Stock market

53% reduction in one year! I think this oversold FTSE 100 stock is now poised for a comeback.

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I like to sift the market for oversold. FTSE 100 stock and I think I’ve found a great one that I’m eager to add to my portfolio.

Buying a stock that most investors can’t wait to sell is always a little risky, but it has several advantages. First, it minimizes the risk of overpaying for my foam. Second, it means I pick up shares on the cheap. Third, I usually get more produce as well.

The big risk is that when a stock sinks, there’s usually a good reason. It takes time to turn around a struggling company. It’s not an overnight job, as I’ve discovered in the past. I will need bags of patience.

Out of fashion

Still I think the luxury fashion group Burberry (LSE: BRBY) has fallen far, far too fast and now seems like a good time to grab it at a bargain price.

In November, Burberry shocked markets with a profit warning, as the cost-of-living crisis hit demand. It doubled down on the gloom in January, cutting operating profit guidance from a range of £552m to £668m to between £410m and £460m.

Buyers are reluctant to cough up £1,890 for a classic heritage trench coat or £420 for his signature scarf, I find. It’s not the only luxury specialist having a hard time. Even the French giant LVMH Demand in Europe and China has declined. Its shares are down 10.96 percent for the year, but that’s nothing compared to Burberry’s 53.11 percent plunge.

Across the FTSE 100 only St. James’s Place has done worse, but unlike Burberry, it is the architect of its own misfortune.

Luxury brands are often seen as recession-resistant, as the ultra-wealthy typically go through the ups and downs of the economic cycle. Yet Burberry is not quite at that level. Its market includes a lot of aspirational buyers, people who like high-end products but think twice about the price. Their numbers may decrease when the economy struggles.

It will bounce back in style

Even though a 50% share price crash seems extreme. Year-on-year sales fell just 7 per cent to £706 million in the 13 weeks to December 30. We’ll know more on Wednesday (May 15), when the full-year results are published.

If they are slightly better than expected, Burberry’s share price could rise. It’s already cheap enough for me, though, trading at just 9.43 times trailing earnings. The trailing yield is now 5.19%. For years, Burberry was valued at about 24 times earnings, and yielded barely 2%. Now seems like a good entry point.

Nevertheless, most brokers do not expect any positive surprises on Wednesday. That’s fine by me. I don’t buy out-of-favor stocks in hopes of making a fortune overnight when the markets suddenly catch on to my brilliant insights. I’m not brilliant. I am average at best.

My secret weapon is that I buy with at least a five-year view. I think at this point, Burberry has a great opportunity to rally itself and investors will take a more positive view.

While I wait for a recovery, I will reinvest my profits to build my position. Burberry remains a strong brand and I think it will re-rank in time.

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