The rise and rise of Frasers

The stock’s price crashed, like all others, in last year’s market meltdown. But notably, it started rising from there in fits and starts even before the broad-based stock market rally of November 2020. But come last November, and it really took off. By December of last year, it had reached its pre-pandemic levels and recently, it reached highs not seen since late 2015. Through the year, the the Frasers’ stock has been reaching new five-year highs and yesterday was yet another day when it did so. 

Strong results update for FTSE 250 stock

This latest jump followed the release of its latest results this week, leading to a 4.2% rise in stock price. For the half-year ending 24 October 2021, the company reported a 26% increase in revenue, compared to the same six months of last year. Its post-tax profits increased by 70% and its cash inflow also rose by 69%. Some increase was to be expected, considering that last year, retailers were hamstrung by the lockdowns. Still, it is good to see the expectations of performance affirmed by the company. 

Also, given the recovery underway, its outlook is positive. It expects its profit before tax for the current year to be in the £300m-£350m range, and this is when it is being conservative. This means there is a good chance that the momentum acquired in the first half of the year could continue in the second half as well. And it could end the year with a near doubling of its first-half profits. 

A note of caution

As positive as this sounds, there are notes of caution here too. The company has warned, as it says, of “well publicised macroeconomic headwinds on the horizon”. In this vein, it mentions cost pressures, supply chain issues, and a potential reduction in consumer spending power, presumably due to high inflation. It also says that the headwinds are “not limited to” these factors only. Besides these, of course there is the emergence of the Omicron variant. Travel restrictions have been put in place and the UK government is asking us to take measures to reduce the spread of the virus as well. These could slow down consumer demand again. 

My assessment  

All-in-all, I do like the stock. And just today, the latest UK growth update has shown an improvement in wholesale and retail trades, even though the overall economy has not really grown. I am cautious, however, going by the latest developments on the coronavirus and the fact that the Fraser share price has climbed a lot during the past year. In this situation, I am not sure how much higher it could climb. If, however, the share price were to drop, say due to a stock market crash, I would buy the FTSE 250 stock. 

As such, here are five FTSE 250 stocks that I would acquire for my portfolio today. 

Shares to buy today for growth

The first company on my list is home services group Homeserve (LSE: HSV). Over the past decade or so, this organisation has grown steadily through a combination of acquisitions and organic growth across the UK and North America.

Homeserve has built a group of home improvement and maintenance businesses, providing consumers with a one-stop-shop for services. Revenues have increased at a compound annual rate of 16% since 2016, and as consumers continue to splash out on their properties, I think this trend will continue. 

Unfortunately, the group suffered a setback last year as profits plunged more than 70%. However, analysts are forecasting a rebound in the current financial year, and they believe growth should return in 2023. 

Some challenges the company may face, which could hamper growth, include competition and rising prices for acquisitions. Despite these risks and challenges, I would buy the stock for my portfolio of FTSE 250 shares today. 

Home improvement

On the home improvement front, I would also acquire engineered door and window components supplier Tyman (LSE: TYMN). 

The current building boom is landing this business with windfall profits. Earnings per share are projected to increase by 57% this year and a further 6% in 2022. 

According to the company’s half-year report, it is benefiting from both high levels of demand and higher prices. This is giving management the resources required to increase market share across North America, including the funding needed to develop new products.

I do not think Tyman’s current growth rate is sustainable, but if the company is able to reinvest its windfall back into expansion initiatives successfully, the enterprise’s growth should continue. Albeit at a lower rate. 

And after a bumper 2021, Tyman’s potential over the next few years has improved dramatically. 

But there are still risks. Challenges that could hold back growth include competition and a housing market slowdown. Rising costs may also weigh on profit margins. 

FTSE 250 hospitality

Like every other hospitality business in the UK, JD Wetherspoon (LSE: JDW) struggled during the pandemic. But the company is now on the road to recovery. For the first 15 weeks of its financial year, sales were 8.9% lower than the same period in 2019. 

The speed of the recovery differs significantly across the group. City centre locations such as Oxford and Newcastle have recorded double-digit growth compared to 2019 levels.

