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It’s not as easy as some people think to find cheap shares. Simply looking for stocks that have fallen over the past year doesn’t necessarily mean the company’s now undervalued.
A lot more time and effort’s needed to look at a business before making a judgment. Based on my research, here’s one I think ticks the box.
Multi-year struggles
I’m talking about JD Sports (LSE:JD). I know this will be a controversial choice for some, given how it went from being a hot growth stock during 2019-2021, only to trend lower in the years that have followed. To a certain extent, the fall’s started to ease, with it only down 7% over the past year.
Back in September, its half-year report showed a 13.5% drop in profit compared with the same period last year, with the statement noting “strained consumer finances” and cautious spending. This is especially felt among JD’s target demographic of younger shoppers. This has led to weaker retail footfall and reduced spending on discretionary apparel and footwear.
When I look even further back, the share price has struggled due to downward revisions to future earnings guidance. This is never a good sign for a company, as it forces investors to readjust their expectations lower for where the share price could be in the future. The potential for further revisions is a risk.
Peak pessimism
But after being beaten up for the past few years, I think the company’s starting to look very undervalued. To begin with, the price-to-earnings ratio is just 6.72. This is below my fair value benchmark of 10, and well below the FTSE 100 average. On this valuation snapshot, it looks cheap.
The gross profit margin for the last year was 47.68%, roughly staying the same for the past decade. It’s a good sign, as it shows the company has strong pricing power and reliable cost control. Importantly, despite the share price decline, the firm remains profitable. It just needs to boost revenue.
Therefore, the stock looks cheap because the fundamental business operations are sound, rather than having major internal problems that would validate the share price move.
The price-to-sales ratio’s 0.35, showing how much investors are willing to pay for each pound of sales. A typical fair value benchmark is 1. So for JD Sports, the low value could indicate the market’s overlooking its potential. For every pound of sales, the company’s market value is relatively low, which can be attractive.
The bottom line
I haven’t gone through every single FTSE 100 constituent in detail to say conclusively that JD Sports is the most undervalued. Further, valuation can be subjective, so I don’t think anyone can firmly say one idea’s definitely the cheapest. However, I do believe it’s one of the cheapest in the index and therefore worth consideration for investors.
