The FTSE 100’s 7%-plus share price rise since the beginning of 2019 has provided a much-needed boost to blue-chip investors following the washout of late last year.
There’s still plenty of trouble out there for share pickers to think about for this year, from the potential impact of slowing economic growth in Europe and Asia, to uncertainty surrounding the UK’s Brexit crisis, and the possible implications of US President Trump’s tense relationship with Chinese trade envoys, Democrats on Capitol Hill and even special counsel Robert Mueller.
Flipping higher again. But why?
I’ve been arguing in recent months, though, that there are plenty of low-cost, big-yielding Footsie firms demanding serious attention given some of the share price weakness of 2018.
I wouldn’t have considered Marks & Spencer Group (LSE: MKS) to be one of these great dip buys, however, even if the investment community begs to differ: the retailer’s share price has surged 17% since the turn of January.
Regular readers will know that I consider M&S to be one of the most dangerous firms on the FTSE 100 to buy right now, and so I’m left scratching my head as to why demand for its shares has gone bananas. The fact that it’s published yet more terrifying trading news in that time worsens my sense of confusion too.
Marks & Spencer is seeing turnover slump across the entire business, and in January declared that like-for-like sales of its clothing and homeware products dropped 2.4% in the three months to December while comparable sales across its food division fell 2.1% year-on-year.
Sales slippage set to continue?
This caused like-for-like revenues across the group to fall 2.2% year-on-year, and I’m not backing the top line to roar back any time soon as competition in the low-to-mid-priced clothing sector intensifies and retail conditions in the UK remain difficult. Indeed, recent figures from the British Retail Consortium showing that the retail sector cut 70,000 jobs last year underlines the stress on the high street as businesses like M&S are forced to close stores.
Reflecting these twin troubles, City analysts expect Marks & Spencer to print another annual profits reversal in the year to March 2019, by 11%, and another (albeit much better) 1% decline is predicted for next year. Given the enormous amounts of hard work that M&S needs to conduct to revamp its long-failing womenswear unit, and to reinvigorate demand for its premium foods when grocery market disruptors Aldi and Lidl are increasing investment in their own luxury products, investors should be braced for sustained weakness stretching beyond the medium term.
For this reason I’m not tempted to buy despite the firm’s still dirt-cheap valuation, a forward P/E ratio of 11.6 times, nor its gigantic 6.5% dividend yield. It’s a share that’s in danger of collapsing again as 2019 progresses, in my opinion, with the price spike at the start of the year raising the chances of a painful drop in the months ahead.
