The stock market crash has thrown up some fantastic bargains for investors. But there is one top stock in particular that I’ve got my eye on after recent declines.
Top stock on sale
The company I’m most interested in after recent declines is fashion house Burberry (LSE: BRBY).
There are a couple of reasons why this business stands out to me as being a top stock.
For a start, the group is one of the most recognisable fashion brands in the world. This should help the business stand out in a crowded environment when the economy starts to recover.
Indeed, companies that have valuable brands or substantial competitive advantages tend to outperform over the long term. They do exceptionally well during periods of economic uncertainty because consumers know what the brand offers.
Some studies show that well-known brands come out stronger on the other side of economic turmoil because weaker competitors tend to reduce advertising spending. This reduces brand awareness. Smaller competitors may also collapse as they lack the financial resources to be able to withstand a prolonged downturn.
This top stock, on the other hand, has a solid balance sheet. According to Burberry’s latest trading update, the organisation has net cash of £600m to weather the storm. Bankers also stand ready to provide a further £300m if the group needs it.
These resources should help the FTSE 100 company pull through.
It is clear that Burberry’s sales will take a big hit this year. In the first quarter, group sales had fallen by between 40% and 50%, according to the company’s latest trading update.
That’s a significant drop, but the firm is still making money. What’s more, in recent weeks, the group has begun to open up its shuttered stores in China.
So, the outlook for this top stock is not as bleak as the market seems to be suggesting. Shares in the fashion house are down around 62% year-to-date. That implies that the shares offer a wide margin of safety at current levels.
Burberry’s current valuation, coupled with its strong brand and robust balance sheet implies that this is a top stock that could be worth adding to your portfolio.
The company’s brand remains one of the most sought after in the world of fashion. That should help support Burberry’s sales growth for years to come.
After recent declines, the stock could produce substantial capital gains for investors when the economy recovers. On top of this capital growth potential, the firm has historically been a good income stock as well.
The company has paid an average dividend of 40p per share per annum for the past three years. This suggests the stock offers a dividend yield of around 3%, which looks very attractive in the current interest rate environment. That level of income, coupled with earnings growth of 3% per annum, which is in line with Burberry’s five-year average growth rate, suggests the stock could return 6% per annum over the long run.
Add in the potential 55% return if the top stock returns to its early 2020 level, and investors could see a return of more than 100% over the next decade. That suggests the stock has the potential to turn £5k into £10k in 10 years.
Considering all of the above, it seems this top stock could generate healthy long-term returns for investors.
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Rupert Hargreaves does not own shares in Burberry. The Motley Fool UK has recommended Burberry. 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.