Up 31% in a month, is it time to buy JD Sports shares?

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JD Sports Fashion (LSE:JD) is a classic case of UK growth stock. With the stock price down 22% over the past year, it mirrors the performance of many other growth stocks that are out of favor with investors. However, I do not think it is time to position myself only on defensive companies. And the jump in JD Sports stocks over the past month has me thinking about whether to buy now. Here is what I decided.

Short term bump gets traction

The main reason for the recent jump can be attributed to the annual results released in June. It highlighted the doubling of pre-tax profit to £654.7m from £324m the previous year. This is partly due to high gross profit margins. If 2020’s 48% figure wasn’t enough, it rose to 49.1%.

All in all, it was a strong report and the stock price jump was justified. The fact that stocks have continued their momentum and continue to rise shows me that investors are rapidly reassessing expectations. The report also noted that trading so far this year is up 5%. Even with some concerns about the outlook, I think some already think the next fiscal year could outperform.

Another reason for the jump came earlier this month, with the announcement of a new president. The process to find a chairman has been underway for some time now, so the arrival of Andy Higginson this month will be a comfort to management.

Messy fusion always stings

Despite the jump, the stock price is still down over a longer period of a year. One of the reasons behind this was the messy merger attempt with Footasylum. The regulator reported a serious lack of governance in place around trading, as well as competition concerns. This ultimately resulted in the move being blocked, plus a £4.7million fine.

I think this dampened the stock price as investors were initially optimistic about the deal and what it might mean going forward. Not only was that optimism suppressed, it backfired to add damage to the reputation of the JD Sports brand.

It was a puzzle of a saga over the past year. The management team really needs to adjust the approach for future acquisitions, otherwise it’s a risk to future share price performance.

Long-term value of JD Sports shares

If the stock price jump had happened in the past few days, I would be more cautious. However, it’s been a big jump over a month now. This leads me to conclude that the tide may have really turned.

The P/E ratio is a modest 10.89, which seems fair to me. Even with worries around the UK economy, JD Sports is well diversified around the world. In fact, last year it generated 30.5% of its revenue in the United States and 23.9% in Europe.

I’m also impressed that 33.8% of revenue comes from non-store channels, such as web and mobile. It makes the business more sustainable in the long run, in my opinion, as consumer habits change.

Based on this, I think the time is right to buy JD Sports stock and am looking to do it myself.

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