Think Marks and Spencer and Sports Direct shares are bargains? Read this now

Dice engraved with the words buy and sell

Marks & Spencer(LSE: MKS) shares have experienced a dreadful run. This time three years ago, the shares were changing hands for just under 500p, however, fast forward to today and the MKS share price is 299p, representing a fall of around 40%.

At face value, Marks shares look cheap right now. With analysts forecasting earnings per share of 26.2p, and dividends per share of 18.7p for the year ending 31 March, The forward-looking P/E is just 11.4, and the prospective yield is 6.3%. However, if you’re thinking of buying the shares, there’s something you really need to know.

High short interest

The thing that concerns me about Marks & Spencer shares is the high level of short interest in the stock at present. According to shorttracker.co.uk, MKS is currently the fourth most shorted stock on the London Stock Exchange. A 10.5% short interest means a number of hedge funds and other sophisticated investors are betting on the company failing, and the share price falling. For this reason, I think it’s worth being very cautious in relation to the stock because we have seen what can happen to highly-shorted shares in the recent past. Just look at Carillion last year, which went into liquidation, and Debenhams this year, which has lost 80% of its value.

To my mind, the big problem with the company is its ailing clothing division, which seems to just consistently underperform. For example, clothing sales in August fell 1.9%, which suggests the group’s strategy is off the mark when you consider that online retailers such as Boohoo are thriving.

As such, I don’t see much appeal in MKS shares right now. I definitely think there are better retail stocks out there. 

Selfridges of sport

Another retail stock that has had a dreadful run recently is Sports Direct(LSE: SPD). Over the last three months, its share price has fallen 24%, meaning that it now trades on a forward-looking P/E of 15. Yet, like MKS shares, I don’t see much appeal in owning the stock right now.

The main problem with Sports Direct for me is the lack of corporate governance. Founder Mike Ashley, who owns over 60% of the shares, is highly unpredictable and this adds significant risk to the investment case. Just last month, Ashley warned that future engagement with shareholders would be “extremely challenging,” which is not really what you want to hear as an investor, is it? It’s no wonder they’ve dumped the stock.

Another issue that concerns me is the group’s strategy. Ashley has stated in recent years that he plans to turn Sports Direct into the “Selfridges of sport”. However, this appears a long way off.

Yes, he’s bought House of Fraser, but I noticed last week that he’s now piling these stores up with cheaper brands that he owns such as Kangol and Firetrap. Personally, I’m not convinced this is the way forward, and I think this will just damage the House of Fraser brand. Furthermore, Sports Direct also has a large stake in Debenhams which, as I noted above, is struggling and has lost 80% of its value in the last year.

So, overall, I’m not convinced SPD is a good stock to buy at present. I see much more appeal in rival JD Sports Fashion.

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The Motley Fool UK has recommended boohoo group. Edward Sheldon owns shares in JD Sports Fashion and boohoo Group. Views expressed on the companies mentioned in this article are those of the writer and therefore may 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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