I’ve been hunting for a dirt-cheap growth stock to add to my SIPP, and it turns out I already own it. There’s a problem, though. Performance has been dire.
The FTSE 100 stock in question is JD Sports Fashion (LSE: JD), a company I’d been desperate to buy for years because it was an absolute growth monster. JD Sports calls itself the ‘King of Trainers’, and maybe that should have warned me. Success can go to one’s head.
That’s not the issue today. The shares have plunged by half in the past three years. Retail is tough across the board, and JD Sports’ isn’t immune. I bought after the first profit warning and have averaged down three times since, but still sit on a near-20% loss. I’m not panicking though. I expect the shares to surge eventually, and I plan to be holding them when they do. It’s just required more patience than I anticipated. But that’s often the way with recovery stocks.
JD Sports can be king again
Sales have been hit hard by the cost-of-living squeeze in the UK, Europe, and the US, which now accounts for 40% of the company’s market. Trouble at key partner Nike, which represents close to half of its sales, hasn’t helped. Promotional activity has been costly, and key product lines are underperforming.
Despite the share price collapse, the underlying business is solid. Full-year sales, covering the year to 1 February 2025, rose 12% at constant currency to almost £11.5bn. JD Sports also posted gross margins of 47.8% and £1.2bn in operating cash flow, but it wasn’t all good news. Adjusted pre-tax profits fell from £961m in 2024 to £923m. Forecasts suggest they’re on course to fall again in full-year 2026, to £849m. The board blames the tough trading environment, consumer squeeze, and the over-reliance on certain underperforming products.
So does all this truly justify a 50% drop in the share price? I can only assume that investors can’t see an immediate recovery coming down the track. The share price remains volatile, with a recent recovery petering out. The share price is flat over 12 months, but down 17% in the past three. That dip will tempt some investors, but they should also brace themselves for more volatility of that sort.
Bargain stock valuation
However, with a P/E of just 6.6, the shares are astonishingly cheap, and sentiment could trigger a spike if the firm lays the foundations for a comeback. Inflation may finally be easing, and US sales grew over Christmas, though UK and European sales remain weak.
What worries me most is rising youth unemployment, and the impact of AI on entry-level jobs, as young consumers are JD Sports’ core market. Even so, the current valuation is hard to resist. If I weren’t already heavily invested, I’d probably buy more. The recovery may take time, but with the shares at levels not seen in eight or nine years, this could be a once-in-a-decade chance to consider a potentially huge recovery play. Patience required.
