However, since then, the share price slowed down, with SMT rising just under 5% in 2021. And in fact, this year has seen the Scottish Mortgage share price drop dramatically – it’s down 25% in 2022. 

But will the stock recover? And should I be buying some shares today? Let’s take a look.

Why has the SMT share price fallen?

So, let’s start by looking at why the SMT share price has dropped. One reason is due to the uncertain global economic outlook, in part because of rising inflation. An example is the UK. The opening up of the economy post-Covid saw fast growth coupled with massive global supply issues. And, as such, the Bank of England expects inflation to reach around 6% by spring 2022. To combat inflation, central banks raise interest rates. And, in times like these, people can receive higher returns on their savings and therefore are less likely to invest. And growth stocks tend to be hit the hardest. Given SMT’s top holdings include NIO, Nvidia, and Illumina, it is clear to see why the fund’s price has dropped.

On top of this, SMT has been impacted by the recent tech sell-off. With its tech-heavy weighting, the global tumble we have seen in the price of these stocks has negatively reflected onto the Scottish Mortgage share price. Further pressures, such as Chinese regulators, have also fuelled the fall.

Long-term growth

However, management makes no secret of the trust’s aim is to look for long-term growth opportunities. Therefore, volatile periods like now should be of no concern to investors.

Instead, as a more valuable measure, it would be smarter to look at returns over a longer time frame. As my colleague Roland Head highlighted, the trust has delivered 650% returns over the past 10 years. This is an achievement that very few investment funds have managed.

Within this period, the trust has also experienced large falls, for example, a 50% drop after the dotcom crash of 2000. What this shows for me is that I should not be deterred from the fall in the share price. And it may actually present an opportunity for me to buy some cheap stock.

Further, investing in it provides me with access to a variety of assets all under one investment. This allows me to diversify my portfolio. What makes this more appealing is the cheap ongoing charges of 0.34%.

Anderson departure

That said, fund manager James Anderson is set to hand over the reins next month. Given the impressive rise of the stock under his control, investors may be disappointed that he’s leaving.

However, co-manager Tom Slater is set to stay, and most of the management team’s members are staying on. As such, I think Scottish Mortgage is still in safe hands.

Will it recover?

Its track record certainly suggests that the trust will recover. And I like the diversification it brings to my portfolio. I think Scottish Mortgage will recover over the long term. However, the current stock market volatility will particularly affect tech stocks. And given its heavy tech weighting, I think we could see the share price drop even further. As such, I won’t be buying any shares just now.

The post The Scottish Mortgage share price is down 25% this year! Will it recover? appeared first on The Twelfth Magpie.

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Charlie Keough has no position in any of the shares mentioned. The Motley Fool UK has no position in any of the shares mentioned. Views expressed on the companies mentioned in this article are those of the writer and therefore may differ from the official recommendations we make in our subscription services such as Share Advisor, Hidden Winners and Pro. Here at The Motley Fool we believe that considering a diverse range of insights makes us better investors.

However, 2022 has seen Tesco shares struggle. And the stock is currently down 5% year to date. Despite this, I think at the current price, Tesco shares could be a great addition to my portfolio. Let’s see why.

Appealing fundamentals

One of the most appealing factors for me is the firm’s strong fundamentals.

In its Q3 and Christmas trading statement released earlier this year, Tesco said overall sales grew 2.6% year on year. And this was 8.2% on a two-year comparison. This growth was in part fuelled by Tesco’s ability to double its online delivery capacity during the pandemic. And as a result, the business said it had the highest total market share in four years. As a potential investor, these are pleasing results to see.

I also think Tesco is considerably undervalued, especially when compared to its competitors. It currently trades at a price-to-earnings (P/E) ratio of a mere 3.3. For context, one of its main rivals, Sainsbury’s, trades at a P/E of 20.6. This is an attractive factor for me. 

What I also like about Tesco is the stability it can provide during volatile periods. The business is not immune to the side effects of issues such as inflation. However, as my fellow Fool Rupert Hargreaves stated, as long as there is a human need to drink and eat, Tesco’s services will be in demand. This places the firm in a strong position.

