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Airtel Africa 

What it does: Airtel Africa provides telecommunications and mobile money services in 14 African countries. 

By Royston Wild. Airtel Africa’s (LSE: AAF) share price has slumped in recent weeks. I’d use this as an opportunity to buy a top growth stock at a discount. 

Today the telecoms business trades on a forward price-to-earnings (P/E) ratio of 6.5 times. This is far below what, say, FTSE 100 rival Vodafone trades on (the earnings multiple here sits at 10.8 times).

City analysts think Airtel’s annual earnings will rise 12% in this financial year. They are tipped to increase 11% next year, too. 

I’d buy the business to capitalise on soaring demand for telecoms and financial services products in Africa. It is the second-largest telecoms provider on the continent, and has been growing revenues and earnings by double-digit percentages for the past 17 quarters. 

Product penetration across Airtel’s portfolio remains quite low. Meanwhile, personal wealth levels in its markets are increasing sharply. I think this perfect blend should deliver excellent long-term earnings growth at the company. 

Royston Wild does not own shares in Airtel Africa. 

Somero Enterprises

What it does: Somero Enterprises designs and sells concrete levelling equipment used by construction companies worldwide.

By Zaven Boyrazian. Somero Enterprises (LSE:SOM) is a designer and manufacturer of laser-guided concrete-laying screed machines. It’s hardly the most exciting business out there, but it plays a pivotal role in the US construction industry.

With the American congress recently passing a $1trn infrastructure investment bill, management has had little trouble finding customers for its products. So, it’s hardly surprising that the group recently hit record revenues.

Despite this, Somero shares have tumbled more than 20% over the last 12 months. It seems investors are getting increasingly agitated about supply chain disruptions, which are having a significant impact on its non-US operations.

However, while frustrating, this is ultimately a short-term problem. And seeing a solid high-growth company trading at a P/E ratio of 7.3 looks too cheap in my eyes. That’s why I’m tempted to bolster my existing position by buying more at today’s stock price.

Zaven Boyrazian owns shares in Somero Enterprises.

Chemring Group

What it does: Chemring Group designs, develops, and manufactures advanced technologies for the defence industry.

By Charlie Carman. China’s rise and the Russo-Ukrainian war have boosted demand for products developed by Chemring Group (LSE: CHG). Defence budgets are expected to increase across its four home markets: the UK, the US, Norway, and Australia.

The group’s order book reached £678m in September, covering expected full-year 2022 revenues. New contracts with NATO members for the company’s countermeasures and energetics business indicate a robust manufacturing pipeline for 2023 and beyond.

Chemring’s other main arm focused on sensors and information also looks healthy. In H1 2022, this division generated 21% revenue growth and a 27% hike in operating profit.

Granted, net debt is currently £18.5m, which could limit future growth prospects. However, a 52% reduction in this figure since H1 2021 shows a positive trajectory.

In my view, significant barriers to entry in the sector contribute to the defence stock’s long-term potential, provided it remains at the forefront of developing state-of-the-art technologies.

Charlie Carman does not own shares in Chemring Group. 

Darktrace

What it does: Darktrace is a cybersecurity company, and uses AI to develop autonomous detection of cyber threats.

By Alan Oscroft. A couple of brokers have price targets on Darktrace (LSE: DARK) of around twice the current share price. I’d never buy the stock based on that, but it’s inspired me to re-examine the company.

The shares got a little overheated last year, but then crashed after some negative reports. Over 12 months, Darktrace shares have now lost around 60% of their value.

Darktrace recently reported a 46% rise in full-year revenue, with a small net profit of $1.5m. It also confirmed 2023 guidance for a 31-34% increase in annual recurring revenue. Predicted adjusted EBITDA margin is in the 15-18% range.

The company has since reported a 29% year-on-year increase in net new customers in its first quarter, reiterating its full-year guidance.

We’re looking at a forecast P/E multiple of 130 as far out as 2024. So there’s definitely valuation risk there. But I think it could be the start of sustainable growth.

Alan Oscroft does not own Darktrace shares.

Marks and Spencer

What it does: M&S is one of the UK’s biggest retailers. It specialises in selling clothing, beauty, home products, and food products. 

By John Choong. Marks and Spencer (LSE: MKS) shares are currently trading at a P/E ratio of 7. Despite the grocery industry being known for its low margins, I think M&S could be an exception and be an excellent growth stock for the long term.

