JD Sports Fashion (LSE: JD.) shares have fallen around 50% from their highs. And currently, they’re trading at a huge discount to the market. Could the athletic and leisure sportswear retailer be one of the UK’s best value stocks right now? Let’s have a look.
Value investing can be tricky
Value investing is easy in theory. It simply involves buying a cheap stock and then waiting until its valuation rises.
In reality however, this style of investing can be tricky. For a start, cheap stocks are often cheap for a reason. If a stock’s trading at a low valuation, it’s usually because there’s some fundamental problem other investors have spotted.
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Secondly, cheap stocks can get cheaper. Just because a stock’s down 50% doesn’t mean it can’t lose another 50%. I’ve learnt this the hard way.
A cheap stock
At present, JD Sports Fashion shares trade on a forward-looking price-to-earnings (P/E) ratio of just eight. That’s a very low valuation. Especially for a company that’s grown its revenues by around 120% over the last five years.
For reference, the average P/E ratio across the UK market is about 14.
But going back to what I said before, we need to closely look at the risks here. Is there some fundamental issue that could hit revenues and/or earnings and send the share price lower?
Looking under the bonnet
Well, one issue that stands out to me is that Nike products seem to have lost their shine recently (I’d know because I’m a Nike shareholder and the stock’s been absolutely crushed).
At the moment, it seems to be all about Hoka and On shoes.
Now, JD does sell these brands, which is good. Yet Nike products account for a large proportion of the company’s sales (around 50% of revenue). So there’s definitely some uncertainty in relation to the growth story.
It’s worth noting that since Nike’s disastrous quarterly results last month, Barclays has downgraded JD Sports shares to an Underweight rating (Sell) from Equal-weight (Hold), citing Nike’s weak quarter.
Another issue to be aware of is that consumers are generally spending less money on ‘stuff’ and more on experiences. During Covid, people spent a lot of money on things like shoes and accessories. Now however, spending habits are shifting.
This was reflected in JD’s latest quarterly results. For the quarter to 4 May, like-for-like sales were down 0.7% versus an increase of 14.5% in the same period last year.
A bargain?
Given these issues, it’s hard to know for sure if JD Sports shares are a bargain. I do think they look interesting at current levels as the company has plenty of potential in the long run. But there’s a chance that near-term results could be poor.
If revenues and/or earnings came in below expectations, the share price may fall further. Looking at the risks here, there are a few other value stocks I’d buy before JD Sports.