Additionally, it has market power to negotiate prices with suppliers, meaning it can keep prices low — in turn drawing in more customers. And when these ideas are added together, it shows just how tempting a proposition Tesco shares are. In fact, supermarkets in general are much in demand at present and last year, rival Morrisons was taken over by a US private equity firm for £7bn. 

Tesco shares concerns

Yet I do have a few concerns as this is a competitive sector. And cheaper, more affordable stores such as Aldi have been on the rise lately. There is always the threat these businesses steal market share from Tesco. IGD expects the discount grocery market to be worth £34.4bn by 2026. And this growth will be fuelled by the increasing cost of living.

A shortage of workers has also forced Tesco to raise its wages, in turn increasing its labour costs. This will squeeze its margins.

Why I’m buying

Regardless of these potential issues, I am still bullish on Tesco. Its strong results even during the pandemic show the retailer’s resilience. With its low P/E ratio, I also think the stock presents real value. Couple that with the potential stability it can provide during turbulent times and I think Tesco shares would be a great addition to my portfolio. As such, I would buy today.

The post Here’s why I’d buy Tesco shares now! appeared first on The Twelfth Magpie.

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Charlie Keough has no position in any of the shares mentioned. The Motley Fool UK has recommended Sainsbury (J) and Tesco. Views expressed on the companies mentioned in this article are those of the writer and therefore may differ from the official recommendations we make in our subscription services such as Share Advisor, Hidden Winners and Pro. Here at The Motley Fool we believe that considering a diverse range of insights makes us better investors.

However, recent times have provided the business with optimism. More countries are ditching their restrictions in return for normal procedures. As such, should I be buying easyJet stock at the current price? Let’s take a look.

Encouraging results

Well, the outlook for easyJet certainly seems to be improving. The firm’s latest results for the three months to 31 December 2021 showed that revenue for the quarter stood at £805m. When compared to the £165m recorded for the same period in 2020, it is clear easyJet has taken large strides since the worst of the pandemic. Further, while the company still reported a loss, it was nearly half (£213m) of the £423m seen last year. And if this loss continues to be cut, I’d imagine this will lead to a rise in the easyJet share price.

We can also expect to see higher passenger volume in 2022. And this will provide easyJet with hope for the months ahead. As I recently mentioned in an article where I stated how I would buy shares in easyJet competitor IAG, passenger volume is expected to reach 3.4bn in 2022. This is nearly twice as high as 2020. This rise in volume is due to the reopening of borders globally, as more countries have dropped restrictions to allow smoother travel.

As I also mentioned, easyJet may have an edge over competitors with its cheap flight deals. As eager passengers look to potentially fly out for budget holidays, the firm is in a prime position to capitalise on this. I think this part of the business could excel in the next few months. And the share price could rise as a result.

easyJet share price headwinds

There are a few risks I must account for, however.

Firstly, while we seem to be coming to the end of the pandemic, an emergence of a new strain could potentially place us straight back in it. Any sign of this would have negative connotations for the easyJet share price.

Secondly, the price of jet fuel may increase because of the Ukraine conflict. The fear of decreasing supply could have a negative impact on the company’s operation. Costs will likely rise in the coming months.

What I’m doing

Despite the risks associated with easyJet, I think the outlook is bright for the firm. While its latest results show the business is heading in the right direction, what we can expect to see in 2022 will only bolster these figures. I also think that as consumers look to jet off for the first time post-pandemic, cheap options such as easyJet will be in high demand (this certainly applies to me). As such, I would be willing to buy easyJet stock today.

The post The easyJet share price is down 38% in a year. Here’s what I’m doing now! appeared first on The Twelfth Magpie.

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Charlie Keough has no position in any of the shares mentioned. The Motley Fool UK has no position in any of the shares mentioned. Views expressed on the companies mentioned in this article are those of the writer and therefore may differ from the official recommendations we make in our subscription services such as Share Advisor, Hidden Winners and Pro. Here at The Motley Fool we believe that considering a diverse range of insights makes us better investors.

Its fortunes changed when news emerged late last week that Russia had invaded Ukraine. The market’s response led to a 6.3% drop in the price on Thursday.

