JD Sports Fashion (LSE: JD) is my favourite growth share, but sometimes I wonder why. The self-styled ‘King of Trainers’ has given me a right kicking since I bought it a couple of years ago.
I jumped on the FTSE 100 stock after it issued a shock profit warning following poor Christmas 2023 trading, thinking this was finally my chance to get it at a decent valuation. It was cheap then, and it’s cheap today.
JD Sports’ shares struggle
A second Christmas disappointment in 2024 knocked the stuffing out of it, yet I kept faith. The JD Sports share price is down 31% over 12 months and almost 45% over five years. At one point, I was sitting on a 30% loss.
A strong run after Donald Trump’s ‘liberation day’ tariff pauses on 9 April almost brought me back to parity, helped by judicious averaging down as I bought more stock at the lower price.
But now it’s falling again, down 14% in a single week. That makes it the second worst performer on the FTSE 100, after falling knife WPP.
So I’ve taken yet another shoeing, just when I thought JD was about to start making tracks. There was no obvious company catalyst. The shares did go ex-dividend on 30 October, although the modest 1.15% trailing yield hardly warrants such a vicious drop.
My immediate view is that investors are worried about the US consumer. JD Sports now generates 40% of its revenue from across the Atlantic. The S&P 500 may be booming, but that’s mostly tech stocks. Traditional sectors are struggling and tariff risks are driving up import prices.
Shore Capital admitted to “scratching our heads looking for a catalyst”, but pinned it on cautious US Federal Reserve comments about consumers and fears of potential UK tax rises in the upcoming Budget.
Cheap and compelling
To me, this looks like a potential buying opportunity. Half-year results, published on 24 September, showed a 20% rise in sales, although like-for-like growth was only 2.5%. There’s been no update since, yet the shares are cheaper, with the price-to-earnings ratio falling to just 6.8 (the FTSE 100 average is 18). JD’s P/E was 8.3 when I last looked a month ago and I thought it looked good value then.
Berenberg reiterated its Buy rating on 25 September, citing low valuation and recovery potential. Shore Capital also sees recent weakness as a buying opportunity, highlighting a strong balance sheet, good margins, and healthy cash generation.
Analyst optimism
Seventeen analysts give JD Sports one-year targets, producing a median of 121p. If that came off, it’s a massive potential 40% gain from today.
Experience tells me the stock’s likely to remain volatile, as the cost-of-living crisis isn’t over. Consumer stocks are highly sensitive to sentiment. Also, JD Sports remains youth-focused. Jobs are tough to find for younger people right now, which means they’ve got less money to spend.
I still think this stock has huge cyclical recovery potential. It’s well worth considering at today’s low, low valuation. But investors must brace themselves for a few knocks and scrapes along the way.
