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I love scouring the market looking for oversold items. FTSE 100 stock and I think I've found a brilliant one that I'm desperate to add to my portfolio.
It's always a bit risky to buy stocks that most investors can't wait to sell, but it has several advantages. First, it reduces the risk of you overpaying for foam. Secondly, it means that I buy the shares at a low price. Third, I usually get better performance as well.
The big risk is that when stocks fall, there's usually a good reason. Turning around a struggling business takes time. It is not an overnight task, as I discovered in the past. I will need a lot of patience.
Out of style
However, I believe that the luxury fashion group Burberry (LSE: BRBY) has fallen too far, too fast and now seems like a good time to get it at a bargain price.
In November, Burberry surprised markets with a profit warning as the cost-of-living crisis hit demand. It doubled in January, lowering operating profit guidance from a range of £552m to £668m to between £410m and £460m.
Shoppers are reluctant to shell out £1,890 for a classic trench coat or £420 for one of their signature scarves, which I buy. He is not the only luxury specialist who is having a difficult time. Even the French giant LVMH has suffered from falling demand in Europe and China. Its shares are down 10.96% in a year, but that's nothing compared to Burberry's 53.11% drop.
Across the FTSE 100, only Santiago Square It has done worse, but unlike Burberry, it is the architect of its own misfortune.
Luxury brands are often considered recession-resistant because the super-rich often ride through the ups and downs of the economic cycle. However, Burberry is not at that level. Its market includes many aspirational buyers, those who like high-end products but have to think twice about the price. Their numbers can decrease when the economy is in trouble.
Will bounce back in style
However, that 50% drop in share price seems extreme. Year-on-year sales fell just 7% in the 13 weeks to December 30, to £706m. We'll know more on Wednesday (May 15), when the full-year results are released.
If they are only slightly better than expected, Burberry's share price could soar. However, it's already cheap enough to buy, trading at just 9.43 times trailing earnings. The final yield is now 5.19%. For years, Burberry was valued at around 24 times earnings and returned just 2%. Now it seems like a good entry point.
However, most traders are not expecting a positive surprise on Wednesday. That's fine with me. I don't buy out-of-favor stocks in the hopes of making a fortune overnight when the markets suddenly catch up to my brilliant ideas. I'm not brilliant. I'm average at best.
My secret weapon is that I buy with a minimum five-year vision. I think at that point, there's a good chance that Burberry will pull itself together and investors will take a more positive view.
While I wait for the recovery, I will reinvest my dividends to strengthen my position. Burberry is still a strong brand and I think it will get that new rating over time.
