After crashing 63% can the Burberry share price ever recover?

Harvey Jones thought he was clever when he bought Burberry shares after a recent profit warning, but instead he’s taking a beating like everybody else. Time to sell?

| More on:

Image source: Getty Images

When investing, your capital is at risk. The value of your investments can go down as well as up and you may get back less than you put in.

Read More

The content of this article is provided for information purposes only and is not intended to be, nor does it constitute, any form of personal advice. Investments in a currency other than sterling are exposed to currency exchange risk. Currency exchange rates are constantly changing, which may affect the value of the investment in sterling terms. You could lose money in sterling even if the stock price rises in the currency of origin. Stocks listed on overseas exchanges may be subject to additional dealing and exchange rate charges, and may have other tax implications, and may not provide the same, or any, regulatory protection as in the UK.

You’re reading a free article with opinions that may differ from The Motley Fool’s Premium Investing Services. Become a Motley Fool member today to get instant access to our top analyst recommendations, in-depth research, investing resources, and more. Learn More.

The Burberry share price (LSE: BRBY) has been through hell and taken me with it. Which leaves me facing a stark choice: do I grit my teeth and stick with my stock pick or get out while I can?

I suppose I should consider myself lucky. Shares in the luxury brand have fallen 62.69% over 12 months. I’m down ‘just’ 38.51%. It’s still the worst performer in my portfolio (although Aston Martin seems desperate to play catch-up).

Burberry was on my watchlist for years, but I resisted with the shares typically trading at an expensive price-to-earnings ratio of around 24, while yielding a lowly 2% or so.

My big FTSE 100 flop

I spotted my opportunity in January, when Burberry issued a profit warning after a poor Christmas trading period.

The board cut full-year profit forecasts from a previous range of between £552m and £668m, to between £410m and £460m. To my credit, I resisted buying Burberry shares then. I’ve learned that one profit warning can quickly follow another, and wanted to see how this panned out.

Burberry shares duly plunged again on 15 May, when the board reported full-year profits had plunged 40% to £383m, as falling demand for luxury goods hit sales in Asia and the Americas. And that’s when I dived in. Silly me.

The shares kept sliding so I averaged down on 30 May and 3 July, telling myself I was bagging Burberry at a bargain valuation of around nine times earnings, while locking into a yield that was shooting past 6%. 

Then on 15 July the group axed CEO Jonathan Akeroyd after some miserable years, issued yet another profit warning and to cap it all, scrapped the dividend. On 23 September, Burberry tumbled out of the FTSE 100 and into the FTSE 250.

When catching a falling knife, it pays to exercise patience. Just because a stock has fallen 50% doesn’t mean it can’t plunge another 50%.

To a degree, the recovery may have begun. Somebody who bought Burberry one month ago will be up 14.31%. As far as I can see, this is purely down to one thing. Investors are betting that the latest bout of stimulus from Beijing will boost the Chinese economy and revive demand for luxury goods from that quarter.

Now it’s stuck in the FTSE 250

The Burberry crash was made in China, and the recovery could start there too. I’m wary though. There’s a widespread feeling that the latest stimulus package isn’t enough, and investors are hanging on for more. If they’re disappointed, Burberry could quickly give up its recent gains.

Also, it feels like the wrong reason to buy a company. Basically, investors are banking on some foreign government to bail everyone out.

Falling demand across the luxury sector has highlighted specific problems for Burberry, which seems to have lost control of its brand and market position. And there are only so many ways a company can make trench coats, bags and scarves seem fresh. Or are there?

The fact that I’m questioning whether Burberry shares can ever recover may be a positive sign. It shows how far sentiment has fallen. But turning around an ailing company takes time, especially one that relies on consumer sentiment at what is a highly uncertain time. I won’t sell but I’m not buying more.

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 positions in Aston Martin and Burberry Group Plc. 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.

More on Investing Articles

Investing Articles

Forget the FTSE 100! Here are 3 dividend shares to consider for a great passive income

If searching for ways to supercharge a passive income portfolio, these non-Footsie dividend shares are worth a closer look, says…

Read more »

Investing Articles

Up 41% and 17%, these FTSE 250 shares still look like bargains to me!

Looking for the best FTSE 250 shares to buy at rock-bottom prices? Here are two Royston Wild thinks deserve close…

Read more »

Illustration of flames over a black background
Investing Articles

Just released: November’s higher-risk, high-reward stock recommendation [PREMIUM PICKS]

Fire ideas will tend to be more adventurous and are designed for investors who can stomach a bit more volatility.

Read more »

Young female analyst working at her desk in the office
Investing Articles

Here’s how I’d target a £23k second income with £300 a month

If I was building a shares portfolio today, here's how I'd go about it. With these strategies I stand a…

Read more »

Investing Articles

Tesla stock, MicroStrategy: here’s what Hargreaves Lansdown investors bought last week

MicroStrategy and Tesla stock were among the most popular investments last week as Donald Trump boosted markets with his election…

Read more »

Investing Articles

1 AI stock worth considering now Stocks and Shares ISAs are safe!

The Budget brought good news for those of us with Stocks and Shares ISAs! I’ve been looking at this one…

Read more »

Engineer Project Manager Talks With Scientist working on Computer
Growth Shares

Up 41% in 1 year, I’m buying more of this growth trust for my Stocks and Shares ISA

A great performance over the last 12 months has pushed our writer to buy more of a very exciting investment…

Read more »

Investing Articles

3 reasons to like the Legal & General dividend

Christopher Ruane explains a trio of reasons why he likes the Legal & General dividend as a source of passive…

Read more »