However, with the stock currently changing hands at around 148p — a slither of the 400p price we saw pre-pandemic — is now a good time for me to be adding IAG shares to my portfolio? Let’s take a look.

The reopening of borders

A major boost for IAG will be the recent reopening of borders around the world. As more and more countries have eased the restrictions placed on international passengers, this should allow the firm to see an increase in passengers over the coming months. Further, some countries have lifted restrictions altogether, for instance, Sweden and Spain. And the benefits they reap from doing so may entice other countries to follow suit. According to the International Air Transport Association, around 3.4bn people will fly in 2022 – nearly double that of 2020. As such, this makes me believe buying IAG shares at the current price could be a steal.

Further, and as my colleague Andrew Woods stated, IAG may benefit more than competitors when it comes to the increased travel we should begin to see. This is because, unlike EasyJet and Wizz Air that focus on short-haul flights, IAG also operates transatlantic routes – estimated to be worth $1bn annually to the firm.

IAG also released its full-year results last week. And the numbers were encouraging. While revenues were up 8.3%, its post-tax loss had declined by 57.7%. When considering buying the shares, these numbers do sway me.

The risks

There are risks, however. The most obvious threat to IAG remains the pandemic. While it seems that the worst of it is over, there’s still potential for it to cause disruption in the future. Any sign of this would most definitely mean a drop in the price of IAG shares. With this said, Boris Johnson recently announced that the legal requirement to self-isolate due to a positive case has ended, showing further how the UK is taking strides to move away from the pandemic. This will provide a boost for the business.

My verdict

So, while a threat linked to the pandemic remains, I’m optimistic about what the future holds for IAG. The firm will see big benefits from the increase in passenger volume this year, and trading for well below half of the pre-pandemic levels I think IAG could be a solid buy. Its full-year results also provide me with confidence. As such, I would be willing to add IAG shares to my portfolio today.

The post Should I be adding IAG shares to my portfolio? appeared first on The Twelfth Magpie.

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Charlie Keough has no position in any of the shares mentioned. The Motley Fool UK has no position in any of the shares mentioned. Views expressed on the companies mentioned in this article are those of the writer and therefore may differ from the official recommendations we make in our subscription services such as Share Advisor, Hidden Winners and Pro. Here at The Motley Fool we believe that considering a diverse range of insights makes us better investors.

The Cineworld (LSE: CINE) share price has climbed 20% in 2022 so far. Today, I’m asking whether this momentum can be sustained into next month and beyond.

Recovery in revenue

I’m actually not expecting all that much in the way of surprises when it comes to Cineworld’s full-year numbers on 17 March. After all, only a few weeks have passed since the company last provided an update on trading. 

In January, the battered mid-cap said performance and attendances had “steadily grown” over the six months to the end of December. In July 2021, for example, total revenue was 50% of what it had been in 2019. By the last month of 2021, this percentage had improved to 88%. Much of this increase can be attributed to popular releases such as Spider-Man: No Way Home, No Time to Die and Black Widow.

What’s far more important however, is how the company has traded so far this year. 

Cineworld share price: going higher?

On a positive note, the gradual (now complete) removal of Covid-19 restrictions over recent months can only be a good thing. Throw in the half-term holidays (and inevitably shocking British weather) and I reckon trading over the last couple of months has probably been solid, albeit not spectacular.

The slate of upcoming movies is also promising. A positive reaction from critics and fans to the new Batman film, for example, could help lift the Cineworld share price in advance of results day. Later in the year, we can expect sequels such as Top Gun 2 and Jurassic Park: Dominion.

Perhaps most importantly, there’s also been speculation in recent weeks that Cineworld will negotiate a deal with Canadian rival Cineplex over the former’s aborted deal to buy the latter. Agreeing to lower damages would actually be in Cineplex’s best interests. This is because it would receive very little (if anything) in the event of the business going bust. Avoiding bankruptcy would probably do no harm to the Cineworld share price either.

Red flags

Of course, lots of very rational arguments against investing in Cineworld remain. These include the reduced window between movie release dates and the same films being made available on streaming platforms. In fact, the rise in the cost of living also makes a monthly subscription to the latter look even better value for money than a trip to the flicks. 

