Stock in Focus: Why I won’t be adding JD Sports Fashion to the portfolio
Is JD Sports Fashion about to follow its budget rival Sports Direct International into the retail sin bin? Or was last month’s 20% decline just a short-term blip in the company’s stellar progress?
With no new stocks to add to the SIF Portfolio this week, I’m going to take a closer look at one of the top stock market performers of recent years. Let’s not forget that even after last month’s slide, JD Sports’ share price is still 10 times higher than it was five years ago.
What’s gone wrong?
For most companies, issuing an ‘in-line’ trading statement would leave their share price unchanged on the day. The problem for companies which continually beat expectations is that the market starts to price in this outperformance. This can lead to problems.
When JD Sports advised investors to expect a full-year result “in line with market expectations” on 29 June, the shares fell by 13% in one day. This compounded the weakness seen since late May, when the stock hit a 52-week high of 462p.
In fairness, management commentary did seem to justify a cautious view. Founder and executive chairman Peter Cowgill said that calendar differences would affect the timing of clearance sales and thus like-for-like sales. He cited the Muslim festival of Eid and also pointed out that last year’s Euro 2016 tournament would make for tough comparatives this year.
Mr Cowgill then went on to warn that the firm was facing “margin pressure in achieving sales growth”. In other words, management have been forced to cut prices by more than expected in order to hit sales targets.
Were investors being softened up for a possible profit warning, or is this business as usual for a big retailer? I’m not sure. City analysts have chosen to give Mr Cowgill the benefit of the doubt. Broker forecasts have remained flat in July:
Still a high flyer?
It’s worth noting that despite last month’s slide, JD Sports still has a StockRank of 90 and StockRank Style of High Flyer. The only classification that’s changed is the firm’s RiskRating, which has moved from Balanced to Adventurous. This signifies a higher level of expected volatility, as a result of the recent share price movement.
Although you might expect last month’s share price slide to have resulted in a lower StockRank, it hasn’t. JD Sports’ StockRank has actually risen since the start of June:
StockRank on 3 June 2017 (L) and 10 July 2017 (R)
The increase to the ValueRank is fairly self-explanatory. The shares are cheaper than they were and now trade on a historic P/E of 18.5, versus 23.6 at the start of June.
The change to the MomentumRank is also unsurprising. The stock’s fall away from its 52-week high has weakened the score slightly.
But the explanation for the increase in QualityRank isn’t so obvious. I’ve had a careful look and it seems to be down to an improvement in the stock’s Earnings Manipulation Risk score (Beneish M-Score) since the start of June:
3 June (top) / 10 July (bottom)
I’m not sure why the results of this test have changed over the last month. After all, none of the ratios used to calculate the M-Score involve the share price. And JD hasn’t issued any financial results during the period.
I’m not sure what’s changed. If I can find out, I’ll update this piece. But this does seem to have lifted the stock’s QualityRank significantly.
What to watch for
From a purely quantitative point of view, Stockopedia’s data suggests that this firm remains in the High Flyer category. These are stocks which may appear expensive, but which, as a class, tend to outperform.
However, there’s clearly a risk that this could change. If this stock becomes a Falling Star, it could underperform the market for a significant period of time. The only real difference between these two types of stock is momentum.
In my opinion, investors need to watch carefully for any sign that JD Sports’ incredible momentum is starting to fizzle out. Here’s how things look at the moment:
The next big test is likely to be when the group’s interim results are published. These are expected on 12 September. If earnings fall below expectations or are guided down for the full year, the bottom half of this list could go orange.
The shares could see further falls as a result, weakening the price momentum they’ve enjoyed for so long.
Even if the group’s interim results are as expected, this might not be enough. If investors think the firm’s growth is slowing and the shares stay flat, then the technical factors supporting price momentum (the top half of the list above) are likely to weaken:
The 50-day moving average will fall towards the 200-day moving average
Six-month relative strength will fall and could go negative
This could put further pressure on the share price.
My verdict
Would I add JD Sports Fashion to the SIF Portfolio if it qualified for my screen? I’d prefer not to. I think the risks of the stock underperforming over the next year are relatively high.
Of course, I may be wrong. I’m effectively trying to anticipate changes to the StockRanks, which isn’t always easy. But I’m comfortable saying that in my view, the balance of risk and potential reward isn’t very attractive at the moment.
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16 comments
nice results from JD today:
· Another record result for the half year with Group profit before tax increased by a further 33%
· Further encouraging like for like* sales growth in stores with strong growth online
· Net increase of 12 JD stores in UK and Ireland
· International development of JD continues with:
a) Net increase of 23 JD stores across mainland Europe
b) First JD stores in Australia
c) Additional stores in Malaysia
· Positive contribution in the period from Go Outdoors
· Interim dividend increased by 4% from 0.25p to 0.26p. Strong cash position maintained in the Group to maximise the available funding to support ongoing growth opportunities
I will be further adding to my position today
Agreed, fantastic results. I bought on the last dip and added more this morning. I know bricks and mortar retail is out of fashion but you can't argue with that level of revenue and EPS growth along with increasing LFL sales and international expansion on a relatively modest PE. Online sales also up to about 13% of total.
looks like this share could be providing a good entry point in.
