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ISA investors! Should you buy this cheap stock and its P/E ratio of 6.5x?

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Tuesday afternoon has brought fresh tension for ISA investors. UK stock markets are extending their decline as fears over the macroeconomic landscape mount. The troubles in the oil industry might be commanding the majority of headlines on the financial pages. But today brought more worrying signals for beleaguered retailers as well.

I recently explained why fresh trading data from Associated British Foods spells bad news for Britain’s beleaguered clothing retailers. The evidence of a worsening storm continues to mount elsewhere too. John Lewis was also chiming in with troubling trading news on Tuesday.

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Sales set to sink

The British shopping institution has been in the doghouse because of weak consumer confidence caused by Brexit uncertainty. The more recent pandemic outbreak, however, means total sales at John Lewis could crash 35% in 2020, it says. It’s a shocking forecast that assumes “significant sales decline between April and June, and weak sales thereafter,” the retailer commented.

John Lewis is suffering from falling demand for its more profitable lines. As the business succinctly noted: “We are buying more Scrabble but fewer sofas.” It’s no wonder sales of big-ticket, discretionary items are slumping. Britons are prioritising essential items like groceries and putting off purchases of expensive goods in expectation of a severe economic downturn. Those final comments should certainly give ScS Group (LSE: SCS) more to worry about.

Shutdown stress

The furniture retailer announced it was axing the interim dividend earlier this month in response to the Covid-19 crisis. It comes after ScS said it was shuttering its stores, its distribution network, and its head office to protect both workers and customers.

The business had seen sales begin to decline before the UK-wide lockdown came into play though. It witnessed reduced footfall in the week leading up to 17 March, it said. That John Lewis update shows ScS could face a battle to get sales moving once quarantine measures are rolled back and tough economic conditions persist too.

The letters ISA (Individual Savings Account) on dice on stacks of gold coins on a white background.

Go for better ISA buys

Of course, ScS has been in some trouble owing to the uncertain political and economic picture created by Brexit. Like-for-like orders were down 4.4% during the six months to January. The UK’s future relationship with Europe might not be top of the list of Britons’ concerns right now. But it’s an extra problem that looms over the retail sector for this year and beyond.

City analysts expect earnings to sink 19% in the current financial year (to July), a figure that could be chopped down should quarantine measures remain in place into the summer. Estimates of a 4% bottom-line rebound are in danger of being culled too, given the economic shock that’s rapidly developing.

ScS is cheap on paper. The company sports a forward price-to-earnings (or P/E) ratio of 6.5 times. This is a signal of the enormous risks it faces in the near-term and beyond though. I’d happily avoid this particular cheap stock and put my ISA cash to hard work elsewhere.

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Royston Wild has no position in any of the shares mentioned. The Motley Fool UK has no position in any of the shares mentioned. 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.

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