This growth stock crashed 20% today! Here’s what I’d do now

This firm was previously a strong performer in a difficult market. Is this one-off problem a buying opportunity?

| 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.

Shares in British fashion retailer Joules Group (LSE: JOUL) fell by as much as 30% on Friday morning (but then recovered to be just over 20% down) after the company warned that profits would be lower than expected this year.

According to management, stock availability issues caused retail sales to fall by 4.5% during the seven weeks to 5 January. This compares with growth of 11.7% during the same period last year.

Joules is not the only retailer to issue a disappointing update this week. However, the company says that its problems were caused by a one-off supply problem with its online sales, not by weaker demand.

If demand continues to remain strong, then it’s possible that Joules could be cheap after today’s drop. In this article I’m going to take a closer look at Joules to see whether the stock might be worth buying.

I’ll also take a look at high street stalwart Marks and Spencer Group (LSE: MKS), whose share price fell yesterday after a disappointing update.

“Demand remains strong”

According to CEO Nick Jones, “demand for the Joules brand and its unique products remains strong”. Mr Jones says that website traffic rose by 8% over the festive period and customer numbers rose. The only problem was that supply issues meant the company couldn’t satisfy online demand.

The company says these one-off issues have been fixed and that it’s taking steps to beef up its logistics operations here in the UK and in the US — overseas sales now generate about 17% of revenue.

A cheap fashion buy?

Today’s update warns that profits for the year ending 26 May are now expected to be significantly below expectations. Based on broker forecasts I can see, I estimate that underlying earnings might now drop to around 13p per share, down from 14.1p last year.

On this basis, Joules stock now trades on about 13.5 times forecast earnings. If the business can return to growth next year, this could be a bargain. But it’s not without risk — problems like this often mark the start of a period of poor performance. I’d consider taking a small position in Joules, but I wouldn’t bet the farm on it.

Is there any hope for M&S?

Marks and Spencer seems to have been in turnaround mode for as long as I can remember. And it’s usually the same story. Food sales are up, clothing and home sales are down.

That’s what happened during the third quarter, which ended on 28 December. Same-store food sales rose by 1.4%, while clothing and home sales fell by 1.7%, on a comparable basis.

These numbers didn’t surprise me. But what did shock me a little was that the group’s online sales of clothing and home items only rose by 1.5%.

Most big retailers are reporting strong online revenue growth, even as store sales fall. For example, Next reported a 15.3% increase in online sales during the final part of last year.

If M&S can’t attract online shoppers, then I think it has a serious problem.

I remain bullish about the outlook for the food division’s move online with Ocado. But I’m starting to think the group’s clothing business may be beyond help. Splitting the business in two is starting to look attractive to me, but could be very difficult and expensive.

I’ll be staying away from M&S stock until things become clearer.

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.

Roland Head has no position in any of the shares mentioned. The Motley Fool UK owns shares of and has recommended Joules Group. Views expressed on the companies mentioned in this article are those of the writer and therefore may differ from the official recommendations we make in our subscription services such as Share Advisor, Hidden Winners and Pro. Here at The Motley Fool we believe that considering a diverse range of insights makes us better investors.

More on Investing Articles

Black father and two young daughters dancing at home
Investing Articles

1 FTSE 250 stock I own, and 1 I’d love to buy

Our writer explains why she’s eyeing up this FTSE 250 growth phenomenon, and may buy more shares in this property…

Read more »

View of Tower Bridge in Autumn
Investing Articles

The FTSE 100 is closing in on 8,000 points! Here’s what I’m buying before it’s too late!

As the FTSE 100 keeps gaining momentum, this Fool is on the lookout for bargains. Here's one stock he'd willingly…

Read more »

Investing Articles

3 ideas to help investors aim for a million-pound Stocks & Shares ISA

The UK has a growing number of Stocks and Shares ISA millionaires, and this plan may be one of the…

Read more »

Illustration of flames over a black background
Investing Articles

2 red-hot UK growth stocks to consider buying in April

These two growth stocks are performing well, but can they continue to deliver for investors through 2024 and beyond?

Read more »

Charticle

Is JD Sports Fashion one of the FTSE 100’s best value stocks? Here’s what the charts say!

The JD Sports Fashion share price remains a wild ride during the first quarter. Could it be one of the…

Read more »

Investing Articles

Could the JD Sports Fashion share price double in the next five years?

The JD Sports Fashion share price has nearly halved in the past five years. Our writer thinks a proven business…

Read more »

Bus waiting in front of the London Stock Exchange on a sunny day.
Investing Articles

If interest rate cuts are coming, I think these UK growth stocks could soar!

Falling interest could be great news for UK growth stocks, especially those that have been under the cosh recently. Paul…

Read more »

Investing Articles

Are these the best stocks to buy on the FTSE right now?

With the UK stock market on the way to hitting new highs, this Fool is considering which are the best…

Read more »