My notes:
Barclays reiterated their support for the stock.
Due to report its first-half results mid september
They look well positioned to grow, with an international store roll-out, the continuing trend of so-called athleisure, and good relationships with tops brands such as Nike, Adidas
Offers better shopping experience than other rivals, with more quality products.
Investec reissued a “buy” rating and set a GBX 455 target
Im long, DYOR.
Looks like what Minervini calls a Stage 4 decline
Peel Hunt Reiterates “Buy” Rating, Sees GBX 500.00/Share; Covisint (COVS) Shorts Decreased By 48.91%
as the retail sector looks like its getting better, with next shares providing a boost today, I thought it be a good time to get back in long on JD, especially after the dip in price.
Next results will be announced late in September
It looks like JD sports are finding new ways to grow by opening gyms, and I have to say what a great idea. go in their shop by their clothing tracksuits etc, then head to their gym:
JD Sports is bolstering its fitness credentials by opening its first gym and store dual fascia in Salford this year.
The sports fashion titan will open the retail division of the site this month, with the opening of the £2m fitness centre scheduled for September.
I think it is a mistake to talk about JD as if they are still simply a UK high street retailer with shops called JD Sports.
They are expanding greatly in other countries and expanding their brands and channels to market. So it is much more than a shop in Reading (for example) selling athlesiure.
Yes, the share price gets ahead of performance from time to time but there's little sign that they have run out of ways to grow profitably. Yes there are economic headwinds for the UK high street retailers but the rest of Europe is doing quite nicely now and they are building their presence there as well as in other countries.
A pause for breath is probably due but I believe this growth story has a lot further to go yet. I remain long on JD.
JD has no real competition on the high street apart from footlocker, but they are still miles apart. Sport direct is just a budget store compared to JD.
JD Shops are always busy, and this is just a correction as Paul said in a overrun share, im sure it will steady itself again once a ground has been found.
I got out this share over a year ago but was my first multibagger (though im still in love with it for sentimental reason lol).
Very good read. I think the cost pressures will outweigh the reasons to hold the shares.
Thanks
Hi Roland,
Interesting article, many thanks.
I've noticed that a lot of high-flying momentum shares have taken a tumble recently. So this could be one of many, where the price simply ran too far ahead of events, and is now correcting.
I think that very highly rated shares need continuous good news. As you say, an in-line update just isn't good enough for a stock that was on a PER of over 20.
Also JD relies on the big brands continuing to supply it. Once they realise how much profit JD is making, you could imagine them jacking up their supply prices, hence squeezing JD's margins, perhaps?
It's the first time ever that I can remember a retailer giving the timing of Eid as a reason for sales not being quite what they expected!
Regards, Paul.
I hold shares in this company and it has done very well for me over the last two to three years, I hope with getting blacks now back into profit and buying thee other outdoor store stores it gives it another outlet to profit from apart from jd alone, although I was in Chester a couple of weeks ago and the store there was packed with customers who were buying, and then there's always tessuti a top end store.also with the company expanding more over seas I see this as an opportunity to hopefully make more profits from the younger generation who always seem to want the newest items which Jd,s have ,and there stores always look more appealing than the other sports stores,wright or wrong I am sticking with this company.
Hi dfr1,
Interesting comments about Blacks returning to profit. My wife was in York last week and she reported that the Blacks store in the city centre was having a closing down sale.
I assume this means JD Sports Fashion (LON:JD.) is pruning unprofitable stores from its portfolio. But I was surprised to see this one go, as it always seemed busy.
Regards,
Roland
You maybe right about JD Sports Fashion (LON:JD.), I sold out in April, too many headwinds and retail is not a sector I want to be in at the moment, but I don't think it is anything like Sports Direct.
I note Severfield (LON:SFR) qualifies in your screen but is not included in your portfolio?
By the way when will you be reviewing £CAML?
Hi herbie,
Central Asia Metals (LON:CAML) isn't due for review until September, as it falls under my new 9-month holding rule, which I'm phasing in gradually
(A review of holdings which are eight months old will be published later in July).
Severfield (LON:SFR) does qualify intermittently for the screen, but the portfolio (http://www.stockopedia.com/fantasy-funds/stock-in-focus-portfolio-6449/) doesn't have any cash for new buys at the moment, due to the impact of extending the holding period. I hope to add a new stock later this month or at the start of August.
Regards,
Roland
I see, I did not know about the 9 month holding rule.
A bit confused why you are reviewing JD Sports Fashion (LON:JD.) now if you have no cash to buy it?
Not keen on fixed holding periods myself.
Hi herbie,
I don't just write about portfolio stocks, I also write about other stocks that may be of interest.
Roland