How I saw the bull run in JD Sports shares coming

Last May I called contrarian about JD Sports Fashion plc (LSE:JD) shares. I believe the share price, at £1.19, is a bargain. This is when the cost of living is rising. My initial view is that the discretionary retail brands will suffer, so they may. Some of the big names in the sector lost almost half their value during 2022, incl Halfords Group plc and Moonpig Group plc.

However, I think JD Sport’s unique market position as a leader in urban streetwear, as well as its core audience of young consumers, will see the stock catch on trend. I was just hoping for durability, so it surprised me that the stock price started to rise steadily.

The stock price is now up more than 10% in the past six months and 20% since the New Year. Can stocks continue to rise this year and next?

Can JD Sports shares continue to rise?

I noted Christmas sales for the underlying business up 20% despite the financial squeeze for consumers. Of course, I think JD Sports has tackled the cost of living challenge with aplomb. I also know the core consumer base is not bogged down with bills and mortgages to pay. In addition, things, such as couples Nike Air Force Ones appear to be a priority purchase from the typical teenage customer. I think the demand for their product is more inelastic than the market thinks.

Additionally, the retailer’s financial fundamentals show the company is making operational improvements. It has increased its balance sheet and held more cash since the pandemic. Additionally, analysts feel the stock is trading 61% below fair value so the upside potential is substantial. Meanwhile, annual earnings are expected to grow in the double digits.

JD Sports offers growth potential

Growth, rather than earnings, is the motivation to buy more JD Sports shares.

In my eyes, the company’s dividend yield (0.3%) is stingy, lagging behind the FTSE 100 average of 3.75%. The company’s payout to investors relative to the stock price has declined since 2017. So, I can’t receive useful income from JD Sports. Meanwhile, the recession, no matter how nimble the underlying business, will have a negative impact on JD Sports’ bottom. However, this is a short-term factor for me. My long-term view is that the company has been able to generate greater profits and also increase its profits rapidly. I see no reason for this important trend to stop.

Invest for the long term

JD Sport management is optimistic about the next few years. This was expected, of course. But the fact that executives are buying more shares for themselves is the proof in the pudding for me. In my eyes this is almost always a sign of bullish behavior.

I have observed research pointing to a recession being more destabilizing for the UK economy than others in the G7. The biggest positive in the evolution of the basic business is the expansion into Europe. It has a huge presence in the UK. Certainly, JD Sports shares are one that I would like to buy more of in this unpredictable stock market. Hopefully the price will drop a bit to provide a better entry point to buy more.