The current market turbulence has provided some opportunities to revisit some tips that have previously proved profitable for me. One of these is JD Sports, which nearly doubled in value when I tipped it for much of 2019.
Since then, the firm has experienced a roller-coaster ride. During the initial days of the pandemic it lost two-thirds of its value, but then quadrupled, leading to a five-for-one stock split last November. However, in the last six months it has slumped again, nearly halving in price, so it is now cheaper than when I recommended closing the position in November 2019.
There are some logical reasons investors are wary of the company. Rising prices and potential supply-chain problems in China threaten margins, while many worry that consumers will choose to respond to rising energy and food costs by cutting back on discretionary spending on clothes. There is 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 from selling tracksuits, shoes and sportswear. Finally, there has been tension between executive chairman Peter Cowgill and some shareholders over his pay.
Subscribe to MoneyWeek
Subscribe to MoneyWeek today and get your first six magazine issues absolutely FREE
JD Sports’ enduring appeal
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 branded apparel, especially limited editions of shoes. JD Sports’ close relationship with companies such as Nike and Adidas – with Nike considering it a strategic partner – puts it in a good position to offer access to these high-margin items, as well as providing a moat against potential competitors.
Most importantly, JD Sports has an impressive record of growth with sales increasing each year, even during the pandemic, with overall sales tripling between 2016 and 2021, all while maintaining a high double-digit return on capital expenditure. The company also has a clear plan for maintaining this growth, especially in the United States, helped by several acquisitions over the past few years, including The Finish Line in 2018, Shoe Palace in 2020 and DTLR last year. It is also trying to increase its sales in Europe.
The combination of high growth and a falling share price means that it now trades at the bargain price of only 10.3 times forecast earnings for 2023. Of course, just because a share offers great value, doesn’t mean that it can’t be caught up in the current market turbulence, at least in the short run. Given that it has fallen so fast in such a short space of time, and that it is still trading below both its 50-day and 200-day moving averages, I’d hold off until it rises a bit to 140p. Once that happens, I’d go long at £20 per 1p, with a stop loss of 95p. This would give you a total downside of £900.
Trading techniques: awards and titles
A large salary and soaring share options aren’t the only rewards that business leaders can receive for doing their job well. Titles, awards and other honours also frequently come with financial success.
For example, in the 2021 New Years’ Honour List around 10% of UK honours were given in recognition for services to business and the economy. Even in countries that don’t have a formal awards system, many business publications and organisations hold annual awards ceremonies for those who they feel have done an outstanding job.
However, while the awards may leave the executives with a glow of satisfaction, some people argue that they are a signal to sell. Since titles and awards are usually given on the basis of past performance, rather than future potential, they may signal that a company’s growth has peaked, in a similar way to the infamous “curse of the magazine cover” – the idea that by the time a business, trend or theme appears on the front of a mainstream magazine, the bull run is very likely to be nearing its end .
An even more cynical interpretation is that many awards end up distorting the behaviour of managers. For example, a manager might decide to pursue unprofitable acquisitions just to maintain or boost their public profile. Receiving an award might also discourage a manager from making financially profitable, but politically unpopular decisions, such as reducing the workforce to cut costs.
Studies seems 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 knighthoods and damehoods in New Zealand in 2000, both the share price and the profitability of firms run by former knights outperformed the wider market, but then underperformed when they were 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 the US firms whose CEOs won a major award lagged the market by as much as 26% over the next three years.
How my tips have fared
As you might expect, the past fortnight hasn’t been very good for my long tips. Construction firm Morgan Sindall fell from 2,155p to 1,972p, below the stop loss level of 2,100p, which means that the position was closed out at 2,100p. Airtel Africa dipped from 146p to 141p, while National Express also declined from 251p to 248p. Supermarket J Sainsbury went up from 237p to 245p, while both ASOS and Domino’s Pizza Group remain below the level at which you should start going long. Counting Morgan Sindall, my long tips are making a profit of £2,365, down from £2,650.
However, the declining market that hit my long tips has been good news for my six short positions, which all moved in my favour. Cinema chain AMC fell from $15.26 to $11.71, remote medicine firm Teladoc Health declined from $35.73 to $32.16, marketing software firm HubSpot went down from $380 to $344, KE Holdings fell to $12.15 and DWAC, the holding company for 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 are now making total net profits of £6,521, up from £5,312.
My short and long tips are making a combined profit of £8,886, up from £7,011. Going forward I now have nine open tips (long Airtel Africa, National Express and J Sainsbury, short AMC, Teladoc Health, HubSpot, KE Holdings, DWAC and Coinbase). I also have three pending tips (ASOS, Domino’s Pizza Group and JD Sports). While I’m not going to suggest that you close any positions, I suggest that you should lock in some more profit by cutting the price at which you cover Teladoc Health to $60 (from $100), HubSpot to $400 (from $500), DWAC to $50 (from $55), AMC to $20 and Coinbase to $90 (from $175).
Matthew graduated from the University of Durham in 2004; he then gained an MSc, followed by a PhD at the London School of Economics.
He has previously written for a wide range of publications, including the Guardian and the Economist, and also helped to run a newsletter on terrorism. He has spent time at Lehman Brothers, Citigroup and the consultancy Lombard Street Research.
Matthew is the author of Superinvestors: Lessons from the greatest investors in history, published by Harriman House, which has been translated into several languages. His second book, Investing Explained: The Accessible Guide to Building an Investment Portfolio, is published by Kogan Page.
As senior writer, he writes the shares and politics & economics pages, as well as weekly Blowing It and Great Frauds in History columns He also writes a fortnightly reviews page and trading tips, as well as regular cover stories and multi-page investment focus features.
Follow Matthew on Twitter: @DrMatthewPartri
December 2023 NS&I Premium Bond winners - check now to see what you’ve won
If you hold money in NS&I Premium Bonds, you can check from today (2 December) to see if you have won in the December prize draw. Here’s how to check.
By Vaishali Varu Published
OpenAI – corporate drama unleashed
OpenAI, the firm behind ChatGPT, was in uproar as its boss was booted out, briefly snapped up by Microsoft and then brought back again.
By Dr Matthew Partridge Published