Should I sell my FTSE 100 tracker and buy this cut-price dividend growth stock instead?

I’m tempted to sell my FTSE 100 tracker to raise funds to purchase a dirt-cheap UK stock that I hope will soon surge back into fashion.

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When I started filling up my self invested personal pension (SIPP) last year, I put £5k straight into a FTSE 100 tracker to get me going.

I decided that would help me tap into all the dividends and growth generated on the index, while I worked out which individual stocks I was going to buy.

I’m in a different position today. My SIPP is now fully invested. That means I can’t buy any more shares, unless I sell something. My eyes have alighted on that tracker.

Time to buy direct equities?

The FTSE 100 has fallen 4.72% over the last 12 months. By contrast, some of my individual stock picks have flown. Taylor Wimpey and 3i Group are up around 20%. Not all have been winners, though.

I also bought mining giant Glencore, whose shares have fallen 26.88% over the last year. My own stake is down 15.4%.

Yet I still believe that buying a spread of Footsie stocks should beat tracking in the longer run. Also, it’s more interesting. And exciting. Trackers get the job done, but they don’t get the juices flowing.

Luxury retailer Burberry (LSE: BRBY) has caught my eye. Its shares have crashed 47.91% over the last year. That’s 10 times the drop on the FTSE 100, which shows how risky individual stocks can be.

So what attracts me to a company like that? First, I think the underlying business remains solid. Burberry has a healthy balance sheet, and a strong brand. Unfortunately, it has been hit by wider troubles in the luxury market, as the slowing global economy hits demand its high-end handbags and raincoats.

Luxury brands usually often withstand a downtown better than mass market players, as the wealthy don’t feel the pinch as much. Not this time. On 12 January, Burberry issued a profit warning, downgrading adjusted operating profit expectations to between £410m and £460m. That’s down from £634m last year.

While Asia-Pacific held up, store sales fell 5% in Europe, the Middle East, India and Africa, and 15% in the Americas. Adverse foreign currency movements didn’t help.

High fashion, low valuation

The board still reckons it can establish Burberry as the “modern British luxury brand”, and hasn’t give up on its £4bn revenue ambition. Yet it’s clearly facing some major challenges. So why does it tempt me?

Burberry shares – like the company’s clothes – have always been too expensive for me. They routinely traded around 24 times earnings. Today, I can buy them at a lowly price-to-earnings valuation of just 10.32 times earnings. The yield is also higher than it was, at 3.39%, although that’s below the FTSE 100 average of 3.9%.

I like buying good companies on bad news but the only way I can do this is to sell my tracker. I’m sorely tempted.

Burberry clearly has issues. Cash flows and earnings are under pressure at a time when it needs to invest heavily to build its brand. Just because a stock has fallen doesn’t automatically mean it will recover. Plus I will rack up trading fees while making the jump.

Yet I think there’s a real recovery opportunity here, if I’m patient, and I plan to take the plunge and buy it. Even though it means selling that tracker.

Should you invest, the value of your investment may rise or fall and your capital is at risk. Before investing, your individual circumstances should be assessed. Consider taking independent financial advice.

Harvey Jones has positions in 3i Group Plc, Glencore Plc, and Taylor Wimpey Plc. The Motley Fool UK has recommended Burberry Group Plc. 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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