and the drop in the Frontier Developments share price starts to make more sense. Gross profit margin has been falling and marketing costs have been rising. The “disappointing launch” of a bug-plagued expansion to one of the company’s most popular titles — Elite Dangerous — didn’t help matters.

The valuation also started to look (very) frothy given that pandemic-related lockdowns were now in the past.

Chinks of light

On a more positive note, Frontier does have an interesting line-up of titles due for release soon. This includes its first highly-anticipated Formula 1 management game, as part of a multi-year agreement with the franchise. Frontier Foundry, the firm’s label for third-party publishing, will also be releasing a number of titles with the view to it becoming a “material contributor” to the company.

In addition to this, the Cambridge–based business expects a resurgence of demand for the aforementioned Jurassic World Evolution 2 when the final part of the Jurassic World trilogy (Dominion) comes to cinemas in June.

All of the above help to explain why analysts believe earnings will jump in FY23 (beginning 1 June). This, in turn, brings the valuation down to a P/E of 28. That’s still hardly cheap. Even so, it is more attractive than the 47 times earnings price tag Frontier had back in December.

Risks to consider

This is not to say the worst is over though.

The higher cost of living could force many to put off the purchase of their next game(s). Even something as simple as better weather could be enough to impact demand and, consequently, the Frontier Developments share price.

Further delays to games are also a possibility. The £500m cap’s Warhammer Age of Sigmar strategy game has already been put back to FY24 in an effort to improve its “quality and longevity“.

A cautious buy

The next update on trading will be in early-to-mid June. Assuming the concerns mentioned above haven’t come to pass, I wouldn’t be surprised to see the Frontier Developments share price finally change direction. This is, however, dependent on it hitting previous revenue guidance of between £100m and £120m.

On reflection, I certainly wouldn’t go ‘all in’ today. However, I do think a lot of negativity is now firmly priced in.

It might not be a screaming buy but I’m more tempted than ever to begin building a position.

Factoring in eSports revenue and console sales, the gaming industry is valued at over $300 billion. And with the explosion of mobile gaming, the metaverse surge and the emergence of in-game economics, the industry is now a thriving microcosm that has transformed interactive storytelling.

While the US and China are leaders in this space, the UK is slowly growing into a European powerhouse, with several companies gaining exposure during the pandemic gaming boom. And when it comes to investing in gaming, the UK has an ever-growing list of stocks that have huge valuations and are big global players now.

What are gaming stocks?

Gaming stocks are companies listed on an exchange that primarily design, distribute or market video games. This is a broad classification that includes a variety of service providers, software developers, animators and graphic consultants that predominantly deal with the creation, launch and post-release support of video games.

For investors new to the space, this article will serve as a starter guide to six of the biggest gaming shares listed on the London Stock Exchange. These companies have the largest market caps and form the core of the UK gaming industry, giving you a detailed picture of what the top gaming stocks in the UK have to offer.

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Top gaming shares in the UK

Frontier Developments

The studio behind popular titles like RollerCoaster Tycoon, Elite Dangerous and Jurassic World Evolution has been a British gaming mainstay for nearly three decades now. Frontier Developments has a multi-pronged strategy that involves licensing rights to popular franchises and also maximising post-release revenue through in-game purchases.

The company gained prominence during the pandemic gaming boom when its share price rocketed over 150% in just one year. But this was mainly due to the fact that a lot of its older releases were being purchased or downloaded again as people were stuck at home. This shows the focus on quality as many of its titles have longevity, something that is rare in the gaming world.

Building on their strategy and success during the first lockdown, Frontier Developments acquired the licensing rights to the first F1 simulator game (launch date: summer of 2022). This is an exciting long-term opportunity for the company to expand its sports portfolio much like Electronic Arts did with the FIFA and NBA 2K series. In the gaming world, this is a huge step ahead because sports simulator games generate steady revenue long after the initial release.

Frontier’s business strategy and recent successes have allowed the company to climb the ranks and become one of the largest gaming stocks listed in the UK.

Keywords Studios

The company with the second-largest market cap on this list of £1.96bn is not a game developer in the traditional sense. Keywords Studios offers both creative and technical assistance to large gaming studios that outsource aspects of development. And this also means the company avoids the pitfalls that most game developers face. The financial loss from unsuccessful releases is largely avoided, which is why the company’s financials have grown steadily.

The Dublin-based services company has recorded year-on-year revenue growth for over five years, and 2021 was no different. Being an ‘under the radar’ gaming stock, the company has made it clear that there will be no direct game launches under the Keywords Studios banner. But to grow its influence and impact on the sector, the company has acquired over 60 smaller studios that perform a range of operations including dialogue voicing, record labels for in-game music, customer care, marketing, user testing and 3D technology.

Keywords Studios has quickly risen to prominence as an FTSE AIM stock for investors looking to include gaming shares in their portfolios.

Devolver Digital

This gaming stock listed in the UK is the only big studio with broad exposure to the thriving American gaming market. Based in Texas, Devolver Digital has a very focused business model of building indie games that shake up the market. The company identifies as a developer-friendly platform that gives creators the tools to compete with the big players.

After the success of its Serious Sam series, this studio has been involved with over 50 successful titles, including the sleeper hit Hotline Miami, Carrion, Shadow Warrior and also published the global phenomenon Fall Guys. Devolver Digital is also making a huge push towards metaverse gaming, which is largely considered to be where the industry is headed in the next decade.

