For contrarian investors, the very best shares to buy are often those that have performed the worst lately. Buying stocks when everybody hates them means gaining entry at a reduced price and, with luck, benefiting when the cycle swings back in their favour.
That’s the theory, and a seductive one. It doesn’t always work in practice though.
Two FTSE 100 stocks stand out for their dismal performance: luxury fashion house Burberry Group (LSE: BRBY) and financial advisory group St James’s Place (LSE: STJ).
Their shares crashed a thunderous 55.37% and 63.56%, respectively, over the last 12 months. They’re now a lot cheaper than they were, but cheap isn’t everything. At some point, they have to recover and there’s no guarantee of that. Just because a stock has fallen by more than half, doesn’t mean it can’t do it again.
Trouble in store
The luxury sector has been hit by today’s economic troubles. In January, Burberry issued a profit warning as sales fell by 5% in Europe, the Middle East, India, and Africa, and by 15% in the Americas.
The high-end fashion house now has a distinctly low-end valuation of just 9.46 times earnings (it was around 25 times for years). That tempts me. As does the dividend, with Burberry forecast to yield 4.46% in 2024 and 4.56% in 2025.
But can it bounce back? We will get a clearer idea on 15 May, when the company publishes preliminary results, but analysts are downbeat. Full-year sales could be even lower than we’ve been led to expect, while the outlook for 2025 isn’t great either.
I’m tempted, but I won’t buy it today. I suspect Burberry may struggle for a while longer, as the recovery is going to take time. I’ll be watching it closely, though.
The wrong place
The Burberry share price skipped the recent FTSE 100 rally but St James’s Place didn’t. It’s up 10.6% over the last month alone. But is that just a dead cat bounce?
St James’s Place was forced to slash customer charges and scrap exit fees after falling foul of the Financial Conduct Authority’s Consumer Duty rules. This turned a 2022 profit after tax of £407.2m into a loss of £9.9m in 2023. The board slashed the full-year dividend by more than half, from 52.78p per share to just 23.83p.
The firm’s reputation has been sullied and deservedly so, in my view. Yet one of the features of the company is that its customers have remained loyal, and still reckon they’re getting a fair deal even if they’re not.
New CEO Mark FitzPatrick is hoping to hit the reset button and investors appear optimistic. But there’s still trouble ahead, as lower fees means lower earnings. St James’s Place also faces a £426m complaints provision.
Again, the shares look cheap trading at 6.88 times forecast earnings, while the 2024 yield of 4.05% is expected to hit 5.22% in 2025. With net cash of £6.44bn, it’s financially solid even though it’s on course to fall out of the FTSE 100.
Yet I question how it can drive earnings back up with the FCA breathing down its neck. As an investor myself, I just don’t like St James’s Place on principle. I can see lots of FTSE 100 shares I’d much rather buy today.
