Down 53% in a year! I reckon this oversold FTSE 100 stock is now ripe for a comeback

This FTSE 100 stock has fallen out of fashion with investors, but Harvey Jones reckons the sell-off has gone too far and is getting ready to buy it.

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I love scouring the market for oversold FTSE 100 stocks and I think I’ve found a brilliant one that I’m desperate to add to my portfolio.

It’s always a bit risky buying stocks that most investors can’t wait to sell, but it has several advantages. First, it reduces the risk of me overpaying for froth. Second, it means I pick up the shares on the cheap. Third, I typically get a higher yield too.

The big risk is that when stocks plunge, there’s usually a good reason. Turning round a struggling company takes time. It’s not an overnight task, as I’ve discovered in the past. I’ll need bags of patience.

Out of fashion

Yet I think luxury fashion group Burberry (LSE: BRBY) has fallen too far, too fast and now looks like a good time to grab it at a bargain price.

In November, Burberry shocked markets with a profit warning, as the cost-of-living crisis hit demand. It doubled down on the gloom in January, downgrading operating profits guidance from a range of £552m to £668m to between £410m and £460m.

Shoppers are reluctant to cough up £1,890 for a classic heritage trench coat or £420 for one of its signature scarves, which I get. It’s not the only luxury specialist having a tough time. Even French giant LVMH has suffered from falling demand in Europe and China. Its shares are down 10.96% in a year, but that’s nothing compared to Burberry’s 53.11% plunge.

Across the FTSE 100, only St James’s Place has done worse, but unlike Burberry, it’s the architect of its own misfortune.

Luxury brands are often seen as recession-resistant, because the super wealthy typically glide through the ups and downs of the economic cycle. Yet Burberry isn’t quite at that level. Its market includes a lot of aspirational shoppers, those who like high-end products but do have to think twice about the price. Their numbers can thin out when the economy struggles.

It will bounce back in style

Yet that 50% share price crash seems extreme. Year-on-year sales only fell 7% in the 13 weeks to 30 December, to £706m. We’ll know more on Wednesday (15 May), when full-year results are published. 

If they’re only slightly better than expected, the Burberry share price could jump. It’s already cheap enough for me to buy though, trading at just 9.43 times trailing earnings. The trailing yield is now 5.19%. For years, Burberry was valued at around 24 times earnings, and yielding barely 2%. Now looks like a good entry point.

Yet most brokers don’t expect a positive surprise on Wednesday. That’s fine by me. I don’t buy out-of-favour shares in the hope of making an overnight fortune when markets suddenly catch up with my brilliant insights. I’m not brilliant. I’m average at best.

My secret weapon is that I buy with a minimum five-year view. I think that in that time, there’s a pretty good chance Burberry will piece itself together and investors will take a more positive view.

While I wait for the recovery, I’ll reinvest my dividends to build my position. Burberry remains a strong brand and I reckon it will get that re-rating, given time.

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 no position in any of the shares mentioned. 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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