Driven by links to an expanding electric car sector, this stock has more mileage after its 235pc gain

An attractive valuation and several growth catalysts suggest further capital increases are ahead for integrated manufacturing specialist

It is natural for any investor to consider crystallising large paper gains made on their holdings. After all, a 235pc capital return in less than five years, in the case of our notional holding in Volex, represents a hugely successful performance in an era where the wider stock market has thoroughly disappointed. Indeed, the FTSE AIM All-share index, of which the company is a member, has fallen by 26pc over the same period.

However, it is imperative for all investors to ignore the past performance of their holdings when determining whether to hold or sell.

Just because a stock has risen in the past does not necessarily mean that further gains are less likely. For instance, it may still trade at an attractive price that offers scope for additional capital gains. Furthermore, several clear catalysts may exist that have the potential to boost its sales and profits, as well as its share price, over the long run.

Moreover, investors who sell a stock must find a better use for their capital. Cash may suffice in the short run but, on a long-term view, it can be difficult to unearth superior opportunities for capital growth vis-a-vis a stock that was recently sold to lock-in profits.

While Volex’s 235pc share price increase since being added to our inheritance tax (IHT) portfolio in August 2018 is impressive, Questor believes there is more to come from the company.

The manufacturer of cable assemblies used in applications such as electric vehicles and medical equipment released an upbeat full-year trading update last month that was better than the stock market anticipated.

Revenue is expected to rise by 16pc year-on-year, while underlying operating profit is set to be about 17pc higher. A 0.2 percentage point increase in the company’s underlying operating profit margin to 9.3pc highlights its capacity to successfully manage costs during an era of rampant inflation. This highlights its strong competitive position, which could prove beneficial over the coming months should inflation prove to be somewhat sticky.

Net debt is due to have fallen by $22m (£17.4m) in the second half of the financial year so that it stands at about $76m at year-end. The company appears to be in a sound financial position to make further acquisitions following four purchases in the previous financial year. It is also well placed to ramp-up investment in the structural growth markets in which it operates, notably electric vehicles, to expand its range of operations.

Trading on a price-to-earnings ratio of 12.9, Volex remains attractively priced given its long-term growth potential. Indeed, its share price

‘Just because a stock has risen in the past does not necessarily mean that further gains are less likely’

includes a wide margin of safety that suggests its risk/reward opportunity is still highly favourable ahead of an improving outlook for the global economy.

While it is tempting to lock-in the stock’s large capital gain, this column believes it has further room to run. Therefore, Volex remains a worthwhile holding in our IHT portfolio.

Update: RWS

Patent translation specialist RWS poses a very different question for investors than Volex.

The company’s shares have fallen by 41pc since being added to our IHT portfolio in December 2017, with the release of a profit warning last month prompting a further deterioration in investor sentiment.

Revenue for the first half of the year is expected to grow by about 3pc, with organic sales declining by 6.8pc on a constant currency basis due to “softer activity levels and slower decision making amongst certain clients”. Even though efficiencies helped to partially offset weaker than expected sales, the company’s full-year adjusted pre-tax profit is forecast to be at the lower end of the range of market expectations.

While this is clearly disappointing, the company’s long-term prospects remain relatively upbeat. It continues to shift to a subscription-based business model that offers the prospect of greater customer loyalty and stickier revenue. And with artificial intelligence being a possible growth catalyst because of its potential to improve productivity among the company’s translators, its financial outlook could improve over the coming years.

With a net cash position of £58m, RWS has the financial means to overcome a challenging operating environment. Its price-to-earnings ratio of 9.3 indicates that it offers good value for money and recovery potential over the long run. Hold.