Don’t repeat my big mistake with the Next share price

Roland Head gives his view on new sales figures from Next plc (LON:NXT) and explains where he went wrong.

| More on:

The content of this article was relevant at the time of publishing. Circumstances change continuously and caution should therefore be exercised when relying upon any content contained within this article.

When investing, your capital is at risk. The value of your investments can go down as well as up and you may get back less than you put in.

Read More

The content of this article is provided for information purposes only and is not intended to be, nor does it constitute, any form of personal advice. Investments in a currency other than sterling are exposed to currency exchange risk. Currency exchange rates are constantly changing, which may affect the value of the investment in sterling terms. You could lose money in sterling even if the stock price rises in the currency of origin. Stocks listed on overseas exchanges may be subject to additional dealing and exchange rate charges, and may have other tax implications, and may not provide the same, or any, regulatory protection as in the UK.

You’re reading a free article with opinions that may differ from The Motley Fool’s Premium Investing Services. Become a Motley Fool member today to get instant access to our top analyst recommendations, in-depth research, investing resources, and more. Learn More.

One of my favourite types of trade is to buy out-of-favour big-cap stocks at bargain prices. Staying true to this policy, I bought a decent chunk of shares in Next (LSE: NXT) in 2017, when the stock was trading at five-year lows.

My big mistake came at the start of this year, when I got cold feet and decided to sell. I made a fair profit, but the company’s financial performance since then has convinced me that I sold too soon.

Today’s second-quarter sales figures are a case in point. Next’s online sales rose by 12.5% during the 12 weeks to 28 July. This was enough to offset a 5.9% fall in store sales, and boost total brand sales by 2.8%.

The company said that the long spell of hot weather meant that it’s “almost certain” that some summer sales were pulled forward from August. So there’s a risk that second-half sales will suffer as a result.

This cautious assessment is probably why the Next share price is down by 7% at the time of writing. But management has a tendency to take a conservative view in sales forecasts. I think there’s a good chance that second-half sales will be better than today’s gloomy sell-off suggests.

It’s not too late to buy

Next shares have risen by 38% over the last year. But I don’t think it’s too late to buy.

The firm has a clear plan to manage the shift from store sales to online. And last year’s operating margin of 18.7% shows that this remains a very profitable business.

Free cash flow remains strong and the company has already spent £300m on share buybacks in 2018. Management said that this should increase 2018/19 earnings per share by 4.7%.

After today’s fall, the shares trade on 12.8 times forecast earnings with a 2.9% dividend yield. That looks decent value to me.

What about this 5.9% yielder?

Next’s dividend yield has fallen over the last year as the share price has risen and the board has used surplus cash for share buybacks instead of special dividends.

If you’re looking for a retailer with a higher dividend yield, one stock I’d consider is budget footwear chain Shoe Zone (LSE: SHOE).

This business has a significant element of owner management with brothers Anthony and Charles Smith occupying two key board roles and owning 50.01% of the firm’s shares.

Although the Smiths’ majority stake means that minority shareholders have little control over the business, both men have worked for the company for at least 20 years. In my view, their management so far suggests that they have worked hard to create value for all shareholders.

Why I’d buy

Two things particularly attract me to this stock. The group’s sector expertise and niche focus allows them to buy stock directly from manufacturers overseas. This results in an unusually high gross margin of 60% and a very respectable operating margin of 6.6%.

The company also benefits from a fairly low-cost and flexible store estate. This means that it’s not stuck with lossmaking stores on long leases, unlike some larger retailers.

Although profits are expected to be broadly flat this year, my view is that the stock’s forecast P/E of 11 and dividend yield of 5.8% are cheap enough to reflect this low growth. I rate this as a small-cap dividend buy.

Should you invest, the value of your investment may rise or fall and your capital is at risk. Before investing, your individual circumstances should be assessed. Consider taking independent financial advice.

Roland Head has no position in any of the shares mentioned. The Motley Fool UK has no position in any of the shares mentioned. 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.

More on Investing Articles

Google office headquarters
Investing Articles

1 reason I like buying S&P 500 shares – and 1 reason I don’t

Will this investor try to improve his potential returns by focusing more on S&P 500 shares instead of British ones?…

Read more »

Young woman holding up three fingers
Investing Articles

3 SIPP mistakes to avoid

Our writer explains a trio of potentially costly errors he tries to avoid making when investing his SIPP, on an…

Read more »

Smiling white woman holding iPhone with Airpods in ear
Investing Articles

Here’s how (and why) I’d start buying shares with £25 a week

Our writer uses his investment experience and current approach to explain how he would start buying shares on a limited…

Read more »

Aerial shot showing an aircraft shadow flying over an idyllic beach
Investing Articles

Here’s my 5-step approach to earning passive income of £500 a month

Christopher Ruane explains the handful of steps he uses to target hundreds of pounds in passive income each month.

Read more »

Investing Articles

2 UK shares I’ve been buying this week

From a value perspective, UK shares look attractive. But two in particular have been attracting Stephen Wright’s attention over the…

Read more »

Investing Articles

A lifelong second income for just £10 a week? Here’s how!

With a simple, structured approach to buying blue-chip dividend shares at attractive prices, our writer's building a second income for…

Read more »

Investing Articles

Here’s how I’d use a £20k Stocks and Shares ISA to help build generational wealth

Discover how our writer would aim to turn a £20k Stocks and Shares ISA into a sizeable nest egg by…

Read more »

Investing Articles

Billionaire Warren Buffett just bought shares of Domino’s Pizza. Should I grab a slice?

Our writer takes a look at a few reasons why Domino's Pizza stock might have appealed to Warren Buffett's Berkshire…

Read more »