However, trade in central London, airports, stations, and regions of the UK where restrictions apply, means activity there is still down by a double-digit percentage compared to 2019 levels. 

Therefore, it looks as if Wetherspoon still has some way to go before it can claim to be back on track. Still, I think this FTSE 250 hospitality giant is an attractive way to invest in the UK economic recovery.

Risks to my investment case include rising staff costs and a squeeze on consumers’ income due to inflation. There is also the potential for further coronavirus restrictions, which may derail the recovery. 

Property shares to buy

Another recovery play I would buy is real estate investment trust (REIT) Shaftesbury (LSE: SHB). 

Due to the pandemic, the central London landlord was forced to write down the value of its property portfolio last year. It also struggled to collect rent from tenants that lost virtually all of their business overnight when forced to close. 

The good news is, business activity in general and central London are now recovering. This is having a knock-on effect on commercial property values. According to a trading update published at the end of October, Shaftesbury’s portfolio increased in value by 5% during the second half of its 2021 financial year.

What’s more, by the end of September, just 2.9% of the portfolio was available to let, down from 8.4% at the end of March. 

These figures appear to show that tenants are returning to central London, and the value of the company’s property portfolio is appreciated as a result. 

I would buy the REIT today based on these numbers even though further coronavirus restrictions could significantly impact commercial property values, and many tenants may not survive another lockdown. This is probably the most considerable risk to the company’s growth right now. 

Retail behemoth

Frasers Group (LSE: FRAS), formerly known as Sports Direct, suffered a loss of £83m last year. However, analysts are expecting profits to rebound this year and grow further in 2023. 

Heavy investments in the group’s online division helped it weather the Covid storm, and this online business is now helping drive the recovery. Management is so confident about the group’s prospects it is returning cash to investors with a share repurchase programme. This should help improve earnings per share, and the company’s overall valuation. 

At the time of writing, the stock is dealing at a forward price-to-earnings (P/E)  multiple of 19.3. According to current analysts projections, this could fall to 17.3 next year.

Evidence shows that consumers tend to trade down to lower-priced commodity products in periods of high inflation. With inflation set to hit 5%, Frasers’ Sports Direct business could possibly benefit from this trend. I would buy the stock for this potential as well as the reasons outlined above. 

Some challenges the group may face as we advance include rising costs due to inflation and further coronavirus restrictions. 

Best stocks to buy now for growth

Rising stock markets and the increasing wealth of the middle class is leading to increased demand for wealth management services. It’s also driving up demand for alternative assets, such as specialist bonds. 

With this being the case, I believe Intermediate Capital (LSE: ICP) is one of the best stocks to buy now. The specialist asset manager has seen steady growth in its assets under management over the past few years.

As these have expanded, so has fee income. Net profit has more than doubled over the past six years. This growth has also allowed the company to increase its dividend from 17.8p per share in 2016 to around 56p for 2021. 

Due to the tailwinds outlined above, I think the company’s growth can continue, although it may slow as the group becomes bigger. 

Demand for the alternative asset manager’s products and services may also decline if there’s a sudden increase in interest rates. Rising rates may reduce the appeal of specialist bond instruments among investors. 

This risk aside, I think this is one of the best growth shares to buy right now and I wouldn’t hesitate to add it to my portfolio. 

As a champion of growth shares

The other company I believe is one of the best stocks to buy now in the growth sector is Frasers Group (LSE: FRAS).  The owner of the Sports Direct brand, Frasers has been buying up other struggling high street brands over the past few years. It’s even begun buying retail parks.

This has helped build the group into a retail giant with substantial economies of scale. As the economy reopens and consumer confidence grows, I think Frasers’ efforts to consolidate the high street over the past few years will start to pay off. 

Unfortunately, its growth is far from guaranteed. The retail sector is incredibly competitive, and while Sports Direct might have been able to conquer the sports retail market over the past decade, there is no guarantee it’ll remain the top dog. It could face multiple challenges such as higher costs and cheaper products from competitors. 

Still, while the company might face some challenges as we advance, I am attracted to its low-cost offering and growth potential. 