It’s no secret that Marks and Spencer’s products are priced on the higher side. Therefore, it may seem contradictive to buy its stock when consumers are ‘down trading’. However, I believe that the retailer’s target market (middle and upper class) isn’t necessarily trading down in groceries. Instead, they’re trading down in eating out, and choosing to seek value in purchasing M&S’ great-tasting packaged meals. After all, Tesco indicated this trend in consumer behaviour.

With the grocer’s latest cost-savings plan and exciting lines of clothing to be launched, I think the company’s top and bottom lines should benefit over the long term as it continues to fulfil its growth plans. As such, I think M&S shares have the potential to head higher from their current levels.

John Choong has positions in Marks and Spencer.

Safestore

What it does: Safestore is a leading supplier of self-storage services in the UK and continental Europe

By Christopher Ruane. The Safestore (LSE: SAFE) share price over the past year might not suggest a compelling growth story. The shares are down 25% in 12 months.

But I think that offers an attractive buying opportunity for me to increase my stake and would consider doing so if I had spare money to invest.

In the most recent quarter, revenue grew 15% compared to the same period last year. That is part of a pattern of long-term growth I expect to continue. Self-storage continues to see growing demand in the UK. Safestore’s well-established brand can help it benefit from that. The company is developing a pipeline of new properties equivalent to around 14% of its current floor space.

A worsening economy could lead some tenants to try and cut their costs by reducing storage space. That might hurt profits. But I am upbeat about the company’s prospects and see strong growth opportunities ahead.

Christopher Ruane owns shares in Safestore.

Rightmove

What it does: Rightmove is the UK’s most popular property portal, providing advertising services to new home developers and estate agents.

By Paul Summers: Shares in property site Rightmove (LSE: RMV) have tumbled nearly 40% in 2022 as investors have become increasingly skittish over the impact of higher interest rates on the UK housing market. I regard this as an opportunity.

At face value, a P/E ratio of 21 doesn’t seem like a bargain. However, it’s far less than the five-year average of 32. This presents as an even better deal when Rightmove’s massive market share, healthy financial position, and staggeringly high margins are taken into account. 

A recovery won’t happen overnight and things could easily get worse for the stock depending on what the Bank of England decides to do about rates in early November. But it does feel like a lot of fear is already priced in.

And let’s not forget that Rightmove makes money even if the properties it lists fail to attract buyers or renters.

Paul Summers has no position in Rightmove.

Rightmove

What it does: Rightmove makes money by listing estate agents on its website and selling additional advertising products.

By Stephen Wright. My Best British growth stock to buy in November is Rightmove (LSE:RMV). I think that now could be a terrific time to add to my investment in this stock.

Right now, the UK property market is under pressure. Rising interest rates have been making mortgages more expensive and slowing down the demand for housing. 

As a result, shares in Rightmove have fallen by around 37% since the start of the year. But I’m seeing this as an opportunity. 

The company has a dominant position in an industry that typically has high margins and it generates significant amounts of cash. There might be some turbulence in the near future, but I think that the business will do well as the economy recovers.

Furthermore, the company has been buying back its own stock over the last few months. To me, this indicates that management also sees the stock as undervalued.

Stephen Wright owns shares in Rightmove.

Diageo

What it does: Diageo is a global leader in alcoholic beverages with products sold in more than 180 countries.

By Ben McPoland. Diageo (LSE: DGE) has been firing on all cylinders for many years. The British drinks giant has a portfolio of over 200 brands, including Guinness, Johnnie Walker and Baileys.

The share price is down this year, though, with the looming possibility of a global recession. Consumers, however, don’t tend to give up their favourite tipple, even during economic downturns. They are unlikely to switch from something like Johnnie Walker (the world’s most popular Scotch whisky) to a cheaper alternative. People basically put these drinks into the “affordable luxury” category.

This consumer loyalty to Diageo’s brands gives it a powerful competitive edge. And, due to its wide global presence, the company stands to benefit as disposable incomes rise in regions like Asia and Latin America.

The shares trade at a P/E ratio of 24, which isn’t particularly cheap. But I think the premium price is warranted for Diageo.

Ben McPoland owns shares of Diageo. 

That pain could come in November.

Howdens Joinery

One FTSE stock that could have a difficult month is kitchen supplier Howdens Joinery (LSE: HWDN).

