The FTSE 250 has been fairly steady in 2023. That’s actually quite respectable, although shares in Dr Martens (LSE:DOCS) have managed to lose around half their market value.
The reason is straightforward – the last 18 months or so have been an almost unmitigated disaster. But there are signs the worst could be in for the company and the stock might be set for a 2024 recovery.
Profit warnings
How many profit warnings add up to a disaster? Management at Dr Martens has had five in six quarters, before withdrawing earnings guidance and growth targets entirely for next year.
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This comes after the company announced a 17% decline in global revenues, led by a 22% drop in US sales. Management also announced it anticipates further declines in 2024.
Obviously, none of that is positive. But while optimistic shareholders have been hoping for a change of fortunes for some time now, I think a recovery might be on the cards even as the stock continues to hit new lows.
Analysts predict a recovery
There are three reasons I think this could be a good time to buy the shares. The first is that every analyst price target I’ve seen for the stock in 2024 is higher than its current share price.
That’s very unusual and it might be that some analysts haven’t yet factored in the latest bad news. I think it’s a good sign of a rally to come, but it’s not my main reason for owning the stock.
More importantly, I think the market might be underestimating the outlook for the business. And this undue pessimism could be creating a long-term investment opportunity.
The US economy
Management attributed the firm’s struggles in the US to a difficult macroeconomic environment. But it has endured self-inflicted warehouse issues too. Yet it’s worth noting that the outlook for the US has been improving sharply in recent weeks.
Specifically, investors have started to become optimistic about the prospect of interest rate cuts in 2024. If these boost growth, Dr Martens could find demand improving quickly.
There were already signs of this in some strong Black Friday sales last month. But the share price doesn’t seem to be reflecting this for now, which is another reason I’m bullish.
Buybacks
The third reason I’m positive on this stock is the recent share buyback programme. Management has been making the most of a depressed share price to repurchase shares at low prices.
This stands out to me as an intelligent use of capital. It’s the kind of thing that can generate long-term value for shareholders even while the business is faced with a downturn.
Of course, if revenues and profits stay depressed, this can’t go on forever. But I think it’s a good decision from management while the opportunity is there.
Is this the FTSE 250’s biggest bargain?
Earnings projections are for the company to make 9p per share in 2024, rising to 10p in 2025. That makes the current share price of around 90p look cheap to me.
Given that I think the company’s fortunes in the US might improve more quickly than anticipated, I believe this stock could rally. I started buying it this month and I expect to keep buying in 2024.
