The Dr. Martens (LSE:DOCS) share price fell 27% this month, pushing the FTSE 250 stock to an all-time low. But could this be an opportunity to be greedy when others are fearful?
There’s a lot weighing on the underlying business at the moment. However, I think investors with a long-term outlook might do well to take a closer look.
Why is the stock falling
Dr. Martens shares came on to the public markets in 2021. And if I’d invested £1,000 in the stock back then, I’d have an investment with a market value of £189 today.
Passive income stocks: our picks
Do you like the idea of dividend income?
The prospect of investing in a company just once, then sitting back and watching as it potentially pays a dividend out over and over?
If you’re excited by the thought of regular passive income payments, as well as the potential for significant growth on your initial investment…
Then we think you’ll want to see this report inside Motley Fool Share Advisor — ‘5 Essential Stocks For Passive Income Seekers’.
What’s more, today we’re giving away one of these stock picks, absolutely free!
By anyone’s standards, that’s a dreadful result. But investors should consider whether this is a fair reflection of problems in the underlying business, or whether there’s a buying opportunity here.
The company’s problems are supply and demand. In terms of supply, inventory levels are too high and on the demand side, the macroeconomic environment is unhelpful.
Excess inventory is a problem because it’s expensive to store. This drives up the firm’s costs and puts pressure on margins.
When inflation is high and rising interest rates are rising, consumers often delay purchases of discretionary products like expensive boots. This results in lower sales volumes.
At its latest trading update, management announced a 5% drop in revenue and a decline of more than 50% in pre-tax profits. Dr. Martens shares immediately fell more than 23% as a result.
Time for a turnaround?
Both of these are genuine issues for the business. But I think they are short-term in nature and the firm has some durable advantages that make the stock worth considering for long-term investors.
On the supply side, the excess inventory is a result of the company shifting its business model from a retail-led approach to a direct-to-consumer strategy. It’s not a good thing, but I expect levels to normalise eventually.
Equally, the difficult macroeconomic environment won’t last forever. Inflation seems to be subsiding and the stock market seems to be expecting interest rates to come down, which should be positive for the business.
I therefore think things can improve significantly for the firm in the future. And when they do, I wouldn’t be surprised to see the stock bounce back from its lows as a result.
The real question, though, is when this is going to happen. If Dr. Martens is going to find its earnings subdued for a few years, investors might well be better advised to look at other opportunities.
This is a risk investors ought to take seriously. But for an investor with a long-term focus, the company has plenty of time to make up for short-term underperformance.
A stock to consider buying?
Dr. Martens shares are at an all-time low and this isn’t just stock market volatility – the issues the business has been facing are genuine. Furthermore, it might be some time until they subside.
Over the last couple of years, investors hoping for a turnaround would have been disappointed. So I wouldn’t invest today based on the view that the stock can’t go any lower – it absolutely can.
Even if it’s not coming soon, though, the company’s brand and history leads me to believe an upturn in its fortunes will come eventually. So I think the stock is worth considering for investors who are willing to wait.