The one downside to buying shares in the retailer today is its valuation. The stock is trading at a forward price-to-earnings (P/E) multiple of 27.5. I don’t think that leaves much room for error if Frasers’ growth doesn’t live up to expectations. 

Nonetheless, despite the above risks and current valuation of the equity, I’d buy the company for my portfolio of growth shares right now. 

Rupert Hargreaves: Frasers

As the country slowly moves out of lockdown, I think Frasers (LSE: FRAS) could be one of the big winners. Formerly known as Sports Direct, the company is one of the UK’s most successful retailers. As the UK reopens, I expect sales and profits to rebound.

Led by the outspoken CEO Mike Ashley, Frasers has also been snapping up distressed retail assets throughout the crisis. I think these deals could help turbocharge the group’s recovery in 2021.

That said, the main challenge facing the business right now is the potential for another wave of coronavirus. This could set back the group’s growth plans.

Rupert Hargreaves does not own shares in Frasers.

Nadia Yaqub: Saga

I reckon things look promising for Saga (LSE: SAGA). The company’s customer base is the over-50s, which are typically loyal and have more money to spend. The UK vaccine roll-out for this demographic has so far been successful.

Saga recent results were dismal. But I think the fact that it has seen a 20% increase in cruise bookings indicates there is pent-up travel demand. I’m not really worried about the company’s debt pile. I reckon once travel restrictions are eased, Saga’s revenue and profitability could bounce back soon.

Nadia Yaqub does not own shares in Saga.

Jamie Adams: Auto Trader

After delivering a stellar 35% return over the last year, the Auto Trader (LSE: AUTO) share price has plateaued in 2021.

Fears of declining advertising spend and semiconductor shortages are playing on investors’ minds.

However, following a recent report from the Interactive Advertising Bureau in the US, ad spend has never been higher worldwide. Auto Trader’s dominant position in the auto industry’s advertising market will benefit from increased spend from sellers as well as a potential car sales boom as people spend their lockdown savings.I see this growth stock’s recent dip as a buying opportunity in April.

Jamie Adams owns shares in Auto Trader.

Royston Wild: Trifast 

I think that fastenings manufacturer Trifast (LSE: TRI) is an excellent UK growth share to buy today. City analysts are expecting the business to report annual earnings growth of 26% in the financial year to March 2022. 

I think Trifast is a particularly-good buy today as it’s due to release a pre-close update for fiscal 2021 on Thursday, April 22. Last time the UK share updated the market in February it said that “trading levels continue to strengthen” and that it consequently expected revenues for the full year to be “slightly ahead of current market expectations.” Be warned, though, that a sudden worsening in the Covid-19 battle could cause severe supply disruptions that might derail this recovery. 

Royston Wild does not own shares in Trifast.

Harshil Patel: boohoo group 

Boohoo group (LSE:BOO) is determined to expand its business over the coming years with its powerful online-only platform in the fast-fashion sector.  

Over several years, it has consistently produced double-digit earnings growth. Both organically and through acquisitions. Recently, the group acquired several brands including Warehouse, Debenhams, and Dorothy Perkins. 

There are further signs of expansion from recent purchases of a new large warehouse in Daventry and a new freehold office building in Soho for its London-based brands. 

Overall, it offers a return on capital of 27% and net cash on its balance sheet. All at an undemanding price-to-earnings ratio of 33.  

Harshil Patel owns shares in boohoo group.

Zaven Boyrazian: Alpha FX

Alpha FX (LSE:AFX) is a currency hedging and international payments solution business that serves over 600 clients, including ASOS and Holland & Barrett.

Its services have proven to be incredibly popular, especially its relatively new global enterprise payment network. Revenue generated by this segment in 2020 grew by 417%!

Currency risk management is currently the larger contributor to overall revenue. And performing such services requires an incredibly high level of skill since the slightest mistake could lead to substantial losses.

But given its successful track record and enormous growth opportunity in international payments, Alpha FX is a stock I want to buy more of for my portfolio.

Zaven Boyrazian owns shares in Alpha FX.