Now, I’m actually a fan of this company. It’s a big player in its market and has a history of generating above-average returns on the money it puts to work.

Unfortunately, it’s easy to overlook these qualities in the current climate. With inflation running high and a housing market now treading water, demand must surely have softened over the summer. We’ll find out when it reports on recent trading on 3 November.

The question is, how much of this is already priced in? Well, the near-halving of Howden’s share price in 2022 would suggest quite a bit. Interestingly, there also seems little interest from short sellers as things stand. This suggests that expectations might actually match reality. If so, there’s no guarantee that we will see another drop next month.

That said, I’m prepared to wait for the numbers before deciding whether to strike.

Marks and Spencer

Interim results from Marks and Spencer (LSE: MKS) will be published on 9 November. Like Howdens, its stock has tanked in value year-to-date.

I can’t say I’m surprised. Having almost overcome the challenge of shaking its tired image, the tightening of purse strings is another hurdle for the business. News that inflation returned to double-digits in September is hardly an encouraging development. A recent update from Ocado (its joint venture partner in the UK), and the reaction to it, don’t bode well either.

On the flip side, the shares look cheap, changing hands at a price-to-earnings (P/E) ratio of a little less than seven. One might also argue that M&S stands to benefit from fewer people eating out but perhaps spending a little more on eating in. And, no, I don’t believe every M&S shopper has suddenly migrated to shopping at a German discounter for their groceries.

Even so, I can’t see a catalyst for a recovery to begin in November. For this reason, I’m happy to watch from the sidelines.

AO World

Down 57%, as I type, electrical goods seller AO World (LSE: AO) has been another big casualty in 2022.

With interim results out on 22 November, I just can’t see how management has been able to turn this still-not-consistently-profitable business around. Like M&S, AO operates in a hyper-competitive environment. And while white goods and gadgets need to be replaced from time to time, many people will avoid doing so in a recessionary environment unless completely necessary.

It seems I’m not alone in being bearish. Broker Canaccord Genuity currently has a ‘sell’ rating on the stock with a target price of just 31p. It’s currently 45p.

Management is clearly trying. The decision to leave the German market and concentrate on the UK, while overdue, does make a lot of sense.

Even so, I still can’t see the attraction of me investing here. They don’t make bargepoles long enough.

Marks and Spencer shares its concerns

It’s no secret that shares in the grocery industry have been performing poorly. This has been exacerbated by the current cost-of-living crisis. So today, CEO Stuart Manchin set out the company’s ‘Reshaping for Growth’ plans.

On the call, Manchin mentioned a shift in consumer behaviour, to seek out more value. This can be seen in the grocery market share data, which has seen discount grocers like Aldi and Lidl increase their market share.

Nonetheless, it’s important to note that M&S’ market share has remained robust at 3.6% throughout the year. This is rather impressive, in my opinion, given the down trading by most consumers during this inflationary period.

The strong performance thus far is most likely due to the Veblen effect. This is a phenomenon that occurs when consumers perceive higher-priced items as being of better quality. M&S’ brand is associated with premium offerings and good value, which has been a valuable selling point.

Tesco‘s latest H1 results offer some insight on this effect as well. CEO Ken Murphy mentioned that consumers have been opting to purchase more of its Tesco Finest items, as people seek better value. Murphy attributed this to changing consumer behaviour as people opt to invite guests over, rather than dine out, given the current inflationary environment. As a result, Tesco has increased its line of premium products by 13%.

Unfashionable outlook

Food aside, M&S has also seen its fashion arm performing well. The division saw healthy volume growth in clothing and home products over the summer. As such, M&S will be doubling down on its kids clothing lines, with plans to launch sportswear in early 2023. Nevertheless, the outlook for clothing is underwhelming.

Latest figures from the BDO’s High Street Sales Tracker showed that September’s retail sales grew at the slowest pace since the pandemic. Fashion sales were only up by a measly 6.7% on an annualised basis (Y/Y). While this may seem like a decent figure, retailers should be expecting a higher figure as this is a period when shoppers usually spend on their autumn and winter wardrobes. Not to mention, increased pressure on its clothing costs from a stronger dollar are expected to trim margins.

That being said, a weaker pound should help encourage more spending from tourists during the Christmas period. This is expected in major cities, where I’m expecting the firm to benefit, given its large portfolio of convenience stores in metropolitan areas, as well as its plans to open more food stores. After all, Tesco reported that its convenience stores experienced a surprising uptick in sales and footfall, growing 6.5% (Y/Y).

Igniting Sparks

What’s really pleased me as an investor is that Marks and Spencer continues to grow its loyalty programme, Sparks. Since being revamped, Sparks has seen an increase in adoption. As a matter of fact, it’s grown its user base from 6m members to 16m in less than two years.

This paves the path for M&S to continue growing its business and market shares in food and fashion. Because of the success of Sparks, the board expects to grow its food market share by approximately 1% in the medium term, while bringing in a healthy 4% margin. The same is also expected for market share gains in clothing, with a 10% margin.

M&S gets to the Gist

Moreover, the retailer has plans to continue modernising its food supply chain when it acquired logistics company, Gist. The acquisition is forecasted to save M&S £50m. This stems from the removal of management fees, better networks, and increased productivity.

Furthermore, the company has other cost savings strategies in place. These include further investments into more energy-efficient refrigeration and lighting, increased automation, and fewer layers of management. Therefore, with lofty ambitions and an effective cost savings plan, I believe Marks and Spencer shares are prime to deliver value to the company’s shareholders.

Remarksable value?

So, will I buy Marks and Spencer shares for my portfolio then? Well, its balance sheet isn’t in the best state as it’s still recovering. Plus, the most recent couple of quarters haven’t presented the best environment for the company to grow. This in itself presents a couple of concerns. The first is energy prices eating into the bottom line. The second is the underperformance of its joint venture with Ocado; the online supermarket reported a less than ideal set of results last month. For that reason, Deutsche Bank lowered its price target for M&S stock to £1.45 from £1.55, despite retaining its ‘hold’ rating.

On the flip side, the long-term outlook remains bright, provided that management can meet it. Let’s not forget the number of times M&S has had to revise its growth plans over the years. The company expects its operating profit to double by 2028 and to continue growing its business locally and internationally through providing the best omni-channel experience for customers. It’s definitely a long way to go, but just take one look at its refurbished stores and it’s not difficult to understand why there’s certainly potential.

Currently, the stock has an average analyst rating of ‘hold’, and an average price target of £1.43. This would present a 50% upside to its current share price. The short-term outlook may be volatile as the company faces tremendous cost headwinds , but the long-term potential is one that I can’t pass up on. This is especially the case with a price-to-earnings (P/E) ratio as low as six. This is why I’ll be adding to my current position through pound-cost averaging.

Overdone inflation concerns

I think one reason why the share price has fallen in recent months is concern around inflation. As a business that sells to the retail consumer, it’s very sensitive to price rises. This will be felt not only in the food division, but also in the clothing and home space.

However, I think that the business will be able to ride out this wave better than people might expect. For example, in the full-year results it highlighted that 82% of sales in clothing and home were made at full price.

The business might lose some customers to cheaper competitors in the coming year, but I think the above statistic helps to show that price might not be the biggest thing that Marks and Spencer shoppers think about. I think the share price doesn’t reflect this optimism given the recent sell-off.

Using traditional valuations

Another reason why I think Marks and Spencer shares look good value is the traditional price-to-earnings metric. The business recorded a profit before tax of £391.4m for the year ended in 2022. Given the corresponding earning per share and the last closing share price of 126p from yesterday, it means the P/E ratio sits at 5.84.

Anything below 10 is a number where I start to think that the business is undervalued. Of course, I do need to be careful that a very low number might just be the result of nobody wanting to buy the shares! But for Marks and Spencer, the latest financials were up significantly from the previous year. With the earnings component strong, it leads me to conclude that it’s the low share price that’s contributing to the low P/E ratio.

A bright outlook for Marks and Spencer shares

Finally, I think the long-term outlook for the company is better than is currently being priced in. The business isn’t a dinosaur and is transforming at pace. For example, it’s closing several stores that aren’t in line with its strategy and aiming for new store openings have payback periods of around 1.5 years.

The joint venture in India, along with strong demand in the Middle East, highlight to me that the firm is focused on growing into international markets sustainably.

As a long-term investor, this ticks the boxes for me of a potentially undervalued stock right now. In the short term, I acknowledge that the share price could fall further. It’s in a downward spiral that could continue, especially if bearish investor sentiment is maintained. Yet this doesn’t overly concern me, as I’m happy at the current price to dip my toe in the water. On that basis, I’m considering buying the stock now.

Marks and Spencer: a contrarian buy?

Marks and Spencer Group (LSE: MKS) has been a turnaround stock for as long as I can remember. But there are signs of improvement. Sales during the 12 months to April were 7% higher than the year before the pandemic. Profits were nearly 30% higher.

Management has updated the M&S store network and reduced the level of discounting. Online sales have risen as the company’s internet offering has improved significantly.

However, management turnover is a potential concern for me. Chief executive Steve Rowe left earlier this year, while finance boss Eoin Tonge announced his departure last week. Pressure on consumer spending is also a risk.

In my view, the best that investors can hope for is slow, steady progress. I think that’s why M&S shares have fallen by nearly 40% so far this year.

But fortunately for new buyers, the shares now trade on a modest eight times earnings, with a forecast dividend yield of 4.6%.

M&S isn’t the first income stock I’d buy today, but I do think the shares look reasonably priced and could deliver attractive returns.

Greggs: cheap eats are still popular

Sales at bakery chain Greggs (LSE: GRG) rose by 16% in the 10 weeks to 14 May compared to the same period last year. It seems consumers still want its cheap, tasty snacks.

The Newcastle-based business said that sales in larger city centres and office locations are still lagging behind. But it added that sales in transport locations are rising fast. Greggs is confident enough to have opened 49 new shops since the start of 2022, closing only six.

However, despite its strong performance so far, management has cited rising costs as a concern. The company also expects consumer spending to come under greater pressure during the second half of the year.

I reckon that Greggs’ products are the kind of cheap treats people will continue buying. But with the shares trading on 16 times earnings and offering a yield of only 3.3%, I think the shares are probably priced high enough for now.

Halfords: is this 5% yield safe?

Cycle and motoring retailer Halfords (LSE: HFD) triggered a price slide in June when management warned of slowing cycling sales and said profits would fall this year.

According to chief executive Graham Stapleton, pre-tax profit could drop by around 20% to £65m-£75m this year. That’s a sharp reversal from the bumper performance seen over the last couple of years, when Halfords benefited from the pandemic boom in cycling and staycations.

Broker forecasts suggest a dividend of 9p per share this year. This would give a dividend yield of 5.3% and should be covered three times by earnings, giving a decent margin of safety.

The main risk I can see is that the UK will suffer a deeper recession than expected. But on balance, I think Halfords could be a decent buy at current levels.

Buying shares when they’re undervalued can often produce excellent returns in the long run. With that in mind, is now the time to buy Marks and Spencer shares for my portfolio? Let’s take a look.

Solid full-year results

The retail giant’s full-year results for the 52 weeks ended 2 April, were pretty solid. For the year, revenue hit £10.9bn, up 7% on the same period two years ago (last year’s figures were less meaningful, due to Covid distortions). Meanwhile, adjusted earnings per share came in at 21.7p versus 16.7p two years earlier, representing growth of an excellent 30%.

Cash flow was up significantly as well and this allowed the group to pay down its debt pile significantly over the period. Overall, it was a good performance, in my view.

Cost-of-living crisis

Looking ahead however, I have some concerns about M&S. My main concern is in relation to the cost-of-living crisis in the UK and the impact on consumer spending. Recently, market research firm Kantar said that over 20% of British households admit that they are “struggling” to make ends meet. Meanwhile, Lloyds Bank just came out and said that most of its customers have less than £500 in their accounts.

And things could get worse. “Somewhere between I think the autumn/October period and January, we’ll start to see it bite,” said M&S CEO Steve Rowe after the company’s full-year results.

I think this could have some major implications for the company in the year ahead. My gut feeling is that, with so many consumers strapped for cash right now, discount supermarkets such as Lidl and Aldi are going to attract a lot of customers over the next year at the expense of the higher-priced chains like M&S. This could reduce the company’s market share and hit its profits. Against this backdrop, it could be hard for Marks and Spencer’s share price to rise.

Lower earnings

Another thing that could put pressure on the share price is the fact that City analysts are currently lowering their earnings per share (EPS) estimates for this financial year. The last time I covered M&S, in mid-May, analysts were expecting EPS of 18.1p. Now however, they’re expecting 17.1p (a decline of over 20% from last year). These kinds of negative earnings revisions tend to hamper share price growth.

