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This stock has been a disaster, but now is not the time to sell

Currys - Hollie Adams/© 2020 Bloomberg Finance LP
Currys - Hollie Adams/© 2020 Bloomberg Finance LP

While annual inflation stood at over five times the Bank of England’s 2pc target for the fifth consecutive month in January, it is widely expected to decline rapidly. The Old Lady of Threadneedle Street, for instance, anticipates that annual inflation will fall from 10.1pc to just 3pc by the first quarter of next year.

It then expects the pace of annual price rises to drop to 1pc in early 2025 and stand at only 0.4pc by the first quarter of 2026.

Clearly, forecasts can sometimes be wholeheartedly wrong. Indeed, the Bank of England’s previous estimates have been somewhat hit-and-miss.

In Questor’s view, though, a slowing UK economy amid fast-paced rises in interest rates is highly likely to prompt a sizeable drop in the annual rate of inflation over the course of the current calendar year.

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This could aid the performance of technology products and services retailer Currys.

It has proved to be a disaster since being added to our Wealth Preserver portfolio in June 2021. Since then, its share price has fallen by 39pc versus a 11pc drop for the FTSE 250 index as investors have given cyclical companies, especially retailers, an ultra-wide berth.

This stance has been wholly unsurprising given the pressure placed on household budgets by rising interest rates and high inflation. They have combined to prompt the lowest consumer confidence readings on record over the past six months, with a challenging economic outlook that is expected to end in recession this year, according to the IMF, further solidifying weak investor sentiment since our notional purchase.

Even though the near-term prospects for Currys remain extremely tough, now is not the right time to sell up and invest elsewhere.

A falling annual inflation rate is set to ease pressure on household budgets and, when combined with weak economic growth, would almost certainly prompt an about-turn in the Bank of England’s hawkish monetary policy stance.

Interest rates would be unlikely to further rise, and could even fall modestly, thereby providing support to the economy and a more upbeat outlook for cyclical companies.

Already, investors seem to be factoring in a more upbeat, or at least less downbeat, outlook for the UK economy. Currys’ share price has surged 38pc higher since the start of the year amid strong gains for the wider retail sector. Its latest trading update, released last month, showed it is on track to meet financial guidance for the full year in spite of tough operating conditions.

Indeed, disappointing international sales, which account for 46pc of revenue, were the main cause for concern. Weak demand across Nordic territories led to an oversupply of goods that caused severe discounting across the sector. In response, the company has sought to reduce costs in an attempt to improve margins.

Its performance in the UK and Ireland, meanwhile, was better than expected and offset a weak international showing as demand for domestic appliances and mobile phones remained robust. Further details on its recent performance will be included in a full-year trading update that is due to be released towards the end of April.

The company’s net debt level increased modestly during the first half of the current financial year. Including lease liabilities, it amounted to 73pc of net assets at the end of October 2022. With net finance costs covered just 2.3 times by operating profit in its most recent financial year, this column would consider a substantial increase in leverage to be a risky move given that interest rates are unlikely to return to their historical lows over the coming years.

Trading on a price-to-earnings ratio of around 6.5, Currys still offers a margin of safety despite its recent surge. Its shares have the potential to continue their recent recovery, albeit at a slower pace than has been achieved over recent weeks, due to its dominant market position and the efficiency measures it is seeking to implement.

Ultimately, the company’s financial performance and share price prospects are closely tied to the future of the UK, and European, economies. Given that they are in the midst of a period of significant change that has brought difficult trading conditions, this column will hold on to Currys given our upbeat assessment for its operating environment as inflationary pressures gradually ease.

Questor says: hold
Ticker: CURY
Share price at close: 77.30p


Read the latest Questor column on telegraph.co.uk every Sunday, Tuesday, Wednesday, Thursday and Friday from 6am.

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