Meme stocks have been grabbing headlines with volatile price swings in recent years. However, a more traditional FTSE 250 company has been quietly outperforming the market in the last few weeks. Hollywood Bowl (LSE:BOWL) has seen its share price surge by an impressive 36% in the past month, catching the attention of many investors.
What happened?
This remarkable performance comes on the heels of a strong year for the company, which has seen the shares climb by nearly 30% over the past 12 months. This growth significantly outpaces the sector and the broader UK market, which have returned -3.1% and 10.8% during the same period.
So, what’s behind Hollywood Bowl’s recent success? The company, which operates bowling alleys and mini-golf centres across the UK, appears to be benefiting from a perfect storm of positive factors.
Firstly, it boasts solid fundamentals. With a price-to-earnings ratio of 15 times, the stock is trading below the UK market average of 16.8 times. This suggests it may still be undervalued, despite its recent gains. The company’s earnings grew by an impressive 12.4% over the past year, and analysts forecast further growth of 6.35% per year moving forward. This isn’t mind-blowing by any means, but steady growth can be a very attractive proposition for long-term investors.
Strong fundamentals
The company’s financial health also appears robust. It operates with zero debt, giving it enormous flexibility in an uncertain economic environment. Unlike many companies still reeling from the pandemic, a strong balance sheet has allowed the company to not only weather recent challenges but also to invest in opportunities.
I suspect investors have also been encouraged by the firm’s dividend policy. The stock currently offers a very generous 4.7% yield. With a pay-out ratio of 61%, there is plenty of room for future increases. Indeed, the company recently announced an increase in its first-half dividend to £0.04 per share, demonstrating confidence in its financial position and a commitment to shareholder returns.
Risks
However, potential investors should be aware that the stock’s rapid rise hasn’t gone unnoticed. A discounted cash flow (DCF) calculation now considers the firm to be approximately 15% overvalued, suggesting that much of the near-term growth is over. Additionally, there has been significant insider selling over the past three months, which could be a cause for caution. Of course, this can be entirely unrelated to company performance, but doesn’t inspire me if management aren’t putting their money where their mouth is.
One for the watchlist
While Hollywood Bowl’s recent performance has been impressive, the leisure industry can be cyclical and sensitive to economic conditions. I suspect the recent move has been entirely justified, but the shares are now potentially fairly priced. I like what I see in the company. However, I reckon my money could be working harder elsewhere. I’ll be adding it to my FTSE watchlist for now.
This post was originally published on Motley Fool
