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This might just be the best growth stock on the FTSE 250

A graph made of neon tubes in a room

With many growth stocks now trading at a fraction of the prices they reached in the euphoria of 2021, I’m scouting out buying opportunities.

I like Watches of Switzerland Group (LSE:WOSG), a retailer of luxury timepieces and jewellery.

Time is money

Of course, nobody needs a Rolex, Breitling or Patek Philippe. Personally, I think it’s fine to just check the time on my mobile phone.

But affluent customers worldwide disagree. The first six months of 2022 saw nearly 12% growth in the value of Swiss watches exported globally compared with the same period in 2021, according to the Federation of the Swiss Watch Industry. That jump took the export value to an all-time high of CHF11.9bn.

Watching the clock

As an investor, I’m drawn to the Swiss watch sector because the industry has enormous pricing power. In times of inflation, the ability to raise prices is essential to stop profit margins being eroded away. According to Gavin Launder, who manages the L&G Future World Sustainable UK Equity Fund, luxury timepiece manufacturers can raise prices without upsetting anybody.

Launder told Shares Magazine: “From an inflation point of view, everybody likes watch prices going up. The person who just bought one is happy because the watch has done what they always thought it would do, which is be a good store of value. The person who wants to buy one is even more convinced it is a store of value and will pay a bit more.”

In addition, brands like Rolex consistently produce fewer watches than are demanded. That means retailers have usually already sold the timepieces before they arrive in store and must resort to waiting lists. And I don’t expect people who are ready to drop £10,000 on a watch to be too badly affected in relative terms by their energy or supermarket bills going up.

Where does Watches of Switzerland fit into this? Well, the FTSE 250 company is the biggest UK seller of Rolex watches. As far as I can see, Watches of Switzerland offers the best way to get equity exposure to Rolex, which is a private company.

Ready, set, go!

It has been growing at a fast clip in recent years. It reported a 40% year-on-year increase in revenue for FY22. Of total sales, 65% came from the UK and the remainder from the US.

It said the American market for luxury watches is ripe for change. This is due to fragmentation, with small retailers all battling it out for market share. Watches of Switzerland plans to beat the competition by drawing on the efficiencies of being a big chain.  

Of course, there’s the risk that US consumers might not like it muscling in on the little guys. Similarly, the company plans to expand into Europe, which could bring its own challenges. Yet as an investor, I think the risks could be worth it for greater geographical diversification.

The company is very profitable, with an impressive 27% return on capital employed in FY22. It trades on a forward price-to-earnings ratio (P/E) of 14.6. That’s cheap in my view for a growth stock forecast to see earnings increase by 15% a year.

I don’t need an expensive Swiss watch to know it’s time for me to add more of this stock to my portfolio!

The post This might just be the best growth stock on the FTSE 250 appeared first on The Motley Fool UK.

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Mark Tovey has positions 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.