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As a long-term investor who likes to buy into in world-class businesses, I tend to steer clear of really cheap FTSE 100 stocks. Twenty years of investing in the stock market has taught me that cheap stocks are often cheap for a reason.
Recently though, I spotted a Footsie stock with a very low valuation and I decided to snap it up for my ISA. Here’s a look at the stock and why I bought it.
The stock’s JD Sports Fashion (LSE: JD.), the athletic footwear and sportswear retailer that has over 4,000 stores worldwide.
I’ve owned this stock in the past and done very well from it. So it’s not a totally new holding for me. Why did I buy it again? Well, there are a few reasons.
One is that it gives me exposure to several brands including Nike, Adidas, On, and Hoka. I like this diversification. Up until recently, I owned some shares in Nike. But that company’s rapidly losing market share to On and Hoka right now so I sold the shares and put the money into this company instead.
Another is that JD has a ton of stores for consumers to visit. For many consumers in the athletic footwear market, going to stores to check out and try on new shoes is part of the buying experience. A few years ago, Nike tried to pivot to an e-commerce model. This backfired massively (and let other brands grab market share) as consumers wanted to buy shoes in store.
It’s worth noting here that JD’s stores are often quite slick and this is giving it an edge in the US. “When we show up, the consumer sees the difference compared to a very old and under-invested store in the US,” said CEO Regis Schultz on a recent earnings call.
A third reason is that the company’s engaged in an aggressive global expansion strategy. Recently, it purchased Hibbett Sports, which has over 1,000 stores in the US.
Finally, the shares look great value on a price-to-earnings (P/E) ratio of around 10. At that earnings multiple, I see potential for a decent valuation re-rating at some stage.
Potential for attractive returns
As for the risks here, there are a few. One is consumer weakness. This has been an issue for the company over the last year. But with interest rates coming down, I’m hoping things will pick up.
Another risk is integration of chains such as Hibbett. Sometimes, major acquisitions can backfire.
It’s also worth mentioning currency risks. Given that the company has a lot of exposure to the US now (more than 40% of revenues), a strengthening pound could reduce profits.
Weighing everything up however, I like the risk/reward proposition here. I reckon this FTSE 100 stock has the potential to generate attractive returns for my portfolio in the years ahead as the company increases its store count and the athletic footwear and athleisure markets grow.
