Growth stocks scare me, especially when they’re flying. I find it so hard to judge whether they can maintain their momentum. With so much of tomorrow’s value built into today’s valuation, a minor earnings disappointment can inflict major damage.
As I result, I’ve missed these two smashers. Have I left it too late to buy them?
The first is JD Sports Fashion (LSE: JD), which has been outpacing the market for as long as I can remember. A decade ago, its shares traded at 14.4p. They got a real lift in lockdown, spiking to 224p in November 2022, but sold off during the cost-of-living crisis. Today, they’d cost me 166p.
Is there more to come?
Despite this volatility, they’re still up 150% over five years and 36% over 12 months. Yet to my surprise, the stock trades at just 12.5 times earnings. I expected more like 20 times. That’s largely down to its fast-rising earnings, which have climbed with the share price, impressively.
Bank of America Merrill Lynch is also impressed, recently stating that as “the largest sports lifestyle retailer globally… [JD] offers best-in-class growth at a compelling valuation”.
JD is building up its brand partners and planning to double its store count over the next five years. Around 40% of these will be in the US. It’s also growing via acquisition.
There are risks. Debt has crept up from £2bn in 2020 to £2.5bn. The US may fall into recession, which could hit sales. If top brand partners, like Nike, switch to a wholly direct route to market, JD could suffer. However, I’m sick of watching the JD Sports share price climb, without my portfolio reaping the benefit. Now I plan to buy it in January.
I also missed out on the Marks & Spencer Group (LSE: MKS) resurgence, that has driven it back into the FTSE 100. I don’t feel so bad about missing out on Marks, though. It was never a stock I considered buying, as I feared its problems were insoluble.
Marks is back
While its food halls are great, the clothing section of its stores were a sorry sight. Its successful transformation strategy was a long time coming but I’m glad it’s finally bearing fruit. Marks now has a solid e-commerce operation too.
The share price has climbed a stunning 125% in the past year. On the FTSE 100, only Rolls-Royce has grown faster. Again, I expected the valuation to be super-expensive, but M&S shares are trading at a reasonable 15.1 times earnings.
There’s still no dividend, but consensus forecast suggests a yield of 1.26% in 2024 and 2.05% in 2025. By then, annual sales could top £13.16bn, up from £11.9bn in 2023. Net debt is heading in the right direction too. It was £2.56bn on 30 September. By 2025, it should have been whittled down to £2.1bn. Not bad, given the cost-of-living crisis.
Operating margins are wafer thin at 4.3%. Another worry – my biggest – is that I’m coming to the party way too late. I’d like to buy M&S shares, but I might wait until for a pullback before parting with my cash. I won’t wait to buy JD Sports though.
