The Burberry (LSE: BRBY) share price has been through hell lately but suddenly it’s flying. What’s going on?
In the last month the luxury goods maker has smashed every stock in the FTSE 100, skyrocketing 28.61%. It’s smashed almost every rival on the FTSE 250, too, where it currently resides. Only construction firm Morgan Sindall did better, jumping 29.54%.
So are we looking at an oversold stock that is making a deserved comeback? Or an old-fashioned dead cat bounce?
This FTSE 250 stock is off like a rocket!
Burberry imploded in January, after the board issued a profit warning and slashed full-year profit forecasts following a nightmare Christmas trading period.
I’ve learned that one profit warning often follows another and it duly arrived in May, when full-year profits plunged 40% to £383m, as sales fell in Asia and the Americas. That’s when I seized my opportunity to snap up Burberry shares at what I thought was a bargain price and bag a dazzling 6%+ yield to boot.
I bought the stock twice in May and averaged down in July as the slide continued, only to find myself nursing a 45% paper loss. I consoled myself with the yield until the board axed shareholder payouts along with its CEO.
At that point I stopped trying to catch the falling knife. Days later the recovery began.
Burberry got its first lift when Beijing announced a new stimulus package. Hopes of a US soft landing also boosted the luxury goods market.
Yet the recovery hasn’t lifted every luxury stock, The biggest of the lot, LVMH, is down 7.59% over the last month. It seems investors decided Burberry had fallen too far. Some may be pinning their hopes on takeover talk. Personally, I never buy shares for that reason.
The recovery will take time
Burberry shares are still down 54.35% over the last year, which suggests there’s still a cut-price opportunity here. They currently trade at a price-to-earnings ratio of 9.97, which looks good value, assuming we can trust the P/E after all that’s gone on.
Interestingly, the 17 analysts offering a one-year price forecasts for the stock have set a median target of 643.6p. If correct, it would suggest a further 18.06% drop from here. It could easily happen.
Burberry still needs to sort out its brand positioning. Its attempts to target ultra-high-net-worth consumers fell short, leaving it exposed to the damage mass-market popularity can do to its image. Say Burberry and some instantly think checked baseball caps, unfairly or not.
The shares jumped 6.34% on Friday, in yet another burst of optimism. That’s cut my personal loss to a mere 27.16%. I’m delighted by the recovery but already have enough exposure and won’t go chasing it.
If I didn’t own Burberry, I’d but it today with a long-term view. But it still think it faces a heap of challenges and expect further share price volatility before it finds its feet, which I think it will in the end.
This post was originally published on Motley Fool
