Marks and Spencer (LSE: MKS) shares have declined in value substantially over the past few years. This performance may have attracted some value investors to the stock, but I believe this could be a mistake. Indeed, while the shares might look cheap today compared to their historical trading performance, the past performance of the MKS share price should never be used to guide future potential. The company has some fundamental weaknesses that don’t look as if they will go away any time soon. As such, I would avoid the business and buy the two cheap UK stocks outlined below instead.
MKS share price: the issues
Over the past year, shares in MKS have fallen 5%. Over the past five years, the stock is off 60%.
This poor performance can be traced to the group’s collapsing profitability. In 2015 the retailer reported net profits of nearly £500m. That figure dwindled to £25m, falling to £24m in 2020.
City analysts expect the group’s profits to remain subdued until 2022. That year, analysts forecast an income of £247m, but this is only a projection at this stage. There’s no guarantee M&S will hit this target.
However, if the group manages to return to growth, investor sentiment towards the enterprise could dramatically change. That may lead to an improvement in the share price. However, it is impossible to tell at this stage.
With so much uncertainty surrounding the outlook for the MKS share price, I’ve been focusing on other cheap UK stocks instead. Two companies in particular that have attracted my attention are Next (LSE: NXT) and Rentokil (LSE: RTO).
UK stocks to buy
Next has benefited over the past year from its expansive online operations. The online business has helped offset falling sales at brick-and-mortar stores. The company is planning to invest hundreds of millions of pounds in its online business over the next few years, which I think will lead to further growth in this division. That’s why I would buy the stock for my portfolio today.
That being said, the UK retail industry is incredibly competitive, and just because Next is growing today does not mean that it will continue to do so. The recent failure of the retail group Arcadia shows that no matter how big a retail business becomes, it is never immune from the winds of change, and fortunes can quickly reverse.
2020 was an excellent year to be a rat. Figures show the UK rat population increased by 30m last year, as the rodents took over deserted office buildings and other locations humans had abandoned.
This is great news for pest control business Rentokil. As one of the largest pest control groups globally, the company may benefit from increased demand for its services in the years ahead. And unlike retailers such as MKS and Next, rats don’t go out of fashion. There will always be a need for pest control services, which suggests Rentokil’s long-term outlook is encouraging.
The company may face challenges, however, in the form of competition and interest rates, as it has a lot of borrowing on its balance sheet. Regulations may also strangle its ability to grow, and there’s always going to be the threat of reputation issues, which could hurt the brand.
But considering the growth of the UK rat population, I would buy this stock for my portfolio today.
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Rupert Hargreaves owns no share mentioned. The Motley Fool UK owns shares of Next. 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.