Plenty of growth stocks have had a good 2024. Burberry (LSE: BRBY) and Watches of Switzerland (LSE: WOSG) aren’t among them. Year-to-date, their share prices have tumbled 50% and 41% respectively.
But is there a case for saying they’re now oversold? Here’s my take.
Troubled sector
Times have clearly been tough for anything faintly related to the luxury sector. High inflation and the subsequent cost-of-living crisis have hit earnings at both companies.
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Last month, Watches of Switzerland’s reported a 40% drop in its annual pre-tax profit to £92m.
Earlier this month, Burberry reported a 21% fall in Q1 underlying sales and now anticipates posting an operating loss over the first half of its financial year. In anticipation of this, dividends were shelved. Oh, and it pushed its CEO out of the door.
As an exercise in ‘kitchen-sinking’ bad news, it was almost impressive.
Green shoots?
There’s certainly an argument for thinking that at least one of these stocks might be in bargain territory.
A price-to-earnings (P/E) ratio of under 10 for the timepiece retailer looks attractive. This is assuming that the company was right to be “cautiously optimistic” on the trading outlook in June. It also believed that the industry was being “more conservative on production” which could make this niche market more stable over the long term.
Burberry’s forward P/E stands at 17, according to my data provider. That’s only slightly below it’s five-year average P/E of 20, although it’s based on a near halving of earnings per share in 2024. A 32% recovery in FY26 brings the P/E down to a more palatable 13.
Feet on the floor
Now, a widely-rumoured first cut to interest rates in August could be just the medicine that both stocks need. But it’s important to stay grounded. That cut’s unlikely to have an immediate impact on sales for either company. Consumer confidence usually takes a while to recover.
It could also be that at least some of the relief that comes from lower rates is already priced into UK stocks. To really move the dial, the cut arguably needs to be greater than expected.
There’s always a chance that the Bank of England might hold its current hand for a while longer too. That would probably be bad news for share prices across the board.
So will I be buying?
I’m definitely interested in making purchases. But I also think that the optimal strategy, if I were to buy, would be to slowly begin building a position in each. There’s arguably still truckloads of risk parked outside their doors, even if at least some of this is now baked in.
The suggestion that they may be unmissable bargains might be too strong.
For what it’s worth, I don’t think Burberry’s doomed. But the rot clearly needs to stop. And soon. If not, there’s a good chance it will be snapped up on the cheap. And that would be a shame for the UK market in general, not just existing holders.
Based on the slightly more encouraging noises coming from management, I reckon Watches of Switzerland’s recovery (if there is one) could come sooner. So I’ll be taking a keen interest in its Q1 update — due in early August — before perhaps taking a stake.
