A number of shares with operations in the UK have seen their valuations come under pressure in recent months. Value-focused retailer Sports Direct (LSE: SPD) is one such stock, with its share price having fallen 29% in the last six months as fears surrounding the prospects for the wider retail sector have caused investors to demand a wider margin of safety.
Looking ahead, there could be further challenges for the business. Consumer confidence could continue to weaken, while investors may become nervous about Brexit. However, in the long run, the stock could offer turnaround potential, given its improving financial outlook and valuation. Could it therefore be worth buying alongside another recovery share which released an update on Monday?
Improving performance
That company in question is ULS Technology (LSE: ULS). The provider of online business-to-business platforms for the UK conveyancing and financial intermediary markets released its half-year results. They showed a rise in revenue of 3% versus the same period of the previous year, with underlying pre-tax profit increasing 6% to £2.89m.
During the period, it was able to increase market share. It enjoyed particular strength within the remortgage transaction segment, while a continued expansion of its sales team allowed it to focus increasingly on the intermediary market.
ULS Technology is forecast to post a fall in earnings of 5% in the current year, followed by a rise of the same amount next year. Although it trades on a price-to-earnings (P/E) ratio of around 11, it seems to lack an obvious growth catalyst. And with the wider conveyancing sector having the potential for future weakness, it may be a stock to avoid at the present time.
Growth potential
In contrast, Sports Direct is due to deliver an improving bottom line over the next couple of years. Its earnings are expected to rise by 16% in the current year, followed by further growth of 10% next year. Since its shares trade on a price-to-earnings growth (PEG) ratio of around 1.1, they could offer a margin of safety after their recent decline.
Although consumer confidence may be weak, this could provide a catalyst for the company’s financial performance. If consumers become increasingly price-conscious, they may begin to favour stores offering steep discounts and competitive pricing. Sports Direct’s business model is focused on offering value for money on major brands, while also obtaining high margins on its own-brands. As such, it could be one of the stronger performers in the retail sector over the medium term.
While the company has experienced elevated political risk and disappointing operational performance in recent years, it could enjoy a tailwind from changing consumer attitudes. As the Brexit process has the potential to cause uncertainty for consumers in terms of how it may impact on the UK economy in the short run, Sports Direct could prove to be a relatively rewarding, albeit risky, contrarian investment for the long run.