Even if a deal is done with Cineplex, I also have to ask myself whether I’d want to own a stake in a company with such a horrific balance sheet. To be frank, there are so many far more robust businesses to choose from in the UK market.

20% up, but…

While the recent momentum might be welcome for those already holding the stock, we need to keep things in perspective. The Cineworld share price is still down 60% in the last 12 months. In the last five years, the company’s value has tumbled 86%.

I don’t think this pessimism is unjustified. And while there are certainly reasons for thinking that the stock could continue rising in March and beyond, I’m still not inclined to get on board even if it does.

If that means me missing out on the mother of all recoveries, so be it. The potential returns aren’t worth the stress of the journey, in my opinion. 

The post Is the Cineworld share price too low ahead of results? appeared first on The Twelfth Magpie.

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Paul Summers has no position in any of the shares mentioned. The Motley Fool UK has no position in any of the shares mentioned. Views expressed on the companies mentioned in this article are those of the writer and therefore may differ from the official recommendations we make in our subscription services such as Share Advisor, Hidden Winners and Pro. Here at The Motley Fool we believe that considering a diverse range of insights makes us better investors.

So, after its impressive rise, and current dip, would Royal Mail be a good buy for my portfolio today? Let’s take a look.

Why has the Royal Mail share price fallen in 2022?

One of the reasons for the fall in price this year is due to the delivery delays the business was experiencing last month. Staff shortages due to the pandemic, as well as high demand around the Christmas period, meant customers nationally were not getting their post on time.

However, the share price stabilised after the release of its Q3 update in late January. Where, although domestic parcel revenue rose compared to pre-pandemic levels, it missed the mark when compared to 2020 figures.

Would I buy?

So, should I be buying the stock? Well, one factor that draws me to Royal Mail is the strides the firm is taking regarding restructuring and streamlining. As my colleague Zaven Boyrazian highlighted, Royal Mail announced its plans to cut 700 managerial positions through the company. While this is without doubt unpleasant for the impending ex-employees, the move is expected to provide £40m in annualised savings from 2023 onwards.

In the short term, this move will come at a cost. The price of sacking these employees could reach £70m. And, as such, Royal Mail has cut operating profit guidance from £500m to £430m. This impact on the firm’s profits may have negative connotations for the Royal Mail share price for the foreseeable future.

Yet, another factor that attracts me to Royal Mail is its low price-to-earnings (P/E) ratio. The business currently has a P/E of under five. And compared to its global rival FedEx (12.3), this tells me that Royal Mail is currently undervalued.

I also like the direction Royal Mail is taking with its GLS division. Management has plans to increase the size of the division, with a target of increasing its operating profits to €500m by 2024-2025. Last year it acquired Canadian firm Rosenau Transport to help meet this aim.

With this said, it must be noted that this expansion has the potential to be costly, and should it fail to meet these targets this could incur big costs for the business. This would most certainly hurt the Royal Mail share price.

Nevertheless, I like the direction the firm is taking. And should it be able to execute these moves effectively, I think we could see a rise in the Royal Mail share price. The business is currently undervalued. And although it may face headwinds in the near future, as it streamlines its operations, I think in the future this will pay dividends. As such, I would be willing to add Royal Mail to my portfolio today.

The post The Royal Mail share price is down nearly 20% this year! Is it a good buy? appeared first on The Twelfth Magpie.

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Charlie Keough has no position in any of the shares mentioned. The Motley Fool UK has no position in any of the shares mentioned. Views expressed on the companies mentioned in this article are those of the writer and therefore may differ from the official recommendations we make in our subscription services such as Share Advisor, Hidden Winners and Pro. Here at The Motley Fool we believe that considering a diverse range of insights makes us better investors.

Some FTSE stocks attract short-sellers like bees to honey. Think battered cinema operator Cineworld or troubled white goods seller AO World. That said, there are other companies where this kind of attention is arguably more surprising. Let’s look at a couple of examples and see whether there’s a buying opportunity for me. 

Is the purple patch over?

It’s interesting to see Kingfisher (LSE: KGF) so high up the table of most hated stocks. Thanks to the explosion in the popularity of DIY over the pandemic and a very healthy housing market, investors might assume that short-sellers would have no interest in the B&Q and Screwfix owner. Then again, recent share price activity suggests otherwise.

Kingfisher certainly hasn’t had the best of starts to 2022. In sharp contrast to index peers like BT and BP, the valuation here has fallen 10% year-to-date. That’s not nearly as bad as the drops seen in tech companies, but it still implies that some in the market think the FTSE 100 member’s purple patch might be over.

Given the above, it’s clear that next month’s full-year results will receive a lot of attention. Back in November, Kingfisher’s share price wobbled after the company revealed like-for-like sales of £3.2bn in Q3 were down 2.4% compared to the same period in 2020.

Is this indicative of more people spending money on other things they couldn’t do previously? Or is it simply a natural fluctuation in earnings that all companies experience? We’ll find out soon enough.

In the meantime, Kingfisher’s stock was trading on a P/E of 11 as markets opened. It also comes with a 3.7% yield. That looks pretty reasonable to me. As things stand however, I’m content to sit on the sidelines and wait to see just how tricky the last quarter has been. 

Shorting target

Another FTSE share that makes the ‘most hated’ Top 10 list is Domino’s Pizza (LSE: DOM). Again, this seems a bit surprising.

Back in December, the company announced it had reached a resolution to a long-running feud with its franchisees. As part of the deal, Domino’s will invest £20m over three years in stores and online apps. Marketing will also be stepped up.

In return, franchisees are expected to open a minimum of 45 stores per annum in the next three years, test and roll out new tech, and get involved in national promotions.

As might be expected, this news sent the shares sharply higher. Unfortunately, a good proportion of these gains have since been lost. Shares have fallen back 16% year-to-date.

But maybe this selling pressure (and shorter interest) does make sense. Like Kingfisher, the trading tailwind from multiple UK lockdowns is now over. The sharp rise in the cost of living could also be relevant. When times are tough, it seems likely that more of us will shun a takeaway in favour of a cheaper, shop-bought alternative. 

As a side note, Domino’s net debt has climbed significantly in recent years. I’d prefer it to be going in the other direction.

But companies with franchise business models often prove to be great wealth-compounders over the long term. Domino remains a highly-cash-generative business and P/E of 19 is also roughly in line with the company’s average P/E over the last five years.

Domino’s has now been added to my watchlist. I wonder if this attention from short-sellers might prove short-lived.

The post 2 surprising FTSE shares being targeted by shorters appeared first on The Twelfth Magpie.

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Paul Summers has no position in any of the shares mentioned. The Motley Fool UK has no position in any of the shares mentioned. Views expressed on the companies mentioned in this article are those of the writer and therefore may differ from the official recommendations we make in our subscription services such as Share Advisor, Hidden Winners and Pro. Here at The Motley Fool we believe that considering a diverse range of insights makes us better investors.

The FTSE 250 is in fine form this morning, rising over 1% in early trading. Is this a sign that February might be a little kinder to investors?

Well, no one knows for sure where share prices will go in the near term. As such, I prefer to stick to my strategy of owning great stocks for years rather than weeks. With this in mind, here are two members of the index I’d be happy to buy, whatever happens next. 

Long term theme

Petcare retailer Pets At Home (LSE: PETS) is an example of a great FTSE 250 business that I could see myself holding for the long term. That’s despite its share price falling around 7% in 2022 so far.

A beneficiary of multiple UK lockdowns and the pet boom that accompanied them, the mid-cap continues to release encouraging updates. Group like-for-like revenue increased 8.7% in the 12 weeks to 30 December compared to the same period in 2020. Perhaps more significantly, it was also 28.1% higher than two years ago.  

This isn’t all that surprising. Pets At Home now seems to have every corner covered. In addition to its 455-store retail estate, the company is rapidly growing its online presence (evidenced by the 99% jump in omnichannel revenue on a two-year basis). It also has a burgeoning veterinary services arm, gaining 9,200 new registrations per week on average.

