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Marks & Spencer vs Royal Mail: are the shares cheap enough to buy in May?

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Will the new month bring stability to broader markets and riches to investors? Today I’m taking a look at the share prices of high street retailer Marks & Spencer Group (LSE: MKS) and postal service Royal Mail (LSE: RMG) to see how £1,000 invested in each would have fared over the past five years and whether one or both might offer a path to riches in the years to come. 

Both companies are members of the FTSE 250 index. Year-to-date (YTD), the stocks are down about 27% and 57% respectively, which means the shares are clearly in bear market territory. Buying stocks during a market correction requires courage. For now, investors may want to do further due diligence on both companies.

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Reading the numbers

Under each company name below, you can see how the price has changed over the past five years and what this means in terms of the compound annual growth rate (CAGR). Then I’ve shown how £1,000 would have fared over five years.

Past share prices are for early May 2015. Current ones are closing prices on 1 May. I haven’t factored-in any brokerage commissions or taxes.

Please note that until recently, both FTSE 100 firms paid regular dividends. The calculation below doesn’t take into consideration the dividends or reinvesting that income.

However, given the uncertainty the economy is facing, in the second half of March, Marks & Spencer said there would not be a final dividend in FY 2020, resulting in cash saving of  around £130m. Royal Mail also said that the board would not propose a final dividend for the year. 

Marks & Spencer

The share price has fallen from 539p to 93p, although on 2 January 2020, MKS shares were around 215p. It means CAGR of -29.63%, so £1,000 would have decreased to about £172.56.

The stock price is now at an all-time low and the outlook is rather grim. We’d need to have more visibility as to when the current lockdown measures may be relaxed. Until then, retail foot traffic will not return to the high street.

On a more positive note, management has recently said that it would boost its online business. About 20% of its clothing and homeware sales are online at present.

In September the group will also start selling groceries through its partnership with Ocado. In 2019, M&S spent £750m to buy a 50% stake in Ocado’s online food delivery business.

Would I buy now? No. I’d like to revisit the outlook for MKS shares later this summer before committing fresh capital to the business.

Royal Mail

The share price has fallen from 479p to 159.7p, but on 2 January, RMG shares were around 232p. That’s a CAGR of -19.72% and means £1,000 would have decreased to £333.45.

RMG shares are also at all-time lows. So does the current price mean value?

Shares in the postal delivery service took a beating even before Covid-19 hit our shores, reflecting concerns on a wide range of issues affecting growth and earnings.

Yet last week, Citigroup upgraded the shares to ‘buy from ‘sell’ with a target price of 210p. The group handles over 50% of all parcel delivery in the UK. And due to increased e-commerce, more parcels are being sent during the lockdown.

As a long-term investor, I’m also getting ready to make a contrarian bullish call on RMG stock. A large amount of bad news has already been priced in to the share price.

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tezcang has no position in any of the shares mentioned. The Motley Fool UK has 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.

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