Marks & Spencer shares are poised to continue rising – so we will keep on buying

An improvement in consumer sentiment means shoppers are likely to become less price-conscious, which should benefit M&S and its focus on product quality

Marks & Spencer’s shares have risen by 62pc since first being tipped by this column in May 2021. They have outperformed the FTSE 100 index, of which they are now a member, by 52 percentage points.

While this is undoubtedly an impressive performance, Questor should in fact have sold the retailer’s shares after just eight months. After all, they were showing a paper profit of 68pc by January 2022 and slumped thereafter amid a stock market rout.

Having sold them, we should have waited for them to fall before buying them back in October of that year. This proved to be their lowest point since our original tip, having declined by 63pc since their January 2022 high. If this course of action had been taken, we would now have a paper profit of 163pc to add to the aforementioned “banked” profit of 68pc.

Of course, timing the market in such a fashion is only possible with the benefit of hindsight. No investor can accurately predict short-term share price movements on a consistent basis, with attempts to do so likely to lead to significant frustration rather than exceptional capital gains.

Therefore, in Questor’s view, a more pragmatic approach that seeks to purchase high-quality companies at fair prices and hold them for the long run is likely to be far more successful. In Marks & Spencer’s case, the company’s shares continue to offer excellent value for money despite their substantial rise. They trade on a forward price-to-earnings ratio of just 11, which suggests they still offer a wide margin of safety. While a discounted valuation may previously have been merited as rampant inflation prompted a rapid rise in interest rates, the operating outlook for Uk-focused retailers is becoming increasingly upbeat.

Falling inflation should prompt interest rate cuts and an improving economic outlook, as well as growing consumer confidence. Sentiment among consumers has been relatively stagnant of late but with wage growth now consistently ahead of inflation, mortgage rates poised to fall and the unemployment rate remaining at or below a historically low level of 4.2pc over the past six months, shoppers are likely to start feeling much more optimistic. This should convince them to spend more on essentials and also purchase a larger amount of non-essential items.

This will benefit the broader retail sector, but will particularly boost Marks & Spencer’s financial prospects owing to the company’s focus on product quality rather than a budget offering. Improving consumer sentiment means shoppers are likely to become less price-conscious, which should equate to a reversal of their previous drift towards no-frills, bargain-basement operators amid a cost of living crisis. Of course, the company’s sales performance has already improved. Over Christmas, for instance, like-for-like sales rose by 8.1pc in the UK. This followed a 10.8pc rise in sales and a 62.8pc increase in earnings in the first half of the 2024 financial year. And with cost savings expected to be generated alongside an ongoing modernisation of its supply chain, the grocer is becoming increasingly competitive.

Although a first-half dividend payment of 1p per share, which equates to a yield of just 0.4pc, is immaterial in an income sense, the company’s first interim shareholder payout in four years highlights growing confidence in the future among its management team.

Recent news that its co-chief executive will stand down, meanwhile, does not pose a significant risk to the long-term prospects of the business. Similarly, a disagreement with Ocado, which has an online grocery joint venture with Marks & Spencer, appears to be fully priced into the latter’s market valuation. And with net debt declining by 13pc in the first half of the year, Marks & Spencer has an increasingly sound financial position that means it is well placed to invest for long-term growth.

Indeed, the company continues to offer significant investment appeal. It is still a high-quality business that trades at an attractive price. Whether its shares will rise or fall in the short run largely depends on factors that cannot be accurately forecast. But with an improving long-term outlook that is poised to further catalyse its capital returns, selling up in the hope of subsequently buying back in at a lower price is best avoided. Instead, investors should simply keep buying.

Questor says: buy

Ticker: MKS

Share price at close: 247p

‘With wage growth now consistently ahead of inflation, shoppers are likely to start feeling much more optimistic’