Christopher Ruane: B&M

Discount shop chain B&M (LSE: BME) had a stellar 2020. But so far in 2021 shares have only added 5%.

I think many investors are wary that the chain, which saw a big sales boost in lockdown, could suffer from reopening. There is a risk that new shoppers won’t be loyal to the chain, in a highly competitive retail environment.

However, the company’s retail prowess and compelling customer proposition already led to it performing well before lockdown. I expect to see strong numbers from the chain again this year.

Christopher Ruane does not own shares in B&M.

Kevin Godbold: Fonix Mobile

Mobile payments and messaging services provider Fonix Mobile (LSE: FNX) arrived on the FTSE AIM market in October 2020. However, the growth stock was first established in 2006. And prior to its admission to AIM the business delivered fast-paced, profitable growth.

Looking ahead, City analysts expect low, double-digit percentage earnings growth in the current trading year to June 2021 and for the year after that. And with the share price near 182p, the forward-looking earnings multiple is just below 24. However, the stock has been rising since listing. And at £182m, the market capitalisation has already doubled. Nevertheless, I reckon the growth proposition looks resilient here.

Kevin Godbold owns Fonix Mobile shares.

G A Chester: Gamma Communications 

A suite of products across instant messaging, video conferencing and other media, combined with ‘always-on’ and ‘work-from-anywhere’ connectivity, make Gamma Communications (LSE: GAMA) a leader in the fast-growing unified communications as a service (UCaaS) market. 

Furthermore, the company has recently established footholds in mainland Europe with several strategic acquisitions. The UCaaS market in Europe is behind the UK but heading the same way. While there’s no guarantee Gamma will be able to replicate its UK success on the Continent, the growth opportunity is huge. As such, I think a rating of 35 times last year’s earnings could prove cheap. 

G A Chester has no position in Gamma Communications.

Edward Sheldon: ASOS

My top British growth stock for April is online fashion retailer ASOS (LSE: ASC).

ASOS posted a fantastic set of half-year results earlier this month. For the six months to 28 February, group revenue was up 25% at constant currency to £1,976m, while diluted earnings per share (EPS) were up 198% to 81.9p. As a result of this performance, the company increased its guidance for the full year.

Since the company posted these results, its share price has fallen. I view this share price weakness as a buying opportunity. There are risks to the investment case, of course, however, with the forward-looking P/E ratio in the mid-30s, I think it’s a good time to be buying the stock.

Edward Sheldon owns shares in ASOS.

Jonathan Smith: The Hut Group

The Hut Group (LSE:THG) is a British e-commerce business. It owns brands such as MyProtein and LookFantastic that have large online revenues. It also helps other businesses improve marketing capabilities due to real-time customer data, with past clients including Honda and Nestle.

THG went public last year and is trading well above the IPO level. In a recent trading update, 2020 revenue was shown to be 41.4% above 2019 levels. In guidance given, management expect 2021 revenue to be 30-35% above 2020 levels! This positive momentum that the business has makes me want to get in on the action.

Jonathan Smith has no position in The Hut Group.

Roland Head: Auto Trader Group

The pandemic has accelerated the development of online car retailing. I don’t see this trend reversing, at least not completely.

I’d tap into this growth by investing in classified listing business Auto Trader Group (LSE: AUTO). I expect this business to perform well as the UK returns to normal (hopefully) in 2021.

Auto Trader’s dominant market share means it’s an essential service for most used car dealers. The business generates very high profit margins — 65% last year, even with the impact of the pandemic.

Auto Trader shares never look cheap, but I think the stock’s forecast P/E of 26 is fair. I’d buy these shares in a Stocks and Shares ISA for long-term gains.

Roland Head has no position in any share mentioned.

Paul Summers: boohoo Group

boohoo (LSE:BOO) has been in the headlines for all the wrong reasons recently. Nevertheless, I’m confident the steps taken to rectify issues with suppliers will see the fast-fashion growth stock emerge as a bigger and better company in time. 

