Rolls Royce has made all the headlines lately, but over five years there is a bigger winner on the FTSE100 — Frasers Group (LSE: FRAS)
If I had invested £1,000 in this British retailer five years ago, I would have just under £4,000 today. It’s not a staggering amount, but it’s still the highest return in the index. Of course, the pandemic is to blame for the slow growth of other stocks. The performance over a three-year period (post-pandemic) is much higher, with Rolls returning 370% during that time.
But Fraser’s ability to perform well despite the pandemic speaks volumes about the company’s resilience, so I wonder if this lesser-known FTSE Gemstone could be a good long-term investment.
Sports and fashion
Fraser’s most popular brand is Sports Direct, but there are many others, such as House of Fraser, Flannels, Game, Studio Retail and more. Each brand targets a different audience, which strengthens the company’s defensive position. For example, by offering highly competitive prices, Sports Direct has contributed a large portion of Fraser’s profits until 2023.
Premium department store brand House of Fraser has been less successful, with many stores on Britain’s high streets forced to close. The company has been in trouble for years, but stubbornly high interest rates have likely forced consumers to opt for cheaper alternatives, delaying the recovery. And it’s not alone – high-end fashion brands like Burberry have suffered a similar fate. But Fraser’s upmarket Flannels chain appears strong and is a key investment focus.
Crucially, by appealing to consumers at both ends of the spectrum, Frasers can ultimately weather most storms. But it hasn’t been smooth sailing. In July 2022, the share price hit an all-time high of £9.42 and was close to surpassing that record again in December last year. It now stands at £8.53, down 3.6% this year.
So what happens from here?
When I see a stock that has recently hit a new all-time high, I’m usually cautious. With no historical price levels to base it on, it’s difficult to estimate its future growth. And in the case of Frasers, several metrics support this thesis.
With earnings expected to decline, the current price-to-earnings (P/E) ratio of 7.1 could rise to 9.8 in the next year. While that’s still low, with the price already declining, it could be a sign of things to come. Moreover, the stock could be overvalued by 18.6% based on future cash flow estimates.
My verdict
Over the past 20 years, Frasers’ share price has been quite volatile. It plummeted during the 2008 financial crisis, only to rise 2,000% over the following six years. It plummeted again in 2015, and did not fully recover until after Covid.
The large price drops and gains create potentially lucrative opportunities for traders who want to buy and sell frequently. However, as a long-term passive investment, the volatility makes it unattractive. In addition, it pays no dividend, so no added value is created when prices fall.
All in all, I don’t see a strong argument to buy the shares. Based on past performance, I expect the price to fall in the next few years. Yes, the last five years have been good for shareholders, but that doesn’t appeal to me in the long term. When it comes to retail, I prefer the less risky dividend stocks like Tesco or Unilever.
The post “If I’d invested £1,000 in this FTSE 100 share five years ago, I’d have this much now!” appeared first on The Motley Fool UK.
Further reading
Mark Hartley has positions in Tesco Plc and Unilever. The Motley Fool UK has recommended Burberry Group Plc, Rolls-Royce Plc, Tesco Plc and Unilever. The views expressed on companies mentioned in this article are those of the author and may therefore differ from the official recommendations we make in our subscription services such as Share Advisor, Hidden Winners and Pro. Here at The Motley Fool, we believe that considering a diverse range of insights makes us better investors.
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