Value Traps And A Bargain Buy For 2016: Sports Direct International Plc, Marks and Spencer Group Plc And Burberry Group Plc

One value play and two value traps among Sports Direct International Plc (LON:SPD), Marks and Spencer Group Plc (LON:MKS), and Burberry Group Plc (LON:BRBY). Which is which?

| More on:

The content of this article was relevant at the time of publishing. Circumstances change continuously and caution should therefore be exercised when relying upon any content contained within this article.

When investing, your capital is at risk. The value of your investments can go down as well as up and you may get back less than you put in.

Read More

The content of this article is provided for information purposes only and is not intended to be, nor does it constitute, any form of personal advice. Investments in a currency other than sterling are exposed to currency exchange risk. Currency exchange rates are constantly changing, which may affect the value of the investment in sterling terms. You could lose money in sterling even if the stock price rises in the currency of origin. Stocks listed on overseas exchanges may be subject to additional dealing and exchange rate charges, and may have other tax implications, and may not provide the same, or any, regulatory protection as in the UK.

You’re reading a free article with opinions that may differ from The Motley Fool’s Premium Investing Services. Become a Motley Fool member today to get instant access to our top analyst recommendations, in-depth research, investing resources, and more. Learn More.

The sheen has gone from Sports Direct International Plc (LSE:SPD) over the past two years with shares now trading where they were in 2013. The growth that was baked into past valuations has petered out with revenue flat year-on-year. While the company has continued to increase margins and profits, which were up 4% for the past half year, investors have sold off to the tune of 23% over the past 12 months. So for a solidly profitable company with growing international aspirations, the current P/E ratio of 13 may appear very attractive, right? Maybe not.

Should I buy?

I believe long-term investors should steer well clear of the company due to its numerous corporate governance issues. The CEO has recently been slapped with criminal charges over the administration process of the USC chain. And the 26-year-old boyfriend of the founder and majority owner’s daughter was recently hired to a nebulously compensated position. With red flags such as these, I don’t believe investors would profit from Sports Direct in the long term.

Opposites attract?

Perhaps the polar opposite of Sports Direct in the minds of shoppers is venerable high-street retailer Marks and Spencer Group Plc (LSE:MKS). Its shares are beginning to appear attractive to many investors after a down 2015 left shares trading at 17 times earnings with a full 4% dividend yield. Marks and Sparks bulls are salivating at expected margin and profit growth for the next year and international prospects, alongside the solid dividend and continued share buyback programme. 

Despite these rosy expectations, I remain unconvinced that M&S is an attractive buy for investors who are looking decades into the future. While the company has done an admirable job of expanding in foods, which now account for 52% of sales, overall revenue has remained largely flat for five years running.

I don’t believe international expansion will be the catalyst for returning the company to high growth either. In its most recent report, international sales were down year-on-year, despite a net gain of nine stores, and they remain much less profitable than their UK counterparts. Pair this with the continued rise of fast fashion, online purchases and changing demographics and I view Marks and Spencer as one share to stay away from.

China syndrome

While Sports Direct and Marks and Spencer remain largely wedded to the domestic market, Burberry Group Plc (LSE:BRBY) shares first soared and have now returned to Earth due to exposure to China. Shares are off nearly 30% for the year on collapsing luxury spending in the Asia Pacific Region, which accounts for one-third of sales.

Despite the bad news coming out of China, most recent year-on-year revenues remained flat while pre-tax profits rose 9%. With higher margins on Chinese sales, the luxury retailer retains significant room to further increase margins by slowing store openings and cutting staff. While the Chinese economy’s growth has slowed, investors would be wise to look past the current panic and realise that 6.5% annual GDP growth bodes well for the Chinese luxury market decades from now.

As a long-term investment, I believe Burberry’s significant pricing power, diversification and luxury profile make it an appealing addition to watch lists, particularly as the shares may have further to fall in the short term.

Should you invest, the value of your investment may rise or fall and your capital is at risk. Before investing, your individual circumstances should be assessed. Consider taking independent financial advice.

Ian Pierce has no position in any shares mentioned. The Motley Fool UK has recommended Burberry and Sports Direct International. We Fools don't all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors.

More on Investing Articles

Investing Articles

6 stocks that Fools have been buying!

Our Foolish freelancers are putting their money where their mouths are and buying these stocks in recent weeks.

Read more »

Google office headquarters
Investing Articles

1 reason I like buying S&P 500 shares – and 1 reason I don’t

Will this investor try to improve his potential returns by focusing more on S&P 500 shares instead of British ones?…

Read more »

Young woman holding up three fingers
Investing Articles

3 SIPP mistakes to avoid

Our writer explains a trio of potentially costly errors he tries to avoid making when investing his SIPP, on an…

Read more »

Smiling white woman holding iPhone with Airpods in ear
Investing Articles

Here’s how (and why) I’d start buying shares with £25 a week

Our writer uses his investment experience and current approach to explain how he would start buying shares on a limited…

Read more »

Aerial shot showing an aircraft shadow flying over an idyllic beach
Investing Articles

Here’s my 5-step approach to earning passive income of £500 a month

Christopher Ruane explains the handful of steps he uses to target hundreds of pounds in passive income each month.

Read more »

Investing Articles

2 UK shares I’ve been buying this week

From a value perspective, UK shares look attractive. But two in particular have been attracting Stephen Wright’s attention over the…

Read more »

Investing Articles

A lifelong second income for just £10 a week? Here’s how!

With a simple, structured approach to buying blue-chip dividend shares at attractive prices, our writer's building a second income for…

Read more »

Investing Articles

Here’s how I’d use a £20k Stocks and Shares ISA to help build generational wealth

Discover how our writer would aim to turn a £20k Stocks and Shares ISA into a sizeable nest egg by…

Read more »