Could you double your money with Marks and Spencer in 2019?

Happy New Years 2019 With Fireworks

What are the chances of doubling your money with Marks and Spencer Group (LSE: MKS) in 2019? A 100% gain isn’t as far-fetched as you might think.

Back in summer 2015, the shares traded at twice their current level, hitting a high of 594p. Since then, the retailer’s underlying profits have fallen by about 10%. But the group still retains many of the characteristics that led shareholders to pay twice as much for its stock four years ago.

Of course, there are problems at M&S. But market sentiment can change fast when things start to improve. The question is how long this might take (and whether it’s even possible)?

Early signs of progress?

Thursday’s third-quarter trading figures for the three months to 29 December show that sales are continuing to fall. Like-for-like food sales were down by 2.1%, while like-for-like sales in Clothing & Home were 2.4% lower.

However, it seems fair to assume that some of this decline was caused by mild weather in November, which blighted performances for retailers who’d stocked up with winter clothing during this period.

There were some positives. Online sales rose by 14% during the festive period, helping to offset some of the sales lost as a result of store closures. In Food, the company says that there have been “early signs of volume improvement,” following price cuts and product updates.

Should you be buying M&S?

To be fair, 2018/19 was always going to be a difficult period. Chairman Archie Norman and boss Steve Rowe have made it clear that their turnaround plan will take several years to deliver results.

Financial guidance for the year to 31 March has been left unchanged, and the shares were also trading flat after Thursday’s figures were released.

As a potential investor, I’m tempted by the turnaround potential here. I don’t think the shares will double in the next year, but the modest forecast P/E of 11 leaves room for improvement. And the 6.8% dividend yield is still covered by free cash flow, which remains strong. For income investors who can accept the risk of a dividend cut, I think M&S remains a potential buy.

Up by 30% in one day

Back in November, I said that I’d prefer to take a punt on a rebound at Ted Baker (LSE: TED) than invest in Marks and Spencer.

My view was that alleged misconduct involving Ted’s founder Ray Kelvin was unlikely to tarnish the firm’s wider brand. It seems I was right. A strong set of Christmas sales figures has sent the stock up by more than 20% so far this week.

We know now that customers are still shopping at Ted stores — and increasingly, online. But despite this week’s rebound, the mid-market fashion and lifestyle retailer’s shares are still worth nearly 35% less than they were one year ago. Is this a buying opportunity?

I see long-term quality

Yesterday’s update confirmed that profit margins have stayed in line with the group’s forecasts this year. This is one of the key elements of the investment case here, in my view.

The group’s operating margin of 11.7%, and return on capital employed of 25%, make it one of a handful of UK retailers that can generate above-average returns.

Although the shares are not as cheap as they were a week ago, I believe they still rate as a long-term buy at around 2,000p.

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Roland Head has no position in any of the shares mentioned. The Motley Fool UK has recommended Ted Baker. 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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