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The market volatility over the past month has meant many investors have been focusing on surviving rather than thriving. Yet the bank holiday period has provided me with some time to look at things more objectively. When filtering for growth stocks, there’s one that has suddenly caught my eye.
Falling over the last year
I’m referring to JD Sports Fashion (LSE:JD). The stock has fallen 37% over the past year due to several factors.
One of the main ones has been the lowered financial guidance and profit warnings over this period. Regardless of the reasons behind lowering guidance, it causes investors to rethink the value of a company. Future share price forecasts are based on a projected earnings growth rate. So if this decreases, optimism about future gains is reduced.
The disappointing numbers have been blamed on cautious consumer spending. Further, around 45% of sales come from Nike products. Given the fall in demand and consumer shift from Nike, this has negatively impacted JD Sports.
Recently, the impact of US tariffs has provided another headache for investors. Around 40% of sales come from America, so import levies pose risks to operations for JD Sports when selling non-US products there.
Why it could be undervalued
Even though some factors explain why the stock is down, I think it has dropped too far. Earlier this month, the share price hit the lowest level since the pandemic crash in early 2020. Yet these two time periods reflect a clear difference in the company’s position and outlook.
In early 2020, the stock hit levels around 61p because there was genuine concern that the lockdowns could cause significant financial difficulty. Fast forward to today, there are no such concerns. The company is larger, more profitable and in a better market position than it was in 2020. So does it really make sense that the share price now is the same as back then? I don’t think so.
The price-to-earnings ratio now stands at just 6.18. For reference, my fair value benchmark is 10. So, to have a growth stock trading at such a low multiple surprises me and makes me think it’s undervalued. The earnings per share for 2024 were 0.13p. The current projection for 2025 is 0.12p. Sure, there’s a small decline here, but no worry about flipping to making a loss.
A bold statement
When I weigh up the current concerns relative to the stock price, I think JD Sports could be the most undervalued growth stock in the FTSE 100. The tariff worry should lessen if the UK strikes a trade deal with the US. If the UK economy shows resilience into the summer, consumer sentiment and spending could improve.
The main risk to my view is that we get another bout of volatility, potentially triggered by a global trade war. Growth stocks tend to be hit the hardest during these uncertain periods, so I’d expect JD Sports stock to fall further. Despite this, I’m seriously thinking about adding the stock to my portfolio shortly.