This gaming stock was listed on the FTSE AIM index in 2021 and, with its market strategy and global exposure, the company is looking to maximise the potential of indie titles.

Team17 Group

Team17 Group has been belting out hits from the 1990s and has a firm hold of the British indie team games market. With popular titles like Overcooked, the Worms series, Hammerting and Blasphemous, the company’s focus on premium, squad-based, pay-to-play games is clear.

The company works with budding indie creators across the globe, and acts as a distributor as well. Over 100 games have been launched under the Team17 banner since the late 90s, and Team17 continues to dominate the party game genre.

Since 2021, the company has also branched out to educational entertainment and gaming apps targeted at children under 13. This is a huge gaming niche and generates a lot of passive revenue. Team17 recently acquired StoryToys, a big name in the edutainment field to strengthen its position as UK’s top ‘edugaming’ company.

Games Workshop Group

The story of Games Workshop is very unique. After humble beginnings as a board game manufacturer in the mid-70s, the company gained global prominence after the success of its miniature wargame Warhammer 40,000. And in the 90s the company made the smart decision to digitise the Warhammer series and release playable computer games as well. Since then, the company has gone on to produce over 50 extremely successful video games playable across every console.

The franchise model is extremely popular in the video game world, and Games Workshop has perfected the art of creating successful sequels. Using its Warhammer series as the blueprint, the company has created multiple streams of revenue and gained licensing rights to other global franchises like The Lord of the Rings as well.

Given its long history, the dominance of a niche category, longevity and huge market cap make Games Workshop a top UK gaming stock.

Are gaming shares right for you?

Gaming stocks might not be for everyone. Traditionally, gaming shares are slightly volatile given the nature of the industry. The industry has become incredibly competitive, meaning even popular releases often get buried. CD Projekt Red’s Cyberpunk 2077 serves as a reminder of how even highly anticipated games with excellent marketing can fail on initial release.

For investors looking at long-term gains from gaming shares, it is wise to look at the biggest shares, catalogue of games, future projects, takeovers and potential collaborations. All these factors cause price fluctuations. It is easy to get caught up in the hype as video game stocks can quickly generate a lot of interest in short bursts.

But with that being said, the industry looks like it is about to take the next big leap in entertainment with virtual world-building and the metaverse. Gaming could become a rewarding avenue for investors who follow the Foolish investing philosophy of being smart and choosing companies with robust values and financials with long-term gains in mind.

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• Calculating compounding growth of earnings, like Warren Buffett does, can be effective in finding consistently profitable companies
• Learning Technologies Group and Frontier Developments both boast strong earnings growth
• These firms have also reported significant increases in revenue

As one of the most successful investors of all time, Warren Buffett knows a thing or two about picking stocks. His technique of calculating the compound growth of earnings per share (EPS) can be very helpful for finding exciting growth stocks. I’m looking closely at this metric, then applying it to two FTSE AIM stocks. Let’s take a closer look. 

How Warren Buffett uses compound growth

Warren Buffett has long stated that investment growth requires time. This is because the power of compounding — that is, the constant rate of return over a given time period — may only truly be seen over a long period. In essence, calculating compound growth allows me to see which companies are consistently profitable over time.

The formula for working out compounding growth is: (V_final/V_begin)^1/t − 1, where V = value and t = time.   

To use the formula, we would take a data set, in our case the EPS figures. The ‘final value’ is the most recent figure in the set. The ‘begin value’ is the oldest figure.

One of Warren Buffett’s biggest holdings is Coca-Cola and we can apply the above formula to understand why he likes this business. Even in the last four calendar years, the EPS displays consistent growth. Its 2021 EPS was ¢2.26 and 2018 was ¢1.51. 

We begin by dividing 2.26, the ‘final value’ from 2021, by 1.51, the ‘begin value’ from 2018. This equals 1.49 and we then calculate 1.46^1/t. The period of time is four years, so 1.46^1/4 gives us 1.106. This result, minus 1, finally equals 0.106, which is 10.6% in average yearly growth in EPS. In my experience, this formula has been ruthlessly effective for finding the best growth stocks.

2 FTSE AIM stocks that display growth    

This process helped me find two growth stocks. The first, Learning Technologies Group (LTG), is a software support services firm. For the 2020 calendar year, EPS was 4.42p, compared to 1.29p in 2016. With the aid of the above formula, I have calculated that the compound annual growth rate of this company’s EPS is 27.9%. This is very appealing to me as potential investor.  

Its price-to-earnings (P/E) ratio, that may reveal if a company is under- or over-valued, is 73. This is far higher than a close competitor, Tribal Group, that has a P/E ratio of 28.79. Nonetheless, a recent trading update forecast that revenue for the 2021 calendar year will not be less than £254m. This is a major improvement from 2020, when revenue was just £132.3m.

Another business, Frontier Developments, a video games developer and publisher, has earnings growth of 19.5%. For 2021, this company’s EPS was 55.4p, having increased from 22.7p in 2017. The firm did swing to an interim loss for the six months to 30 November 2021, due to higher costs. Nonetheless, revenue increased 33% to £49.1m on a year-on-year basis.

The technique of calculating compound earnings growth is regularly used by Warren Buffett. While it should be supported with other information, like revenues, it is a good indicator of whether a company is performing for its shareholders or not. Both Learning Technologies Group and Frontier Developments fit the bill and I will be buying shares in both firms now.