Shares remain below the highs hit in mid-2020. With people looking for new clothes to wear out to fully ‘unlocked’ bars, however, this gap will likely close before long. Factor in a raft of recent acquisitions (e.g. Debenhams) and a bulletproof balance sheet, and a normally-frothy forecast P/E of 33 actually looks great value for the growth on offer.

Paul Summers owns shares in boohoo Group.

Tom Rodgers: Open Orphan 

Human challenge vaccine and antiviral clinical trial operator Open Orphan (LSE: ORPH) is starting to spin out non-core assets from its main business, adding extra value for shareholders. And with the share price around 50% higher in the last month, more investors are starting to see the potential here.

If it can hold this momentum, the £295m market cap business will become one of AIM’s 100 largest companies when the index is reconfigured in May 2021. Now profitable month-on-month and with around £20m cash on its balance sheet, all eyes are on FY20 results, likely coming in June 2021.    

Tom Rodgers holds shares in Open Orphan

Andy Ross: Calnex Solutions 

Calnex Solutions (LSE: CLX) specialises in testing and measurement services for telecommunication (5G) networks. Given the UK has just had its 5G spectrum auction, investor interest in telecoms service providers ought to be high.  

With a market capitalisation of only around £100m, the company is smaller and should be able to grow quickly. Especially as results have been good. A trading update in February showed a probably bright future, as it revealed that revenue for FY21 would be ahead of market expectations.  

The main risks with this share are twofold. One is that as it reports in US dollars, a weaker dollar could hurt profitability. The other is its valuation. The P/E ratio is around 29. Overall, though, I think it’s a top British growth stock.  

Andy Ross does not own shares in Calnex Solutions.

Kirsteen Mackay: Pets at Home Group  

I think Pets at Home Group (LSE:PETS) will continue to grow throughout April. That’s because the UK is beginning to re-open, and people are getting out and about in the sunshine with their dogs. Pet purchases exploded in the pandemic and the trend does not appear to be subsiding. The BBC even reported a pet food shortage across supermarkets last month. Pets at Home has a price-to-earnings ratio of 33, earnings per share are 13p and it offers a dividend yield of 1.6. 

Kirsteen Mackay does not own shares in Pets at Home Group.

What’s been happening with Frasers Group?

Frasers has a £2.7bn market cap and earnings per share are around 18p. This gives it a price-to-earnings ratio of approximately 27. I think this indicates a share on the expensive side, particularly as it has several challenges ahead.

The most recent budget did nothing to ease Frasers’ troubles and boss Mike Ashley called business rates relief measures “near worthless” for large retailers. He even said he’s rethinking some store plans due to the high business rates.

Frasers’ acquisition strategy is at the heart of its approach to growth. In fact, it bought Evans Cycles out of administration in 2018, followed by Jack Wills and Psyche. The group also has a 37% stake in Mulberry and 10% in Hugo Boss, and it recently bought a Wigan retail park.

But it’s not always easy. The FTSE 250 group noted its interest in purchasing Peacocks, but missed out. It also failed to buy long-term target Debenhams, as well as Topshop in which it was rumoured to be interested.

Nevertheless, these disappointments highlight how the group is always on the lookout for new acquisitions to help scale its business. And Ashley has made no secret of the fact he wants to bring luxury brands to the high street under the Frasers banner.

This is great in theory, but company debt considerably outweighs its cash. I think this could pose a challenge to securing future acquisitions on favourable terms.

The company also has other challenges to deal with in keeping its existing companies afloat. At Evans Cycles, it’s implementing drastic cost-cutting measures. This includes slashing 300 jobs.

Will the Frasers share price thrive in 2021?

The pandemic and subsequent lockdowns have brought it a world of challenges. While Frasers is still making decent returns online, it has considerable overheads to consider on the bricks and mortar side. In early December, the company projected a double-digit rise in underlying EBITDA for FY21. But as the government announced the current lockdown, its guidance had to be pulled, which was very disappointing for shareholders.

For most of Frasers’ stores, this lockdown is due to end on 12 April, but it’s unfortunately led the group to draw an impairment charge of over £100m.

