FTSE 100 luxury brand and retailer Burberry (LSE: BRBY) has fallen by over 10% over the past month. It even touched its lowest levels in a year last week. This could either be a sign to be cautious about the stock or it could be a buying opportunity. Which one is it?
Why did the Burberry share price fall?
First, let me try and figure out why the share price fell in the first place. Much of this decline has come in the last few days. This follows disappointing news from China, which is one of the company’s big markets. In its recent trading update, the company noted that strong growth in demand from the country contributed to an overall buoyant performance. China’s economy recently showed some small signs of slowing down as well as rising coronavirus cases. The economy’s growth is still strong, to be sure. But the sharp reaction to a rise in Covid-19 cases may impact the economy far more in the future.
I think that this adds to any concerns investors may already have had about the stock when the company’s CEO, Marco Gobbetti, stepped down to pursue opportunities elsewhere. He has been credited with re-energising the brand in his years at the helm. It does not help that his departure comes at a time when Burberry has already had a bad year because of the pandemic.
Also, even though risks to the stock have piled up as a result in the recent months, in relative terms its price still remains quite high. It has a price-to-earnings (P/E) ratio of around 20 times. It is not the highest among FTSE 100 stocks, but at the same time, financially healthy and growing stocks can be found with lower P/E ratios. They could have played a part in reducing demand for the Burberry stock.
Why the stock is a buy for me
Still, I think it is only a matter of time before the stock starts rising again. For purely mathematical reasons, once its P/E has fallen low enough, it will look attractive to investors again. Moreover, considering its positive recent trading update that day may come sooner rather than later. If its earnings rise, and its price has already fallen, it could start looking attractive.
Also, we do not know how the China situation will play out yet. It is possible that no real slowdown happens there at all. Also, there is a pickup in growth in countries like the UK and in the euro area. This can be a positive to some extent for the brand too.
I am less sure about how a replacement for Gobbetti will play out in the short term. At the same time, Burberry has been a coveted luxury brand for a long time. And he leaves it in a place from which it can come back to good health. So I think there is more reason to stay positive than not, for now.
I already hold the Burberry stock, but if I did not, I would consider this a good opportunity for me to buy.
