When it came to predicting which investments would perform the best in 2023, I’m not sure many people would have had the foresight to suggest Marks and Spencer (LON: MKS) shares. I know I wouldn’t!
However, the retail bellwether’s return since January has been shockingly good.
Not so stuffy
Marks and Spencer stock is up 75% year-to-date (at the time of writing). So, a £1,000 investment would now be worth around £1,750.
Should you invest £1,000 in Marks and Spencer right now?
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For simplicity’s sake, I’m ignoring any costs involved.
Any positive impact of dividends can also be ignored because, well, the company hasn’t paid out any cash to its owners since the beginning of 2020!
Index-beater
Now, a 75% return in eight months or so is undoubtedly brilliant. This is particularly the case for a very large company and one often accused of having a tired and stuffy brand that only appeals to more ‘mature’ consumers.
However, this gain is even better when compared to the 5% fall seen in the domestically-focused FTSE 250.
Once again, we have evidence that stock-picking has the potential to turbocharge a person’s wealth if, by luck or skill, they buy the right stocks.
Why has this happened?
I think we can safely say that M&S’s rise is due to a number of reasons.
For one, it seems like investors are still more interested in buying bombed-out value stocks over anything growth-oriented. Check out the share price performance of Rolls Royce and Centrica for more evidence of that.
But there have also been signs that, after many failed attempts, the current turnaround plan is actually bearing fruit. Like-for-like sales have been rising in both its Clothing & Home and Food divisions.
More to come?
There are certainly reasons for thinking this momentum can continue.
In its most recent update, the company stated that it expected profits to grow in the current financial year. It added that interim results in November would show “significant improvement against previous expectations“. That sounds pretty bullish to me!
I think this makes a return to the FTSE 100 when the next reshuffle occurs in September look increasingly possible. As well as inspiring confidence in retail investors, this means that index funds focused on only the UK’s biggest businesses will be forced to buy in.
It goes without saying that a resumption of dividend payments would probably be embraced by those looking for passive income too. This would give the share price yet another boost.
Long term loser
On the downside, the outlook for the UK economy isn’t exactly great. Even if the £4.5bn cap does everything right, external events might conspire to drag the stock down.
I’m also a bit wary of the valuation. A price-to-earnings (P/E) ratio of 13 might look reasonable compared to the market as a whole but it’s actually not all that cheap for the battered Consumer Defensives sector. Could we see some profit-taking in due course?
Most importantly, one can’t ignore the fact that Marks has lagged the market over the long term. If I’d invested that £1,000 five years ago in the very same stock, I’d be almost £250 poorer (ignoring dividends and costs again).
Past performance is no guide to the future. But nor should it be completely ignored.
And this is why Marks and Spencer shares still aren’t for me.
