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One FTSE 100 stock with the potential to explode

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The stock market has been taking a battering recently, and it may seem difficult to find good quality stocks. However, now may be the best time to buy shares. In particular, one company with great potential is JD Sports Fashion (LSE: JD). Using the famous Warren Buffett quote “be fearful when others are greedy, and greedy when others are fearful”, I’ll explain why I want to be greedy with this FTSE 100 stock.

Great company

Firstly, JD Sports is a trainer and sportswear retailer, selling items associated with popular brands, such as Nike and Adidas. The Sports Apparel market was valued at $181.5bn in 2021 and is expected to reach $279.2bn by 2029, representing a compounded annual growth rate (CAGR) of 5.53%.

Likewise, the global footwear market is expected to have a CAGR of 4.8% from 2021 to 2028, from $97.42bn to $134.99bn. This is a result of higher consciousness of health in people’s minds, and more people taking up sport. This represents steady growth that JD Sports is primed to take a share in.

Furthermore, JD Sports is a strong player in this area, dominating the market in most of Europe, and in 2016 expanded its presence in Asia, where it is looking to continue to grow. In fact, revenue grew by 29.1% in the last quarter year on year (YoY), which shows that it is not only growing in this market but is also taking market share away from its competitors.

Its strong brand within the sports apparel and footwear industry should ensure that it maintains this position and continues to grow in Asia.

Stumbling blocks

Even with this positive light, it is important to factor in the key headwinds JD Sports faces. These arise from the short-term worries of inflation and economic concerns.

Goldman Sachs recently reported that UK inflation could hit 22%. This will result in higher costs to produce sports apparel and footwear, whilst simultaneously driving demand down, as items such as a pair of adidas shoes become less affordable. Although there is strong YoY revenue growth, rising costs are starting to have an effect, with quarterly earnings falling 24.5% (YoY).

Cheap valuation

However, it is important to understand that these are issues with the macroeconomic environment and not the fundamentals of the business. I also believe much of this negative economic outlook has already been priced in. JD Sports shares have fallen by 50% since they hit an all-time high in November 2021, trading at a price-to-sales ratio of just 0.7 and a price-to-earnings ratio of just 9.

Considering its strong brand presence and revenue growth, its shares look pretty cheap. Moreover, it remains profitable and has positive free cash flow, so should survive any economic turmoil. Therefore, I should be rewarded in the long term as economic conditions begin to stabilise.

The post One FTSE 100 stock with the potential to explode appeared first on The Motley Fool UK.

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Muhammad Cheema has no positions in any of the shares mentioned. The Motley Fool UK has recommended Nike. 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.