An additional concern for me is the company’s debt pile. While M&S has paid down debt recently, it still stands at £2.7bn as of 2 April. With interest rates rising, the group’s interest payments are likely to increase. This could also have a negative impact on profitability.

Should I buy M&S shares now?

Given these issues, I’m going to leave Marks and Spencer shares on my watchlist for now. All things considered, I think there are better stocks to buy in the current environment.

Marks and Spencer

Marks and Spencer (LSE: MKS) is a major British multinational retailer that sells clothing and beauty, home, and food products. This week, three director dealings were carried out. A large number of shares were received in lieu of a cash dividend, but a portion was sold to cover tax and national insurance obligations.

• Name: Stuart Machin
• Position of director: Chief Executive Officer
• Nature of transaction: Free shares
• Date of transaction: 22 June 2022
• Amount received: 203,120 @ nil
• Total value: N/A

• Name: Stuart Machin
• Position of director: Chief Executive Officer
• Nature of transaction: Sales of shares to cover tax and national insurance liabilities
• Date of transaction: 22 June 2022
• Amount sold: 99,121 @ £1.37
• Total value: £135,805.68

• Name: Sacha Berendji
• Position of director: Property, Store Development, and IT Director
• Nature of transaction: Free shares
• Date of transaction: 22 June 2022
• Amount received: 138,115 @ nil
• Total value: N/A

• Name: Sacha Berendji
• Position of director: Property, Store Development, and IT Director
• Nature of transaction: Sales of shares to cover tax and national insurance liabilities
• Date of transaction: 22 June 2022
• Amount sold: 67,399 @ £1.37
• Total value: £92,343.37

• Name: Paul Friston
• Position of director: International Director
• Nature of transaction: Free shares
• Date of transaction: 22 June 2022
• Amount received: 131,691 @ nil
• Total value: N/A

• Name: Paul Friston
• Position of director: International Director
• Nature of transaction: Sales of shares to cover tax and national insurance liabilities
• Date of transaction: 22 June 2022
• Amount sold: 62,264 @ £1.37
• Total value: £88,048.11

Cranswick

Cranswick (LSE: CWK) is a leading UK food producer and supplier of fresh and premium food products. It’s most famous for its meat products. Four directors opted to exercise their share options this week. However, they then proceeded to sell portions.

• Name: Mark Bottomley
• Position of director: Chief Financial Officer
• Nature of transaction: Free shares
• Date of transaction: 27 June 2022
• Amount received: 31,800 @ nil
• Total value: N/A

• Name: Mark Bottomley
• Position of director: Chief Financial Officer
• Nature of transaction: Sale of shares
• Date of transaction: 27 June 2022
• Amount sold: 16,379 @ £30.82
• Total value: £504,768.02

• Name: Adam Couch
• Position of director: Chief Executive Officer
• Nature of transaction: Free shares
• Date of transaction: 27 June 2022
• Amount received: 48,100 @ nil
• Total value: N/A

• Name: Adam Couch
• Position of director: Chief Executive Officer
• Nature of transaction: Sale of shares
• Date of transaction: 27 June 2022
• Amount sold: 24,775 @ £30.82
• Total value: £763,515.95

• Name: Jim Brisby
• Position of director: Chief Commercial Officer
• Nature of transaction: Free shares
• Date of transaction: 27 June 2022
• Amount received: 31,800 @ nil
• Total value: N/A

• Name: Jim Brisby
• Position of director: Chief Commercial Officer
• Nature of transaction: Sale of shares
• Date of transaction: 27 June 2022
• Amount sold: 16,379 @ £30.82
• Total value: £504,768.02

• Name: Chris Aldersley
• Position of director: Chief Operating Officer
• Nature of transaction: Free shares
• Date of transaction: 27 June 2022
• Amount received: 26,300 @ nil
• Total value: N/A

• Name: Chris Aldersley
• Position of director: Chief Operating Officer
• Nature of transaction: Sale of shares
• Date of transaction: 27 June 2022
• Amount sold: 13,546 @ £30.82
• Total value: £417,460.628

HomeServe

HomeServe (LSE: HSV) offers low-cost home warranty and home repair options. It markets itself as the solution to expensive and inconvenient emergency home repairs. Three massive director dealings happened earlier in the week, as shares were awarded to these directors based on performance conditions.

