With all of the New Year celebrations now out of the way, it is a good time to look at what to invest in for the coming year. It may sound incredibly obvious, but a good place to start is by looking at what the best performers were during 2019.
It may be the case that there were some flash-in-the-pan spikes that need to be viewed carefully, but there can be merit in jumping on the bandwagon of a stock that did very well last year.
To that end, let’s have a look at JD Sports (LSE: JD), which can wear the crown of being the best performing (from a share price gain point of view) stock in the FTSE 100.
The undisputed King
From a price of 349p in January of last year, it rallied hard to finish the year at 837p, with a remarkably smooth uptrend. This was a return of 139%!
When we compare this to the performance of the FTSE 100 as a whole, it really puts into context the size of the move. The index returned just over 12%, meaning JD Sports gave investors over 10 times the performance of the index.
What happened here?
When a stock rallies by this amount, it is either due to one important factor, or many smaller ones. For JD Sports, it was the latter.
Firstly, it has benefited from the fall off in competition, with Mike Ashley’s Sports Direct International… sorry, Frasers Group as it is now known… struggling, as one can see from earnings reports. Further, Ashley’s aggressive approach to growing his presence on the high street has not always been the best strategy, as can be seen from the acquisition of House of Fraser. Investors therefore have cycled out of Sports Direct and into JD Sports.
There is plenty of merit to JD Sports without external factors though. The business itself has been able to grow earnings by 49% in the past 12 months, and has a very high gross profit margin of 47%. Cash flow has dried up somewhat, but this can be put down to acquisitions.
JD agreed to acquire Footasylum in March of this year for around £90m, but that deal is still the subject of a CMA investigation. Yet it is the takeover of US chain Finish Line from 2018 that has been a larger boost for 2019. The dampened retail sector here in the UK has been offset by that presence in the US, enabling JD Sports to still grow earnings at a group level.
Still room to grow?
Of 11 analysts offering a viewpoint on the company, the range in share price forecast varies between 680p to 900p, showing that the professionals think further upside could be there, but limited.
Indeed, with a P/E ratio of 31, it is easy to see why some investors may be cautious of buying-in right now, and I would agree. Fundamentally I think the business is sound and will continue to perform both from acquisitions and from picking up business due to the demise of competition. But after the stellar share price rally of 2019, I would wait for a pullback to see the P/E ratio and other financial ratios return to lower figures before investing.
Jonathan Smith and The Motley Fool UK have no position in any of the shares mentioned. 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.