Down 14% in a month, is this the FTSE 100’s biggest bargain right now?

Jon Smith mulls over whether he should buy one of the worst-performing FTSE 100 stocks based on it being an oversold value purchase.

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Despite the FTSE 100 celebrations last month as it made fresh all-time highs, not all constituents have enjoyed a similar uplift. In fact, some stocks are heavily down in the short term, raising the question of whether there are some bargains to be had now, despite the success of the broader index.

The lowdown

One that has come on my radar is Burberry (LSE:BRB). The luxury fashion powerhouse might be an enduringly popular brand, but the share price hasn’t been in vogue recently. The stock is down 14% over the past month, making it one of the worst performers on the index.

Over the past year, the story doesn’t get any better. It’s down 55% over this period, making fresh 52-week lows.

Before I consider if it’s a bargain or not, I need to understand how we got into this situation in the first place. Part of the problem isn’t just with Burberry, but with a general slowdown in luxury spending. High interest rates and low economic growth in many developed countries have caused even the affluent to tighten their belts when it comes to spending.

Further, for the average person on the street who might occasionally buy a luxury piece of clothing, it has become a lot more unaffordable with inflation pushing prices up.

Burberry has struggled in this environment, issuing several profit warnings over the past year. This clearly is a red flag for investors, hence the fall in the stock. The 2023 results showed a dip in revenue, but the main impact was felt on the bottom line. Profit after tax fell from £492m in 2022 to £271m in 2023.

Trying to find value

With such a sharp fall in a stock that’s still making a profit, my initial thought is to look at the price-to-earnings ratio. A reading below 10 could indicate that this is an undervalued bargain.

However, the ratio is 13.62! Digging deeper, this makes sense. It’s true that the stock has dropped. Yet profit after tax almost halved as well. So really the stock isn’t any better value than it was before.

Some would say that it’s a smart buy based on the future outlook. The stock reflects the current situation, which is one of pessimism. Yet it’s logical to think that consumer demand will return when people feel more confident.

This is true, but that could take some time. Elections in the UK, US and parts of Europe are going to happen between now and the end of the year. Central banks are likely to start changing monetary policy too (cutting interest rates). I’m not sure that consumers are going to want to make expensive purchases until the dust has settled.

Not for me right now

Simply put, I don’t think that Burberry shares are a bargain right now. If anything, I think they’re fairly priced based on the situation with the business and the sector in general.

I believe the firm will do well in the long term, but see little value in buying right now. If the stock continued to fall in coming months, then I would look to step in and purchase.

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 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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