As a long-term investor with a buy-and-hold approach, I like finding shares that offer excellent potential for strong performance over a number of years.
One UK stock has climbed 15% in the past 12 months — and 156% in five years. Not only that, but I think there could be more superb performance yet to come. I have been buying the shares this year.
Simple yet strong
The share in question is retailer JD Sports (LSE: JD).
At first glance, the sports shoe and tracksuit trade might not seem like an obvious goldmine. But JD has proven that it can be.
A lot of customers want sportswear and casualwear. Some is bought online, but stores remain important. JD has built a successful online and offline operation that benefits from its aspirational brand as well as proven retail know-how.
Margins can be attractive in the industry; at 5.4%, JD’s net profit margin last year was higher than most supermarkets, although still well below apparel retailers such as Next. With its global footprint, JD already has considerable scale. Revenues last year came in at £8.5bn.
Ambitious growth plans
However, the company is certainly not resting on its laurels.
It has set out a growth strategy and key objectives for the coming five years. Whether it might lead to another 156% share price surge as in the past five years remains to be seen. But what is clear is that JD has big ambitions.
The plan foresees double-digit revenue growth in percentage terms, a double-digit operating margin (last year this was 8.4%) and annual capital expenditure of £500m-£600m, part of which will help fund 250-350 new shop openings annually. The company is targeting £1bn of cash generation annually from operating activities.
Promising UK stock
I think that sets the stage for potentially blockbuster growth in the business.
Currently this UK stock trades on a price-to-earnings ratio of 13. If the growth plans deliver, I think there is lots of room to grow.
That is why I have been buying JD Sports shares this year. I am not alone. This month saw a director’s spouse buy 40,000 shares and a non-executive director purchase over 27,000 shares. Both purchases were at a higher price than JD was changing hands for at the start of today’s trading session.
Weighing risks and rewards
As any athlete knows, however, life can contain disappointments. JD has ambitious growth plans — but things may work out differently. Adding hundreds of new stores will mean high capital expenditure, which could eat into profits. A weak economy might see some customers shun fancy trainers in favour of cheaper footwear.
Will JD clear these hurdles? A change in management last year made the City nervous that the company might not maintain its historical growth rates, but so far the new leadership seems up to the job. If I had spare cash to invest in the UK stock market now, I would be happy to buy more JD Sports shares.