• Name: David Bower
• Position of director: Director
• Nature of transaction: Free shares
• Date of transaction: 27 June 2022
• Amount received: 21,119 @ nil
• Total value: N/A

• Name: David Bower
• Position of director: Director
• Nature of transaction: Free shares
• Date of transaction: 27 June 2022
• Amount received: 10,190 @ £11.69
• Total value: £119,121.10

• Name: Tom Rusin
• Position of director: Director
• Nature of transaction: Free shares
• Date of transaction: 27 June 2022
• Amount received: 30,619 @ nil
• Total value: N/A

• Name: Tom Rusin
• Position of director: Director
• Nature of transaction: Free shares
• Date of transaction: 27 June 2022
• Amount received: 11,815 @ £11.69
• Total value: £138,117.35

• Name: Richard Harpin
• Position of director: Director
• Nature of transaction: Free shares
• Date of transaction: 27 June 2022
• Amount received: 34,911 @ nil
• Total value: N/A

Types of shares in a SIP

To provide context, there are a few types of shares within a company’s share incentive plan (SIP). A SIP is an employee plan for companies within the UK to flexibly award equity to employees. Publicly listed companies normally exercise this option because it’s tax-efficient for both the employer and its employees.

In this instance, all the director dealings above occurred with free shares. These shares were acquired by directors under their companies’ share plans. These were either a restricted share plan (Marks and Spencer), or incentive plans (Cranswick and HomeServe).

Share award schemes give employees actual shares rather than share options. The value of shares given to directors here is treated as employment income. This means that it may be subject to tax and national insurance contributions. That is unless the directors opt for an HMRC-approved share scheme, which has its own rules and requirements. Incentive plans give directors shares when they hit certain performance targets. For HomeServe directors, the awards were subject to the company’s earnings per share.

Hungry for more

After years of declining profit margins, Marks and Spencer launched its latest turnaround programme in 2020 under the Never the Same Again name. This bid to improve the brand’s image and business operations looks like it might be working. The FTSE 250 firm has posted an excellent recovery since, with improvements in customer perception of the M&S brand. As a result, M&S Food sales grew 10.8% year-on-year, while expanding its market share from 3.4% to 3.6% over a three-year period. This was also helped in part by its key partnerships with Coca-Cola‘s Costa Coffee and Ocado.

Additionally, the firm saw its operating margins improve in the second half of its financial year. Even so, I was impressed that the board is aiming to further improve its food supply chain through boosting efficiency and cutting costs. Thus, I expect its food prices to become more affordable, allowing it to expand its market share.

Getting the right fit

Marks and Spencer isn’t just its food business, however. One of the main reasons behind its poor past performance can be attributed to the company’s inability to keep up with the times, as far as its struggling clothing offer was concerned.

That being said, the Never the Same Again programme gave a breath of fresh air to the retailer’s clothing segment. Consequently, the division saw its sales figure jump 51.6% on the year and 3.8% against three years ago.

There’s also the positive effect of M&S’s investments in digital. With heavy competition from e-commerce giants and more nimble omnichannel retailers, Marks and Spencer was always going to struggle. However, enhanced investment has made its e-sales more market competitive. In fact, market penetration has almost doubled to 34%. This has been helped by around its 40 clothing brand partnerships. Moreover, the acquisition of Jaeger and The Sports Edit have added even more depth and variety to its offer.

A summer with Marks and Spencer

Since 2018, Marks and Spencer has reduced its debt levels by 12%. What impressed me most though, is its cash position, which has grown by a whopping 455%! Furthermore, profit margins are back to a healthier level of 2.8%, with free cash flow at £1.1bn.

Nevertheless, my concerns of a potential recession impacting sales are shared by the board. Having said that, CEO Stuart Machin stated that its market positioning and business strategy will help mitigate any slowdown. He believes that the company has a strong brand image to help it maintain its market share. He also expects strong tailwinds from travel, leisure, and weddings to keep its sales numbers strong.

Marks and Spencer shares have a price-to-earnings (P/E) ratio of 9. While it’s not seen as a traditional growth stock, it does have an average price target of £1.93. This gives it the potential to rebound by 43% over a one-year period. Therefore, I’ll be capitalising on its low share price and will buy some stock for my portfolio in July.

Is it worth buying for my portfolio given that it has slumped more than 40% since January? Let’s take a look.

