Burberry Group plc announces a 10% fall in profits — but is it now a contrarian buy?

It’s that age-old investing adage: never try to catch a falling knife. This means “be careful about buying into shares when they are falling, because they could fall even more”.

But, if you choose your company and your moment well, investing in a firm when its share price has taken a knock can be the best thing to do.

Sentiment for Burberry is negative at the moment

The opening up of China to the world has led to a never-ending supply of cheap manufactured goods. And it has also led to a middle class that has swollen to the hundreds of millions. These nouveaux riches are eager to spend their money on consumer products. So it’s companies that cater for the world’s emerging consumers that will really do well in future years.

This is why Warren Buffett recently bought into Apple, and why I think you should invest in luxury goods maker Burberry (LSE: BRBY). You may be a little surprised to hear this now, considering this company’s latest results, just released, show total revenue fell by 1% to £2.52bn for the year to 31 March, and adjusted profit before tax fell £35m to £421m.

But I think the edging down in sales and profits is not a sign that this firm is heading for trouble, but rather turbulence on its flight path to further growth.

What’s more, the business is taking the opportunity to overhaul its retail operations so that, both online and in its stores, it can provide a better service. It also plans to cut costs by at least £100m by 2019. Chief executive Christopher Bailey has admitted it is a challenging time for luxury goods makers. And many are questioning Burberry’s growth credentials.

That means this is the time to buy

But true contrarians will have noticed that the share price has nearly halved from the highs of last year. And the fundamentals are appealing, with a P/E ratio of 14.34 and a dividend yield of 3%. This looks great value for a company that has such long-term growth potential. And although earnings have edged down, when seen in a big picture context they have been remarkably resilient. Plus, the dividend yield is being paid out consistently, making this both a growth share and a high yielding investment.

Last year this was a firm that could do no wrong, and the share price just climbed higher and higher. But the time to buy is not when everyone else is leaping in, but when current sentiment is negative, and most shareholders are thinking of selling. This is why contrarian investing is difficult: going against the crowd is counter-intuitive.

Warren Buffett once said “It’s far better to buy a wonderful company at a fair price than a fair company at a wonderful price.” In my view, Burberry is that wonderful company, and at current levels you will be paying a very fair price.

In my opinion, Burberry is a strong contrarian buy.

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Prabhat Sakya has no position in any shares mentioned. The Motley Fool UK owns shares of and has recommended Apple. The Motley Fool UK has recommended Burberry. We Fools don't all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors.