Sunday, 18 October 2015

Sports Direct and JD Sports

Since the demise of JJB, the UK sports apparel market, which is in practice the entire apparel market for a certain segment of British society, is dominated by two firms, Sports Direct (LON:SPD) and JD Sports (LON:JD). Each has it’s own colourful chairman and unusual activity, but the current share prices are very different, as per the charts below.

SPD.L at Oct 16, 2015

Both firms have performed traditionally very well, as oligopoly markets often do. However SPD.L is currently oversold (the daily RSI14 is below 30) and also near the bottom of a parallel rising channel. Note the RSI14 over the last two years; it does not stay in this condition for long. I'd prefer to buy at the absolute channel bottom (640p) although I'm happy to recommend a scaled entry from the current market price (652p).

JD.L at Oct 16, 2015

As a hedge against this, the competitor, JD.L look exhausted. It has been continually overbought all summer (yellow box, that in itself is interesting), but since the last sharp rise above 800p, has developed a strong negative RSI divergence, but yet is nowhere near oversold. If we look at the fundamental performance of the two companies (below), another disparity rears it’s head.

Although SPD.L makes a profit of 8.5% it only trades at a P/E of 16.5, whereas JD.L, with 5.2% margin, trades at a P/E of 23.4. So JD.L is 'more expensive'.

Other points are that the SPD.L EPS is higher, despite a lower nominal share price, and a quick glance at the net income chart (the left hand bottom bar chart) shows that SPD.L is growing, whereas JD.L is more static.

All this leads me to recommend buying SPD.L here, with a target above the previous high of 820p, eventually leading to the March 2014 all time high of 924p. You may also consider a hedge (perhaps only 50%) in the form of a short on JD.L shares, maybe back to the 887p pivot from August 27th.

No comments:

Post a comment

Please leave a comment. They are moderated and spam (links to your site) will not be published.