Marks and Spencer shares look cheap

After the recent share price fall, Marks and Spencer shares certainly look cheap. For the year ending 3 April 2023 (FY2023), City analysts expect the group to generate earnings per share of 18.1p. That gives the stock a forward-looking price-to-earnings (P/E) ratio of just eight. To put that number in perspective, the median forward-looking P/E ratio across the UK’s FTSE 100 index is about 14.2. So, there could be some value on offer here.

Meanwhile, we could see a return of dividend payments in the near future. MKS cancelled its dividend during Covid and last financial year paid no distribution to shareholders at all. It advised in its last half-year results that it was unlikely to pay a dividend for FY2022. However, analysts have pencilled in a dividend payment of 7.4p for FY2023. I’ll stress that this is just an estimate and there’s no guarantee the group will pay this. Yet if it did, that would represent a yield of around 5.2% at the current share price.

What are the risks?

Of course, just because a stock is cheap and pays a dividend, doesn’t necessarily make it a ‘buy’. I also need to look at the risks and balance them with the potential rewards on offer. And I see a few risks here at the moment.

The most obvious risk is inflation and its potential impact on consumer spending. Right now, a lot of Britons are struggling to pay their household bills due to high energy and food costs. As a result, they’re watching every penny.

This could potentially hurt Marks and Spencer, which has a higher-priced supermarket as a key part of its offer. It’s worth noting that recent data from Nielsen shows German-owned value chains Aldi and Lidl have been the best performing supermarkets recently, with sales growth of 6.4% and 9.1% respectively for the four weeks to 23 April.

A second major risk here is the company’s debt pile. At 2 October 2021, the group had net debt of £3.15bn on its books. The issue here is that UK interest rates are rising rapidly. So, this debt is going to become more expensive to service. Higher interest payments are likely to eat into profits.

Another issue for me personally is that profitability is very low. Over the last five years, return on capital employed (ROCE) has averaged just 3%. Companies that have low returns on capital often turn out to be poor investments because they don’t grow much over the long term.

MKS shares: my move now

Weighing up risk and reward here, I’m going to leave Marks and Spencer on my watchlist for now. The stock does look cheap. However, I’m convinced that there are better shares to buy today.

Retail giant

Marks & Spencer, best known as just M&S, is a high street retail chain with roots stretching back over 120 years. It primarily sells clothing and food in its 400 stores in the UK, 150 overseas, and its online store too.

So what’s the current state of play with the M&S share price? Well, as I write, the shares are trading for 136p. At this time last year, the shares were trading for 152p, which is a 10% drop over a 12-month period. More recently, the shares have dropped from 238p since the beginning of January to current levels, a decline of 42%.

I believe M&S shares have been on a downward slump recently due to macroeconomic headwinds. Soaring inflation, the rising cost of raw materials, and the global supply chain crisis has put many businesses under pressure. The stock market correction in March, caused by geopolitical tensions, did not help the retailer either. So is now a buying opportunity or should I steer clear of M&S?

For and against buying M&S shares

FOR: Although no business is “too big to fall,” M&S’ history, profile, and record do boost my investment case. It has continued to operate and perform consistently through two world wars and numerous recessions. The current headwinds could be temporary and M&S has a history of navigating stormy waters and emerging on the other side.

AGAINST: Current macroeconomic headwinds, especially rising inflation and higher costs of raw materials are a real worry for me. Is this a temporary issue or are these new costs the new normal? Either way, profit margins will be squeezed, having a material impact on any returns I hope to make.

FOR: M&S shares look good value for money right now too on a price-to-earnings ratio of just seven. This is much lower than the FTSE 100 average of 15. What will help performance and growth is the fact it owns 50% of online grocer Ocado, which has experienced major growth in recent years. This growth is forecasted to continue too.

AGAINST: Rising interest rates is bad news for M&S shares. It has close to £3bn of debt on its balance sheet. I’m usually put off by lots of debt on a balance sheet and in the current macroeconomic climate, this could affect performance and the returns of a potential investor.

What I’m doing now

Right now, I will not add Marks & Spencer shares to my holdings. The negatives are outweighing the positives for me. Macroeconomic headwinds are having a real impact on its investment viability in my view.

I will keep a keen eye on developments, however, specifically M&S’ next trading update, which is expected at the end of May. This could shed more light on the investment viability of the shares moving forward and could tempt me to reconsider my position.