At 20 times forecast earnings, the shares aren’t exactly cheap. However, I can’t see the themes of “long-term pet ownership, humanisation and premiumisation” highlighted by the company disappearing any time soon. Moreover, the company is “firmly on track to report a record year of sales and profit growth”, according to soon-to-depart CEO Peter Pritchard. It also has net cash of £77m on its balance sheet. 

My only slight concern right now, aside from the need to replace its leader, is the extent to which inflationary pressures might impact the company going forward. They certainly won’t go away overnight. Then again, that’s true for all sorts of businesses. 

I’d be comfortable buying Pets At Home today but I’d back up the truck if the share price continues to fall over 2022.

Another solid FTSE 250 stock

Kitchen supplier Howden Joinery (LSE: HWDN) is another FTSE 250 stock that benefited from the three UK lockdowns. A hot housing market may have also contributed to what has been something of a purple patch for the near-£5bn-cap business. Like Pets at Home, however, the shares have lost a bit of momentum in 2022 so far. As I type, they’re down 12%.

Howdens is down to report its latest set of full-year numbers (covering the vast majority of 2021) later this month. Given that the company only recently stated that pre-tax profit should be “at the top end of analyst forecasts“, I can’t see its value tumbling from here.

Of course, I may be completely wrong. Now that we look to be coming to the end of the pandemic, there’s a possibility that more existing holders may look to bank some profit. After all, kitchens aren’t something that people replace every year.

Still, a P/E of 17 doesn’t exactly scream ‘overvalued’ when I consider Howden’s solid margins, strong brand, consistently high returns on capital and sizeable market share. So, even if the company does struggle to repeat 2021’s performance, I’m confident that this would still be a worthy addition to my quality-focused portfolio.

The post FTSE 250: 2 growth stocks I’d buy and hold for years appeared first on The Twelfth Magpie.

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Paul Summers has no position in any of the shares mentioned. The Motley Fool UK has recommended Howden Joinery Group. Views expressed on the companies mentioned in this article are those of the writer and therefore may differ from the official recommendations we make in our subscription services such as Share Advisor, Hidden Winners and Pro. Here at The Motley Fool we believe that considering a diverse range of insights makes us better investors.

Believing that a company’s value might explode this year sounds a bit ambitious given the funk markets are currently in. But as 2021 showed, it’s also achievable if I pick the right FTSE stocks and encounter a healthy dollop of luck.

Today, I’m focusing on one share that I think has the potential to perform better than most in 2022. It might not, of course, but I do think it’s possible.

A FTSE stock that’s ready to fly

Online travel operator On the Beach (LSE: OTB) probably wasn’t the stock some would expect me to talk about in these terms and I understand why. The Manchester-based business has endured a tough couple of years thanks to the pandemic. I won’t include any figures on trading here. Let’s just say they haven’t been great. 

Having said this, there are a few reasons why I think the shares could finally be ready to fly.

First, we appear to be entering the final stages of Covid-19. As confidence returns (and restrictions become a distant memory both at home and abroad), more of us will feel confident enough to start booking holidays. Goodness knows, the demand is there. Yes, that will take some time to filter through to OTB’s numbers, but analysts are already expecting earnings per share growth of 126% in FY23 (beginning this October). Growth that strong could light a fire under the share price.

Second, On the Beach’s asset-light business plan means it can be far more nimble than larger industry rivals. If it needs to prioritise marketing particular destinations to gain the full benefit of the post-pandemic recovery, it can do so quickly. To me, that gives it an advantage over its travel stock peers.

Third, On the Beach’s finances are arguably in a better state than other companies in the sector. In its annual report, it said it “enters the new financial year well-funded to successfully and sustainably grow market share“.

Clearly, the probability of On the Beach soaring in price depends greatly on it releasing better-than-expected updates. However, a sizeable gain is not unrealistic for a business of its size. As I write, OTB shares are worth less than half the value they hit in April 2018. The market cap at Friday’s close was £475m. While the past is no reliable guide to the future, it shows that in a travel-friendly world, the share price can be much higher.

