Selecting my top UK stock for this year back in December wasn’t easy with so many headwinds facing the economy.
Nevertheless, I’m very happy with how my pick has performed so far.
Too cheap
Looking across the market at the end of 2022, I felt that investors had been a bit too harsh on trainer and athleisure seller JD Sports Fashion (LSE: JD).
At the time, the shares had dropped over 40% in value in 2022 as purse strings across the UK (and the world) were tightened due to rampant inflation and rising interest rates.
As always, the question I asked myself was how much of the bad news had already been priced in. My suspicion was a lot and then some. After all, JD has great links with the top sporting brands, a loyal following and better margins than sector peers.
The valuation looked too low as well. As battered as most retailers with a high street presence (justifiably) were, a price-to-earnings (P/E) ratio of 10 felt cheap.
So far, I’ve been on the money.
Index-beater
As I type, shares in the FTSE 100 member are up a little over 40% in 2023 so far. In other words, I’d now have around £1,400 from a £1,000 investment at the end of last year (excluding fees). That’s the sort of performance one might expect from junior mining or biotech stocks rather than a top-tier juggernaut.
It’s also far more than the index as a whole. Since the beginning of the year, the FTSE 100 has gained just under 4%.
This serves to remind me that going hunting for great stocks when other investors are thoroughly fed up can sometimes lead to solid outperformance.
Will JD Sports run out of puff?
Obviously, it goes without saying that these gains could be lost just as quickly as they’ve been made. This is likely to be the case if the cost-of-living crisis doesn’t ease as quickly as some analysts are now expecting. And one should never dismiss just how big the role of luck can be when investing.
Recent news of a cyber attack is just the sort of thing to hit confidence and push investors to take profits. However, I’m inclined to think there are more legs to this recovery. This is particularly after hearing CEO Régis Schultz’s plans for the Bury-based business.
Gearing up for growth
JD will now strive for double-digit growth in revenue and operating margins over the next five years as it looks to double its market share and become “the leading global sports-fashion powerhouse“. This will be achieved by spending £500m-£600m each year. A big chunk of this cash will be put towards expanding the store estate in “underpenetrated markets“, including North America and Europe.
Naturally, the market lapped up this bullish talk. And why not? Despite the gains made over recent weeks, this UK stock still trades on a P/E of only 14.
Still a buy
It’s still early days but so far, I’ve been heartened by JD’s share price rebound. In fact, I wouldn’t be averse to snapping up some stock now if I had the funds to do so. This is especially as annual profits for FY22 are expected to top £1bn.
Crisis? What crisis?
