As Christmas approaches, are these retailers contrarian opportunities or falling knives?

Is it worth buying these battered shares before the festive season?

| More on:

The content of this article was relevant at the time of publishing. Circumstances change continuously and caution should therefore be exercised when relying upon any content contained within this article.

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.

Christmas is on its way. Over the next few weeks, retailers will be doing everything they can to get us through their doors (real or virtual) and buying their wares. However, with Brexit at least somewhere on the horizon, inflation predicted to rise and concerns over what Trump’s presidency might mean for the global economic outlook, more UK consumers are being cautious with their spending and where they shop than ever before.

Given this, it may be pertinent to look at two once-hugely-popular retailers who have fallen on hard times – Marks and Spencer (LSE: MKS) and Sports Direct (LSE: SPD). Will the festive period kick-start a revival for both or does more pain lie ahead?

Good times gone?

2016 hasn’t been kind to M&S, but you could say that about many of the last 20 years too. Last week’s uninspiring interim results revealed a 18.6% slump in underlying pre-tax profit, thanks to another drop in Clothing & Home sales. This placed even more pressure on the shares which now languish at 340p, only a few pence more than their price five years ago. Although dividends may have helped cushion the blow, it’s hard to argue that the performance in recent years has been anything but disappointing for long-term investors. With online competitors drawing customers away, it’s unsurprising that CEO Steve Rowe is cutting the company’s reliance on clothing, shutting stores and focus more on developing its food offering, which continues to be warmly received.

But if M&S investors have had a bad year, it pales in comparison to that endured by Sports Direct’s owners. Concerns over working conditions and the treatment of staff heaped pressure on the company earlier in the year. The recent allegation that it recorded private discussions between MPs on a recent visit to its Shirebrook warehouse hardly helped matters. Forget growing earnings, I suspect most shareholders would be satisfied if Sports Direct simply managed to stay out of the spotlight for a while, especially as the share price has more than halved in a year.

Worth the bother?

While it’s probably an understatement to say both companies are rather unpopular with the market at present, this does leave their shares trading on fairly reasonable forecast price-to-earnings (P/E) ratios of just 11 for M&S and 16 for Sports Direct. Using an extremely rough rule of thumb that anything less than 10 is cheap, it’s not surprising if value-focused investors are starting to take notice of both companies, particularly the former.  

Distinguishing a contrarian opportunity from a ‘falling knife’ isn’t easy but I’m inclined to avoid both shares for now. While Sports Direct could do little wrong before this year’s antics (high returns on capital, consistently rising earnings and a strong balance sheet saw investors flock to the stock), the company still has a lot of work to do to restore its image, which won’t happen overnight. Moreover, I’m not convinced that sporting gear tops most Christmas wishlists.

Although M&S food outlets are hugely popular and likely to do well over the festive season, the company’s lacklustre performance over an extended period, coupled with intense competition from other retailers (both online and in-store) suggests investors should buy its turkeys but not its shares.

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.

Paul Summers has no position in any shares mentioned. The Motley Fool UK has recommended Sports Direct International. We Fools don't all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors.

More on Investing Articles

Investing Articles

Could the JD Sports Fashion share price double in the next five years?

The JD Sports Fashion share price has nearly halved in the past five years. Our writer thinks a proven business…

Read more »

Bus waiting in front of the London Stock Exchange on a sunny day.
Investing Articles

If interest rate cuts are coming, I think these UK growth stocks could soar!

Falling interest could be great news for UK growth stocks, especially those that have been under the cosh recently. Paul…

Read more »

Investing Articles

Are these the best stocks to buy on the FTSE right now?

With the UK stock market on the way to hitting new highs, this Fool is considering which are the best…

Read more »

Petrochemical engineer working at night with digital tablet inside oil and gas refinery plant
Investing Articles

Can the Centrica dividend keep on growing?

Christopher Ruane considers some positive factors that might see continued growth in the Centrica dividend -- as well as some…

Read more »

Smiling family of four enjoying breakfast at sunrise while camping
Investing Articles

How I’d turn my £12,000 of savings into passive income of £1,275 a month

This Fool is considering a strategy that he believes can help him achieve a stable passive income stream with a…

Read more »

Person holding magnifying glass over important document, reading the small print
Investing Articles

2 top FTSE 250 investment trusts trading at attractive discounts!

This pair of discounted FTSE 250 trusts appear to be on sale right now. Here's why I'd scoop up their…

Read more »

Smiling young man sitting in cafe and checking messages, with his laptop in front of him.
Investing Articles

3 things that could push the Lloyds share price to 60p and beyond

The Lloyds share price has broken through 50p. Next step 60p? And then what? Here are some thoughts on what…

Read more »

Young female business analyst looking at a graph chart while working from home
Investing Articles

£1,000 in Rolls-Royce shares a year ago would be worth this much now

Rolls-Royce shares have posted one of the best stock market gains of the past 12 months. But what might the…

Read more »