However, with the vaccine rollout making excellent headway, the future is looking a little brighter. I think Frasers Group should begin its recovery as pent-up demand for shopping sees footfall return through the summer. Analysts are largely bullish on its future revenues, and the Frasers share price is up 11% year-to-date.

But would I buy Frasers as a long-term investment? There’s no doubt billionaire Mike Ashley is a go-getting business owner, but he’s made mistakes as well as good deals over the years. 

All in all, I’m wary of the bricks and mortar retail market in the current economic environment. Therefore, I don’t have any plans to invest in Frasers Group. There are other stocks I prefer.

UK shares to buy 

The first company on my list of shares to buy for a new bull market is ITV (LSE: ITV). Shares in this business have been under pressure over the past 12 months. It’s easy to understand why. Group advertising revenue plunged at the beginning of the pandemic. And it’s been slow to recover. 

The company’s most recent trading updates show it’s getting back on its feet and, as the UK economy continues to open up, I think this trend will continue.

Unfortunately, the company also faces other challenges. Large US streaming services are giving ITV a run for its money. These platforms have been drawing users away, and that’s likely to continue. This could impact the group’s appeal to advertisers. That’s the biggest challenge facing the enterprise right now.

Still, I’d buy ITV shares for my portfolio today for the new bull market, despite this risk. 

Bull market investment 

Another stock I’d buy for my basket of UK shares is Plus 500 (LSE: PLUS). Rising stock markets tend to encourage investors and traders to take on more risk. That’s generally good news for stockbrokers and trading platforms such as Plus 500. 

This company isn’t the only business in the sector, but I think it’s one of the best. It has a track record of returning excess profits to investors and, at the time of writing, the stock supports a dividend yield of just under 4%.

Of course, there’s no guarantee the business will benefit from the new bull market. There’s also no guarantee the company will hit current dividend forecasts. The group’s most considerable risk is competition, as larger peers have more money to throw at customer-acquisition initiatives. If customers start to leave the platform, growth could slow. 

Even after taking these risks into account, I’d buy Plus 500 for my portfolio today. 

Retail investment 

Finally, I’d also add lifestyle retail group Frasers Group (LSE: FRAS) to my basket of UK shares for a new bull market.

As the Sports Direct brand owner (and like all retailers), Frasers’ top and bottom lines have taken a big hit due to the pandemic. But I think the company’s fortunes could begin to change as the UK economy starts to open up. And analysts appear to agree.

The City expects its income to rise to £143m by 2022, up from £94m in 2020. These are just forecasts at this stage, and there’s no guarantee Frasers will hit this target. 

Indeed, the company faces multiple risks such as increasing competition in the retail sector. The problems facing brick-and-mortar retailers are also well documented. High costs and business rates have been and will continue to be serious issues for the organisation, and other UK shares in the sector, as we advance. 

Nevertheless, I’d buy Frasers for its recovery potential in the new bull market. 

Frasers Group is, in fact, down more than 10% in start-of-week business. And it’s within a whisker of plunging to six-week lows below 425p per share. It’s fallen on the back of a fresh trading release which underlines the pressures facing non-essential retail operators like this.

Frasers Group pulls guidance

So what did the firm-formerly-known-as-Sports Direct say today? Well it said the sudden announcement of fresh lockdown measures by the government on Saturday night has forced it to withdraw its guidance for the fiscal year ending April 2021.

The FTSE 250 business commented that “given this is a peak trading period, and combined with the high likelihood of further rolling lockdowns nationwide over the following months at least… [the board] can no longer commit to Frasers Group achieving its publicised guidance.”

This is quite a turnaround for Frasers Group investors to swallow. Just last week, the retail colossus upgraded its earnings estimates for the financial year. It predicted then that adjusted EBITDA would jump between 20% and 30% year-on-year. The shuttering of almost all of its stores since the weekend has consigned these bold forecasts to the bonfire.

Tiers and fears

Under Tier 4 rules — restrictions which have been slapped on London and huge swathes of the South-East — retailers selling non-essential goods have had to shut up shop. Frasers Group sells its wares online but its e-commerce operations won’t offset the huge damage that mass store closures will cause.

