When developing a long-term investment strategy, value shares are a critical component to consider. They can provide a solid foundation of low-cost stocks that deliver reliable returns.
Typically, these are companies that have gone through a troubled period and are now trading below fair value. Unlike growth stocks, they usually aren’t making headlines and may appear unfavourable. But in the long run, they are stocks that are expected to recover.
Like in that old fable, the tortoise and the hare: slow and steady wins the race!
A top value share
One promising stock that has already delivered decent returns is Marks and Spencer (LSE: MKS).
It made a spectacular comeback over the past few years. Back in 2020, the share price was floundering below 99p after years of losses. Now back above £3, it’s close to a seven-year high.
So how did this happen — and where is it headed?
Falling out of fashion
As one of my favourite UK high street stores, I was sad to watch it struggle all those years. Naturally, the pandemic added to its woes but the troubles began long before. Food-wise, I feel it’s always been a winner but its fashion business let it down.
The sharp rise of affordable online clothing retailers hit the brand hard in the 2010s. It was already struggling to compete with high-street retailers like Primark and Zara. A slow and error-riddled attempt to launch its own online store meant it fell out of favour with a new generation of shoppers.
Back in the game
The company became profitable again in late 2021 following a strategic overhaul. Then, when Steve Machin took over as CEO in 2022, its fortunes took off. In May this year, it posted a 58% rise in annual profits, prompting the shares to rally by almost 10%.
But it’s not in the clear yet.
A partnership with delivery firm Ocado was meant to boost profits but sales failed to materialise, resulting in missed targets. When M&S withheld a final payment, Ocado threatened to sue.
A recent boost in sales may help smooth things over but the future is uncertain. Seeking out a new delivery solution could be expensive and disruptive. With things on the up, the last thing it needs now is to upset the apple cart.
Growth and dividends
Using a discounted cash flow model, the shares are estimated to be undervalued by 37%. With earnings forecast to grow 22%, M&S sports an attractive forward price-to-earnings (P/E) ratio of 12.8. That’s down from a trailing P/E of 15.8.
But even more impressive is its huge sales boost recently. With £13bn in sales compared to a £6.8bn market cap, its price-to-sales (P/S) ratio is only 0.5. That’s a promising figure.
Dividends were reinstated this year but are negligible. After being reduced in 2019 and again in 2020, they were cut altogether. Now they’re back at 3p per share. A positive sign but far from 2018’s dividend of almost 18p. For now, the 1% yield offers little value but if growth sustains, it could get back to the 6% average it held before 2020.
All things considered, the pros outweigh the cons for me. It’s hard to ignore the impressive recovery the company has achieved over the past few years.
From a long-term perspective, I’m optimistic about the company’s prospects.
