Is it too late to buy these Footsie turnaround stocks?

Roland Head gives his verdict on the latest figures from these fast-moving stocks.

| 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.

Luxury fashion group Burberry Group (LSE: BRBY) has risen by 25% over the last year, as investors priced-in the benefits of a weaker pound and resurgent sales in China.

But the group’s stock fell by more than 6% when markets opened on Wednesday, after it issued a rather mixed trading update. The good news was that retail sales rose by 19% to £1,268m during the second half of the year, thanks to growth in China and an “exceptional performance” in the UK.

The bad news was that most of these gains were the result of shifting exchange rates. Underlying retail sales rose by just 3% and underlying group revenue fell by 1% to £1,607m, thanks to a 13% slump in wholesale revenue.

In fairness, falling wholesale revenue was to be expected. Burberry is currently running down its stocks of beauty products in preparation for a shift to a new partnership with US group Coty, whose brands include Clairol and Marc Jacobs.

But the group’s retail operations account for 80% of sales. If underlying growth is slowing, then profits could come under serious pressure as the pound continues to gain strength against the US dollar.

Despite this, I believe Burberry remains attractive from a financial perspective. The group had more than £500m of net cash at the end of September and has a trailing 12-month operating margin of 14%. Although the short-term outlook is uncertain, I suspect the longer-term picture will be more favourable. I’d hold for now.

I underestimated this engineer

I sold my shares of Fenner (LSE: FENR) just before Christmas, thinking that at 250p, a recovery was already priced-into the stock. I was wrong. Fenner’s share price has since risen by another 35% to 337p.

The group delivered an impressive set of interim results today. Revenue rose by 11% to £307.4m during the six months to 28 February, while underlying operating profit was 60% higher at £24m.

The company said “market drivers in many of the group’s businesses are starting to look more favourable” and highlighted a “clearly improving trend” in oil and gas. As a result, the board now expects full-year operating profit to be “above previous expectations”. Management also expects to benefit from a lower tax rate in the current year.

I suspect there could be more to come from Fenner, but I think it’s worth considering what might go wrong. Like Burberry, Fenner has benefityed hugely from the weaker pound. While the group’s underlying operating profit rose by 60% during the first half, underlying growth excluding currency effects was just 27%.

Is it too late to buy Fenner?

Underlying earnings are expected to rise by 50% to 12.7p per share this year, and by a further 26% to 16p in 2017/18. This puts the stock on a forecast P/E of 25 for the current year, falling to a P/E of 20 next year.

Although the interim dividend was increased by 40% to 1.4p per share in today’s results, the stock’s forecast yield of 1% remains low. The shares seem fully priced to me, but they may well continue to outperform. I’d continue to hold, but wouldn’t buy more.

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.

Roland Head has no position in any shares mentioned. 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.

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 »