The Pfizer and BioNTech vaccine is being rolled out quickly across the UK. More than 130,000 Britons received their jabs in the first week alone. However, the fast spread of a super-coronavirus variant has prompted new restrictions and cast fresh concerns over Frasers Group’s profit-making abilities.

Forecasts in danger

Current Tier 4 lockdowns are set to remain in force until December 30. But it’s not unreasonable to suggest they could remain in place for months. Health secretary Matt Hancock told the BBC yesterday that “we don’t know how long these measures are going to be in place. It may be for some time until we can get the vaccine going.”

It’s possible then, that Frasers Group could suffer a severe hangover that extends well into the financial year ending April 2022 too.

Broker forecasts for Frasers Group are set for another sharp revision in the space of just a few weeks. Right now, the retail play is predicted to report a 24% earnings rise in fiscal 2021. This leaves it trading on a forward price-to-earnings (P/E) ratio of 8 times.

There isn’t much time to lose as Debenhams is set to close all its stores by March. The collapse of Arcadia, with its brands that include TopShop, Burton and Dorothy Perkins, also complicates things. Arcadia was Debenhams’ biggest concession holder, and its demise was the back-breaking straw.

I can’t really tell what shareholders might think of Mr Ashley’s latest ambition. Over the past week, the Frasers share price hasn’t really moved. And it has already started falling back from November’s high point. It has, however, performed well in 2020 by FTSE 250 standards. By Wednesday, Frasers had fallen just 4% in 2020, while the index is down 9%.

A poor five years

Over the past five years, Frasers stock has lost 25%, against an 18% gain for the FTSE 250 index. And there’s no dividend, so it hasn’t been a great investment. But is that about to change in 2021?

The latest update Thursday certainly had a positive effect. The Frasers share price gained 6% approaching midday, on the back of improved first-half profits. Revenue fell 7.4%, hit by the Covid-19 impact on high street shopping. But the company reported a 24.9% rise in underlying EBITDA, with underlying EPS up 51.9%.

In 2020 especially, the strength of a company’s balance sheet can be critically important. Net debt dropped a fraction, by 1.7% to £250m. That’s reasonable compared to that improving EBITDA, so I don’t think I should worry. And underlying free cash flow rose by 55.6% to £252.6m, which is encouraging.

Beating the FTSE 250 index

As I write, Frasers is leading the FTSE 250 on the day. So would I buy now? Not on the back of one set of first-half results. No, I’d need to have a reasonably clear view of a firm’s long-term prospects. And I find the outlook cloudy, for several reasons.

Comments made by chairman David Daly echo one of my main concerns. He suggested that “much of the UK High Street, which was already suffering before Covid-19, won’t survive unless the Government addresses the out of date business rates regime which is due to return come April 2021.”

People might start returning to shopping in high volumes in the coming months. But there’s still a long-term problem. With the efficiencies and cost savings associated with online shopping and the underlying distribution networks, costs of doing business are increasingly stacked against high street sellers.

Not my style

Then there’s Mike Ashley’s leadership. He’s very keen to expand by acquisition, particularly buying up failing companies. And now there’s Debenhams again, which itself fell from glory and dropped out of the FTSE 250 index some years ago. I tend to prefer my chief executives to be a little more on the cautious side.

Then again, Mr Ashley can be a tough businessman, and maybe that’s what’s needed right now. He does appear to be steering Frasers Group comfortably through the pandemic crisis.

But we’re looking at a forward P/E of 23, which I think is too rich. I see better growth buys out there.

The Frasers Group share price was up 13% at the time of writing, close to 500p too. It’s shot higher on strong half-year results which prompted the retailer to raise its guidance for the full fiscal year.

Frasers Group enjoys profit surge

The Covid-19 pandemic has, of course, delivered a hammerblow to a British retail sector already under huge pressure. Frasers Group has been no stranger to these troubles and revenues dropped 7.4% during the six months to 25 October, to £1.89bn.

Indeed, sales at the group’s core UK Sports Retail division slumped 9.8% during the half year, or 12.4% excluding acquisitions. The lion’s share of turnover here is sourced from the company’s Sports Direct unit and therefore sales slumped due to mass store closures.

