The FTSE 100 might be flying but this stock is still undervalued

Jon Smith shows how he can still find undervalued FTSE 100 stocks to add to his portfolio despite the index ripping to new highs.

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The FTSE 100‘s been enjoying a great run of form recently. In the past month, the index has gained over 500 points, reaching all-time highs. Yet despite this, there are still pockets of opportunity investors can take advantage of. In fact, here’s one I believe is actually undervalued despite the surge in the index.

A rollercoaster ride

I’m talking about JD Sports Fashion (LSE:JD). The business has been on a wild ride over the past year, which I think partly explains why it’s currently undervalued. During this period, the stock’s down 25%.

The growth stock previously had been performing very well, but the share price took a nose dive at the start of the year following a profit warning. It had expected full year earnings to be above £1bn, but reduced the forecast by £125m.

It blamed this on milder weather and also on “more cautious consumer spending”. This saw the stock fall and it hasn’t made it back to the pre-warning levels.

On the other hand, the stock jumped in April, thanks to the confirmation of the acquisition of US sportswear retailer Hibbett. At a cost of £878m, this isn’t a small outlay, with Hibbett having a strong physical store presence in the US.

The future benefits once properly integrated could help to strengthen JD Sports’ position on the other side of the pond. Of course, a risk going forward is that the purchase backfires, proving to be a costly mistake.

Thinking about value

The erratic swings in the share price due to the reaction of the news can make it hard to pin a fair value on the company. Yet from my view, it looks cheap.

The price-to-earnings (P/E) ratio is 8.98, which is below the fair value benchmark of 10 I usually use. Further, JD Sports’s a growth stock. Therefore, I’d expect the P/E ratio to be closer to 20 as investors buy the stock based on future earnings potential. They are happy to pay a premium based on current earnings in the expectation of further growth.

Further, the stock’s always going to be sensitive to the state of the consumer, given that it sells directly to the man and woman on the high street. The good news is that the UK has bounced back from a recession. The US is also looking like it won’t go into a recession at all.

Based on the trajectory of the economies, I’d say JD Sports is well set to benefit from higher consumer spending. This is a sharp contrast to where we were six months ago. Yet based on the share price, I don’t think investors have figured this out yet. On that premise, the share price looks too low for me.

The bottom line

I’m thinking about buying JD Sports shares for my portfolio. It provides me with an undervalued growth stock that should keep rallying even if the broader index starts to slow.

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.

Jon Smith has no position in any of the shares mentioned. The Motley Fool UK has no position in any of the shares mentioned. 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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