Are FTSE fashion stocks my gateway to riches?

The UK’s top fashion stocks have underperformed the FTSE 350 by 22% over the past three years, according to eToro Global Markets Strategist Ben Laidler. But given the outperformance of several fashion stocks this year, it may be time to buy them now.

A mixed basket

The FTSE is home to an array of fashion stocks. Although several names have underperformed the main index with some eye-watering declines (like ASOS at -95%), there have also been a number of winners. For instance, JD Sports (+100%) and Frasers (+68%) have performed strongly.

High street retailers like JD and Frasers suffered during the pandemic while online giants like ASOS and boohoo saw their share prices boom. Nonetheless, the tide has turned as FTSE companies with a more prominent high street presence have recovered from their lows.

Meanwhile, e-commerce firms have been on the losing end since lockdowns were lifted, not helped by a raging cost-of-living crisis. According to a recent ONS survey, 68% of Brits are spending less on non-essentials in response to high inflation, with 49% becoming more price conscious.

Fashionable return

That said, strong momentum in the industry may push the underperformers up from their bottoms. In fact, a basket containing 10 of the top fashion stocks are up 10% against the FTSE 350 this year. As such, those who bought those stocks earlier this year are up comfortably on their positions.

^{Data source: eToro}

Laidler says, “We are seeing early signs of a share price recovery in 2023, with sentiment starting to improve as inflation in the UK reaches a peak”. Thus, provided inflation continues to decline, cost-of-living pressures should begin to ease and leave households with more disposable income.

And with demand for travel, weddings, and other social events staying robust, further growth in the share prices of a number of FTSE fashion stocks may be in store. After all, Marks and Spencer reported superb growth in its clothing segment thanks to strong demand for event-related clothing.

Should I buy FTSE fashion stocks?

Given the huge disparity between several FTSE names, it still very much remains a stock picker’s market. Potential investors still need to remain cautious of “online retail hangover, weak profitability, and cost-of-living headwinds”, according to Laidler.

Therefore, those who are interested in getting in on the fashion hype may want to assess several factors before potentially investing in FTSE fashion stocks:

• Is the company profitable? Is inflation going to affect its bottom line and dampen shareholder value?
• How affluent is its customer base? Are they more resilient to inflation than others to grow sales volumes and revenue?
• Are the shares overvalued? Do their P/E and P/S ratios justify future earnings or lack thereof?

So, having assessed the top 10 fashion stocks using my checklist, I can safely say that Marks and Spencer shares are my favourite.

The group just posted a blowout set of earnings and has seen its share price sky-rocket by 100% from its October lows. Pair the above with its more affluent customers, improving financials, enhanced products, and cheap multiples, and I see M&S as one of the biggest beneficiaries from the fashion boom.