Next (LSE: NXT) is a share I’m desperate to avoid in 2020. You might think I’m mad given that it appears to be one of the hottest momentum stocks on the FTSE 100, its share price exploding 80% since the turn of last January.
I actually used to own shares in the clothing and home décor retailer but sold out several years back. I was worried about the rising competition to its flagship Next Directory online and catalogue division as other mid-tier clothing retailers got their act together and invested heavily in their own e-commerce operations. Moreover, the threat of the newer kids on the block like ASOS and Boohoo gave me extra to worry about.
And I have remained bearish ever since, my pessimistic take on Next and its profits profile being justified by the subsequent deterioration in consumer confidence following the Brexit referendum of summer 2016.
Reasons to be cheerful
I have to take my hat off to Next though. It’s performed much more resiliently than I had been expecting, despite this challenging climate. Indeed, in its most recent update it said that sales of full-price items were up 2% in the three months to October, a solid showing when wider retail sales continue to slump, and better than the retailer itself had been expecting just a few weeks earlier.
What’s more, City analysts expect the retail giant to keep making progress, despite the tough outlook for the medium term. Predicted earnings rises of 6% and 4% have been made for the fiscal years to January 2020 and 2021. And this leads to expectations that dividends will keep rising after Next’s progressive payout policy was resurrected in fiscal 2019.
Last year’s 165p per share reward is anticipated to rise to 172p in the present period and again to 177.6p in the following year. Yields subsequently sit at a solid-if-not-exactly-spectacular 2.4% and 2.5% respectively.
Too much risk
So Next has been resilient in 2019, but has its performance merited the sort of share price burst that we have seen? Not in my book.
The heady gains of the past 51-and-a-bit weeks now leave the business dealing on a forward P/E ratio of 15.6 times, making it more expensive than large swathes of the FTSE 100 — the broader average for Britain’s blue-chip index sits at 14.5 times.
It’s not a shocking premium, sure, but it fails to reflect the high chances of a political and thus economic earthquake at the end of 2020, one that threatens to create aftershocks well into the next decade and could make the current troubles in the retail sector look like small potatoes.
If anything, the chances of a no-deal Brexit are even higher than they were a year ago given government plans to get a trade deal with the European Union drawn up by the close of next December — a highly-challenging task, to put it lightly — or drag the UK out without one. And therefore consumers could be increasingly reluctant to part with their cash in the run-up to the deadline. Now, Next could continue to impress on the sales front, but it’s not a chance I’m willing to take. I’d rather invest my hard-earned cash elsewhere.
Royston Wild has no position in any of the shares mentioned. The Motley Fool UK owns shares of and has recommended ASOS. The Motley Fool UK has recommended boohoo group. Views expressed on the companies mentioned in this article are those of the writer and therefore may differ from the official recommendations we make in our subscription services such as Share Advisor, Hidden Winners and Pro. Here at The Motley Fool we believe that considering a diverse range of insights makes us better investors.
Motley Fool UK 2019