Nothing’s guaranteed

But I’ve already mentioned that luck plays a role. Any stock that’s attractive on paper can perform disastrously events conspire against it. Another Covid-19 variant, industrial action, terrorism in a popular destination — all of these can dent holiday bookings. And that would keep OTB’s share price grounded.

Plus there’s the possibility the general market malaise we’ve seen in January may continue for longer than anyone expects. This will prove a drag on most share prices. This is why spreading my cash between quality growth stocks and funds is an essential part of my investing strategy.

Optimistic holder

Yet I do think there’s a real chance of On the Beach finally rewarding this patient, battle-scarred investor in 2022. Exploding in value in under a year is a challenge, but I think the odds might be turning in this FTSE stock’s favour.

It remains my favourite Covid-19 recovery play. 

The post I think this FTSE stock could explode in 2022 appeared first on The Twelfth Magpie.

More reading

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• With a yield of 6.8% and a P/E ratio of 12.1, is this a dirt cheap FTSE 250 stock to consider?
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Paul Summers owns shares in On the Beach. The Motley Fool UK has recommended On The Beach. Views expressed on the companies mentioned in this article are those of the writer and therefore may differ from the official recommendations we make in our subscription services such as Share Advisor, Hidden Winners and Pro. Here at The Motley Fool we believe that considering a diverse range of insights makes us better investors.

Why investors are walking away 

As one might expect, this isn’t just some random capitulation. Today’s trading update contained what I believe to be pretty worrying news for investors. 

Not that this was immediately apparent. After all, revenue rose 11% to £307m in Q3 — up from £275.6m over the same period in 2020. Direct-to-consumer sales came in 33% higher — a record for the company. Retail sales were particularly buoyant and benefited from more people striding into the stores in October and November.

“So, what’s the problem?“, you might ask. Well, that 11% mentioned above is actually down on the 16% growth achieved in the first half of its financial year. The reason for this probably won’t come as a surprise.

Like many other listed businesses, ongoing supply chain issues are starting to kick Dr Martens where it hurts. A move to prioritise the higher-margin DTC trading led to a 14% reduction at its wholesale arm. So, the company has essentially taken one step forward and one step back.

To make matters worse, revenue in the Asia Pacific region fell by 28% due to Covid-19 restrictions in countries such as China and Australia.

Has the Dr Martens share price fallen too far?

The Dr Marten share price hit a record low of 266p earlier today. Is this simply a case of the market over-reacting? Could the bootmaker turn out to be a canny contrarian buy in time? 

Well, no one knows where share prices will go in the near term. However, my gut tells me that things might get worse before they get better, especially as the company said today that February and March are regarded as “quieter trading months“. Regardless of how confident it is in being able to meet current expectations for its full year, that’s hardly bullish talk. Oh, and the latter is only the case if there is “no significant Covid impact in Q4“. Now, I’m as hopeful as the next person that we’ve reached the pandemic’s endgame. I wouldn’t like to bet on it though. 

For balance, I do recognise this is a brand loved by millions of people around the world. And it’s clear that the company is holding its own online. Sales here made up 39% of the total mix in Q3; that’s far higher than it used to be just a couple of years ago. Year-on-year e-commerce revenue also climbed 16% in the quarter, despite a “tough comparative“. 

Is this enough though? I don’t think it is. Just knowing that I don’t replace my own pair of boots very often is sufficient to make me question the investment case here. And the £2.9bn cap valuation.

Falling knife

I questioned the valuation of Dr Martens not long after it came to market almost exactly one year ago. Today’s update only serves to make me even more bearish. The shares may be down 36% from where they were one year ago but I think they could get even cheaper, especially with the company’s peak trading period now behind it.

Regardless of how highly I rate its products, Dr Martens looks to me like a falling knife. I won’t be attempting to catch it.

The post What’s going on with the Dr Martens share price? appeared first on The Twelfth Magpie.

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Paul Summers has no position in any of the shares mentioned. The Motley Fool UK has no position in any of the shares mentioned. Views expressed on the companies mentioned in this article are those of the writer and therefore may differ from the official recommendations we make in our subscription services such as Share Advisor, Hidden Winners and Pro. Here at The Motley Fool we believe that considering a diverse range of insights makes us better investors.