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How I saw the bull run in JD Sports shares coming

Long-term vs short-term investing concept on a staircase

Last May I made a contrarian call about JD Sports Fashion plc (LSE:JD) shares. I believed the price of the shares, at £1.19, was a bargain. This was at a time when the cost-of-living was soaring. My initial view then was that discretionary retail brands would suffer, and so it proved. Some big names within the sector lost nearly half their value during 2022, including Halfords Group plc and Moonpig Group plc.

However, I felt JD Sport’s unique market position as an urban streetwear leader, as well as its core audience of young consumers, would see its shares buck the trend. I only expected resilience, so it’s been surprising to see the share price has been steadily rising since then.

The share price is now up over 10% in the past six months and 20% since the the New Year. Can the stock continue to climb over this year and the next?  

Can the JD Sports shares keep rising?

I noted Christmas sales for the underlying business were up 20% despite the financial squeeze for consumers. Certainly, I feel JD Sports has navigated the cost-of-living challenge with aplomb. I am well aware its core consumer base isn’t bogged down with bills and mortgages to pay. Moreover, goods, such as a pair of Nike Air Force Ones are seen as priority purchases from its typical teenage customer. I think the demand for its products are more inelastic than the market thinks.

In addition, the retailer’s financial fundamentals demonstrate a company making operational improvements. It has bolstered its balance sheet and retained more cash since the pandemic. To top that, analysts feel the stock is trading 61% below fair value so the potential for growth is sizeable. Meanwhile, annual earnings are forecast to grow in the double-digits.

JD Sports offer growth potential

Growth, rather than income, is my motivation for buying more JD Sports shares.

In my eyes, the company’s dividend yield (0.3%) is stingy, lagging the FTSE 100 average of 3.75%. The company’s pay out to investors relative to its share price has been declining since 2017. So, I’m unlikely to receive meaningful income from JD Sports. Meanwhile a recession, no matter how nimble the underlying business is, will negatively impact JD Sports’ bottom line. However, this is short-term factor for me. My longer-term view is that the company has managed to make much bigger profits while also strongly increasing its margins over a long stretch. I see no reason for this noteworthy trend to cease.

Investing for the long haul

JD Sport’s management are feeling bullish about the next few years. This is to be expected, of course. But the fact executives are buying up more stock for themselves is the proof in the pudding for me. In my eyes this is almost always a sign of bullish behaviour.  

I’ve observed research pointing to a recession being more more destabilising to the UK economy than others in the G7. The biggest positive in the underlying business’s evolution is its expansion into Europe. It has a bigger presence there than in the UK. Certainly, JD Sports stock is one I am keen to buy more of in this unpredictable stock market. Hopefully the price dips a bit to provide a more attractive entry point for me to buy more.

The post How I saw the bull run in JD Sports shares coming appeared first on The Motley Fool UK.

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Henry Adefope has positions in JD Sports Fashion. 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.