The current market turmoil has given me the opportunity to revisit some advice that has worked for me in the past. One of them is JD Sports, which nearly doubled in value when I tipped it for much of 2019.
Since then, the firm has been on a roller coaster ride. In the early days of the pandemic, it lost two-thirds of its value but then quadrupled, leading to a five-to-one stock split last November. However, in the last six months it has fallen again, its price almost halving, so it is now cheaper than when I recommended closing the position in November 2019.
There are logical reasons why investors are wary of the company. Rising prices and potential supply chain issues in China are threatening margins, while many fear consumers may choose to respond to rising energy and food costs by cutting discretionary spending on clothing. There’s also the risk that people returning to the office will switch from casual “athleisure” to smarter clothes – bad news for a company that makes its money selling tracksuits, shoes and activewear. Finally, there have been tensions between executive chairman Peter Cowgill and some shareholders over his salary.
The enduring appeal of JD Sports
However, these problems are much less serious than you might think. Even before the pandemic, the worlds of sportswear and fashion had begun to merge, with people willing to pay large sums of money for designer clothes, especially limited-edition shoes. JD Sports’ close relationships with companies such as Nike and Adidas – Nike considers it a strategic partner – put it in a good position to provide access to these high-margin items, as well as provide a wedge against potential competitors. .
More importantly, JD Sports has an impressive growth record with sales increasing every year, even during the pandemic, with overall sales tripling between 2016 and 2021, while maintaining a high double-digit return on investment. The company also has a clear plan to maintain this growth, particularly in the United States, aided by several acquisitions over the past few years, including The Finish Line in 2018, Shoe Palace in 2020 and DTLR last year. He is also trying to increase his sales in Europe.
The combination of strong growth and a falling share price means it is now trading at the premium price of just 10.3x forecast 2023 earnings. Of course, that’s not because a stock offers great value that it cannot be caught. in the current market turmoil, at least in the short term. Given that it has fallen so quickly in such a short time and is still trading below its 50 and 200 day moving averages, I would hold off until it moves up a bit to 140p. Once that happens I would go long at £20 by 1p, with a stop loss of 95p. That would give you a total downside of £900.
Trading techniques: rewards and titles
High pay and booming stock options aren’t the only rewards business leaders can receive for doing their jobs well. Titles, awards and other honors often come with financial success.
For example, in the 2021 New Year’s Honors List, around 10% of UK honors were awarded in recognition of service to business and the economy. Even in countries that don’t have an official awards system, many publications and trade organizations hold annual award ceremonies for those they believe have done outstanding work.
However, while rewards can leave executives with a glimmer of satisfaction, some people say they are a sell signal. Since titles and awards are usually awarded based on past performance rather than future potential, they can signal that a company’s growth has reached its peak, similar to the infamous “curse of magazine cover” – the idea that the moment a company, trend or theme appears on the cover of a mainstream magazine, the bull run is likely to be over.
An even more cynical interpretation is that many rewards end up distorting the behavior of managers. For example, a manager may decide to pursue unprofitable acquisitions simply to maintain or enhance their public profile. Receiving an award can also discourage a manager from making financially profitable but politically unpopular decisions, such as downsizing to cut costs.
Studies seem to confirm that CEO awards and titles are indeed bad news. A 2016 study by Konrad Raff of the Norwegian School of Economics and Linus Siming of Bocconi University found that after the abolition of knights and queens in New Zealand in 2000, the share price and profitability of companies run by former knights have outperformed the broader market. , but then underperformed when reinstated nine years later. Similarly, a 2009 study by Ulrike Malmendier of the Haas School of Business and Geoffrey Tate of the University of Maryland found that US companies whose CEOs won a major award were 26% behind the market in over the next three years.
How my tips fared
As you can imagine, the last fortnight hasn’t been very good for my long tips. Construction company Morgan Sindall fell from 2,155p to 1,972p, below the 2,100p stop loss level, meaning the position was closed at 2,100p. Airtel Africa dropped from 146p to 141p, while National Express also dropped from 251p to 248p. J Sainsbury’s supermarket fell from 237p to 245p, while ASOS and Domino’s Pizza Group remain below the level at which you should start long. Including Morgan Sindall, my long tips make a profit of £2,365, up from £2,650 previously.
However, the market decline that hit my long tips was good news for my six short positions, all of which moved in my favor. Cinema chain AMC fell from $15.26 to $11.71, remote medicine company Teladoc Health fell from $35.73 to $32.16, marketing software company HubSpot fell from 380 $344, KE Holdings fell to $12.15 and DWAC, the holding company of Donald Trump’s social media empire, fell from $47.91 to $45.75. Digital currency exchange Coinbase also fell from $121 to $61. Overall, my short positions now generate total net profits of £6,521, compared to £5,312 previously.
My short and long tips generate a combined profit of £8,886, up from £7,011 previously. Looking ahead, I now have nine boards open (long Airtel Africa, National Express and J Sainsbury, short AMC, Teladoc Health, HubSpot, KE Holdings, DWAC and Coinbase). I also have three boards pending (ASOS, Domino’s Pizza Group and JD Sports). While I’m not suggesting that you close positions, I do suggest that you keep some more profit by reducing the price at which you hedge Teladoc Health to $60 (from $100), HubSpot to $400 (from $500), DWAC at $50 (from $55), AMC at $20 and Coinbase at $90 (from $175).
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