2018 Outlook: Stocks to watch

With JD Sports shares up 160% over 18 months by June, the give-back this summer was barely surprising. What was surprising was that the stock continued to fall. Shares were just 3% higher this year by December. Record half-year profits should have underpinned them, backing our view that JD Sports has carved out a niche resistant to faltering high street trends

JD Sports can outplay Amazon

With JD Sports shares up 160% over 18 months by June, the give-back this summer was barely surprising. What was surprising was that the stock continued to fall. Shares were just 3% higher this year by December. Record half-year profits should have underpinned them, backing our view that JD Sports has carved out a niche resistant to faltering high street trends. 

We suspect ‘The Amazon Effect’, after the June announcement of Amazon Wardrobe’s plans. However, we think Adidas and Nike will remain JD Sports’ biggest suppliers for the long term. If we’re right, their reputation as brand protectors will leave Amazon as a secondary outlet. 

JD Sport’s status as the leading generator of free operating cash flow in Britain’s retail sector—more than doubled in five years—will then return to the fore. We note robust profits and underlying sales growth coincided with a 35-store ramp in space, pointing to solid efficiency. 

A similar pace in H2 and a JV announced in September offering access to South Korea could trigger a full-year guidance upgrade. In that case, JD Sports’ 5th January trading update will be a catalyst.

Greggs in our 2018 basket 

The jury’s out on whether Britain’s economy is heading for a Brexit-fuelled slump, but even if it is, everyone will still succumb to a ‘cheeky Greggs’ from time to time. And when we say ‘everyone’ that includes more of the kind of folk we assume might not have been customers ten years ago. 

The hot foods retailer has transformed itself over that time, reducing costs and introducing higher-margin products. These have broadened its appeal, and fattened margins and profits. To be sure, revenue growth hasn’t rocketed. The trend remains in low single digits. But it is Greggs’ defensive qualities that are to our taste, exemplified by more than two decades of progressive dividend rises, whilst return on capital has not strayed below 20%. Capex has been demanding, but it’s been self-funded. 

The group has zero debt. This is the kind of reputation that has boosted the shares 180% over five year, including a 36% advance in 2017. The probability that Greggs will get less solid in 2018 is low. We therefore expect traders to continue to pop into the stock around earnings and sales releases. The group has pencilled in a trading update on 16th January.

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