Burberry Group plc announces a 10% fall in profits — but is it now a contrarian buy?

Sentiment around Burberry plc (LON: BRBY) is currently negative – that means this is the time to buy.

| More on:

The content of this article was relevant at the time of publishing. Circumstances change continuously and caution should therefore be exercised when relying upon any content contained within this article.

When investing, your capital is at risk. The value of your investments can go down as well as up and you may get back less than you put in.

Read More

The content of this article is provided for information purposes only and is not intended to be, nor does it constitute, any form of personal advice. Investments in a currency other than sterling are exposed to currency exchange risk. Currency exchange rates are constantly changing, which may affect the value of the investment in sterling terms. You could lose money in sterling even if the stock price rises in the currency of origin. Stocks listed on overseas exchanges may be subject to additional dealing and exchange rate charges, and may have other tax implications, and may not provide the same, or any, regulatory protection as in the UK.

You’re reading a free article with opinions that may differ from The Motley Fool’s Premium Investing Services. Become a Motley Fool member today to get instant access to our top analyst recommendations, in-depth research, investing resources, and more. Learn More.

It’s that age-old investing adage: never try to catch a falling knife. This means “be careful about buying into shares when they are falling, because they could fall even more”.

But, if you choose your company and your moment well, investing in a firm when its share price has taken a knock can be the best thing to do.

Sentiment for Burberry is negative at the moment

The opening up of China to the world has led to a never-ending supply of cheap manufactured goods. And it has also led to a middle class that has swollen to the hundreds of millions. These nouveaux riches are eager to spend their money on consumer products. So it’s companies that cater for the world’s emerging consumers that will really do well in future years.

This is why Warren Buffett recently bought into Apple, and why I think you should invest in luxury goods maker Burberry (LSE: BRBY). You may be a little surprised to hear this now, considering this company’s latest results, just released, show total revenue fell by 1% to £2.52bn for the year to 31 March, and adjusted profit before tax fell £35m to £421m.

But I think the edging down in sales and profits is not a sign that this firm is heading for trouble, but rather turbulence on its flight path to further growth.

What’s more, the business is taking the opportunity to overhaul its retail operations so that, both online and in its stores, it can provide a better service. It also plans to cut costs by at least £100m by 2019. Chief executive Christopher Bailey has admitted it is a challenging time for luxury goods makers. And many are questioning Burberry’s growth credentials.

That means this is the time to buy

But true contrarians will have noticed that the share price has nearly halved from the highs of last year. And the fundamentals are appealing, with a P/E ratio of 14.34 and a dividend yield of 3%. This looks great value for a company that has such long-term growth potential. And although earnings have edged down, when seen in a big picture context they have been remarkably resilient. Plus, the dividend yield is being paid out consistently, making this both a growth share and a high yielding investment.

Last year this was a firm that could do no wrong, and the share price just climbed higher and higher. But the time to buy is not when everyone else is leaping in, but when current sentiment is negative, and most shareholders are thinking of selling. This is why contrarian investing is difficult: going against the crowd is counter-intuitive.

Warren Buffett once said “It’s far better to buy a wonderful company at a fair price than a fair company at a wonderful price.” In my view, Burberry is that wonderful company, and at current levels you will be paying a very fair price.

In my opinion, Burberry is a strong contrarian buy.

Should you invest, the value of your investment may rise or fall and your capital is at risk. Before investing, your individual circumstances should be assessed. Consider taking independent financial advice.

Prabhat Sakya has no position in any shares mentioned. The Motley Fool UK owns shares of and has recommended Apple. The Motley Fool UK has recommended Burberry. We Fools don't all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors.

More on Investing Articles

Rainbow foil balloon of the number two on pink background
Investing For Beginners

2 UK stocks that could do well out of the general election

Jon Smith runs the rule over two UK stocks that may benefit from higher spending on healthcare, consumer staples and…

Read more »

Concept of two young professional men looking at a screen in a technological data centre
Investing Articles

Could this undervalued growth stock be the next big success story in US tech?

Shares of this US technology giant have collapsed almost 50% in 2024, but is the growth stock now an incredibly…

Read more »

Young black woman using a mobile phone in a transport facility
Investing Articles

After soaring 35% this year, is there still value in Barclays shares? Here’s what the charts say!

Barclays has been on a tear in 2024. But where does that leave investors considering buying some shares now? This…

Read more »

Light trails from traffic moving down The Mound in central Edinburgh, Scotland during December
Investing Articles

Nvidia stock has surged 3,450%. This UK investment trust owns loads!

Nvidia's recent amazing price surge has helped boost the value of this investment trust too as the chipmaker is its…

Read more »

Bronze bull and bear figurines
Investing Articles

After the general election what might happen to the FTSE 100?

Our writer’s been looking at the manifestos of the three main political parties to try and understand how the general…

Read more »

Young Caucasian man making doubtful face at camera
Investing Articles

When will Shein hit the UK stock market and should I invest?

With Shein looking likely to list on the London stock market in 2024, this writer weighs up the case for…

Read more »

Investing Articles

Start supercharging passive income with REITs!

Are REITs the ultimate investment for boosting income generated from a portfolio? Zaven Boyrazian explores some of the most lucrative…

Read more »

Investing Articles

Should I buy more Rolls-Royce shares near 500p?

This investor is wondering whether to buy more Rolls-Royce shares this summer or to just stick with those he already…

Read more »