Still, investors have sent Fraser Group’s share price soaring on news of exceptional profit growth during that time. Before taxes, the FTSE 250 share saw earnings rocket 17.6% in the half year to October, to £106.1m. Underlying EBITDA, meanwhile, shot 24.9% higher to £226.3m.

Store sales rocket as lockdowns lifted

Frasers Group said that “the strong reopening of stores after lockdown [and] growth in our online business” helped drive profits in the first half. The contribution of its new Flannels designer fashion stores, profits from acquisitions made in the prior fiscal year, and ongoing cost-cutting, also helped push the bottom line higher from the same 2019 period, the UK share said.

As I say, Frasers Group lifted its profits expectations for the full year on the back of that robust first half. The retailer now expects underlying EBITDA to rise between 20% and 30% in the 12 months to April 2021.

This is up from the 10-30% earnings improvement the firm had forecasted back in August.

Reasons to be cheerful

Frasers Group has undoubtedly benefitted significantly from the rise of the athleisure fashion segment in 2020. It’s a sub-sector which analysts reckon will go from strength to strength in the years ahead too.

The retailer’s strong online performance also bodes well for future profits. Incidentally, Frasers Group recently announced a huge £100m investment programme to bolster its digital business and capitalise on the booming e-commerce market to its fullest.

City analysts reckon Frasers Group’s earnings will soar 25% in the current financial year. And they reckon they’ll soar 21% in fiscal 2022 too. Such estimates could receive a shot in the arm following Thursday’s solid results. Today, Frasers Group trades on a forward price-to-earnings growth (PEG) ratio of 0.9.

That’s more than twice the FTSE 100 company in second place, Spirax-Sarco, so what was happening?

It’s all about the collapse of Arcadia, the owner of Topshop, Burton and Dorothy Perkins. And Mike Ashley is getting in on the act. It seems Mr Ashley, the man behind Frasers Group (LSE: FRAS), formerly Sports Direct International, offered to stump up £50m as a loan to keep things running for now. And he also appears keen to get his wallet out for any top-brand administration disposals.

Ex FTSE 100 company

Frasers Group was itself a FTSE 100 member when it was Sports Direct. But its share price is now down close to 50% since mid-2015. And it dropped out of the top index in 2016. So it all looks like a group of companies fighting over the remnants of our increasingly outdated and struggling high street giants.

Anyway, the mooted loan appears to have fallen through quickly. And observers expect Arcadia to call in Deloitte as administrators within days. So what has this got to do with JD Sports?

Seeking acquisitions

JD is still a buoyant FTSE 100 company. And it’s in a more powerful position than most to notch up bargain-priced acquisitions among the strugglers. It’s been pursuing a possible acquisition at Debenhams for some time, and a deal was rumoured to be about to emerge last week. But in recent days, investors appear to have gone off that idea, pushing the JD share price down nearly 15% last week week. Why?

Well, Arcadia is Debenhams’ biggest concession-holder. Debenhams stores are home to numerous outlets for a variety of Arcadia’s brands. The Arcadia collapse that could be as little as hours away throws the outlook for Debenhams into question again. Not that there was really much clarity in the first place.

Top dog struggle

So that seems to be what’s behind the JD Sports share price hike on Monday. It’s a collective sigh of relief from investors after exclusive talks between JD and Debenhams ended with no deal. But what happens now in the struggle for superiority between these FTSE 100 and FTSE 250 competitors? The way could be open for Frasers to make a new approach for Debenhams. And there might be opportunities for investors to make some profit from whoever comes out on top.

But do you know what my feeling is right now? Confusion, mainly. One thing I am certain of is that I won’t be buying any of these shares any time soon.

JD Sports looks like a respectable FTSE 100 company with a great track record for investors. But its shares are on a P/E multiple of around 30, with tiny dividends on offer. Frasers Group’s prospective P/E is lower at 22. But there’s no dividend. And it’s driven by the sometimes mercurial Mike Ashley.

I see far less bewildering investing options out there.