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Today marks the beginning of a new fiscal year. and there is a FTSE 250 stock which is at the top of my shopping list right now.
I have a new ISA contribution limit that allows me to invest £20,000 without worrying about dividend or capital gains tax. And there is one action where I wouldn’t mind using the entire allocation!
But first…
Before we continue, a couple of things are worth noting. First of all, I don’t plan on investing 100% of my ISA allocation in a single stock, no matter how impressive I think it is.
Second, investing my entire allocation is not the same as investing 100% of my net worth. Focusing on one stock this year would still leave me with an overall diversified portfolio.
However, there is that stock that I really like. If the stock market closed and this was the only stock I could buy, I would and feel good about things.
Diploma
the action is Diploma (LSE:DPLM) and has had one of the best performers on the FTSE 250 in the last five years. Since 2018, the company’s share price has increased by around 140%.
Diploma is a distributor of specialized industrial components. More specifically, it is a collection of smaller companies focused on this industry.
With a price-earnings (P/E) ratio of 37, the stock doesn’t look cheap. And it is not. So the high price comes with risk, but I still think the underlying business makes it one of the best UK stocks to own.
In my opinion, the company has excellent growth prospects, a strong competitive position and an attractive economy. That is why I own the shares and plan to continue buying them.
Growth
Diploma’s approach involves acquiring businesses and helping them operate more effectively using their scale, infrastructure and expertise. This gives you two types of growth prospects.
First, there is inorganic growth, obtained from the purchase of other businesses and their future profits. Second is organic growth, as the amount of revenue these businesses generate increases.
The prospects for both seem good to me. On the inorganic side, Diploma just closed a deal, has 50 more in the pipeline now, and another 2,000 identified for the future.
Organic growth also looks impressive. In their last earnings update, the company reported 10% organic earnings growth, which I think is good in a rising interest rate environment.
Economic Sciences
As a distributor, Diploma does not have a lot of property, plant and equipment. This gives you low operating costs, making it economical to run.
Last year the company earned £144.3m in operating income using £49.6m of fixed assets. And its capital requirements were less than 9% of the cash generated through its operations.
Those are attractive numbers, so it’s natural to wonder what’s stopping someone else from doing the same. More specifically, what prevents a company like Amazon disrupting Diploma’s business?
The answer is that the FTSE 250 company is more than just a dealer. It also provides its clients with specialized knowledge, experience and personalized customer service, which is difficult to replicate.
As a result, I expect Diploma to withstand disruption in the future. And with its growth prospects, I’d feel good about investing 100% of my ISA allocation for this year in the stock, if necessary.
Please note that tax treatment depends on each individual’s individual circumstances and may be subject to change in the future. The content of this article is provided for informational purposes only. It is not intended to be, nor does it constitute, any form of tax advice. Readers are responsible for carrying out their own due diligence and obtaining professional advice before making any investment decisions.
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