This is one of our most volatile stock tips, and it's still worth buying

Telegraph

21-05-2025

Questor is The Telegraph's stock-picking column, helping you decode the markets and offering insights on where to invest.
Life for FTSE 100 retailer Next and its investors has not been plain sailing in recent years. While its share price has risen by 120pc since we tipped it as a 'buy' during November 2020 – outperforming the FTSE 100 index by 84 percentage points – the company's stock has come under severe pressure at times.
Notably, it slumped during 2022 amid rampant inflation and rapid interest-rate rises that pointed to a weak outlook for UK consumers. This meant that, for a very brief period, our tip was showing a 24pc paper loss.
Since then, though, it has delivered on its potential. Indeed, in Questor's view, the stock's performance over recent years highlights both the capacity of equities to deliver exceptional gains and the inherent volatility that investors must be able to shoulder along the way. Unfortunately, having the former without the latter is simply not possible.
In the short run, it would be wholly unsurprising if Next's share price experiences a further bout of elevated volatility. After all, the UK economy faces an uncertain near-term outlook. Inflation is currently 60 basis points above the Bank of England's 2pc target and is expected to rise to as much as 3.5pc in the coming months. Although this may be insufficient to prompt a full-blown cost-of-living crisis, it could nevertheless dampen consumer sentiment to at least some extent.
Sticky inflation is also likely to leave the central bank somewhat hamstrung when it comes to the prospect of further interest-rate cuts. Although looser monetary policy almost certainly lies ahead, delays to rate cuts, alongside their inherent time lags, mean that Next's operating environment may come under a degree of pressure.
Additionally, the full impact of the recent increase to employer National Insurance contributions is yet to become clear. Alongside an uncertain global economic outlook, investor sentiment towards cyclical firms could moderate over the coming months.
The company's recent performance has of course been extremely encouraging. Its latest trading update, released earlier this month, showed its full price sales in the first quarter of the financial year were ahead of previous guidance.
They rose by 11.4pc versus the same period a year earlier, which was up on the firm's previous forecast of 6.5pc. According to the company, this was largely because of good weather pulling sales forward from the spring and summer months. As a result, it has not changed its sales guidance for the second quarter of its financial year, or for the full year, with total annual sales of £6.6bn still expected.
Next, however, updated its full-year profit guidance following a better-than-expected quarterly performance. It now forecasts that earnings per share will rise by 9.7pc, which is up from a previous estimate of 8.5pc. Given that it trades on a price-to-earnings ratio of 20.2, it appears to offer fair value for money when its growth potential and solid fundamentals are taken into account.
For example, net interest costs were covered over 12 times by operating profits in its latest financial year. This suggests it is well placed to overcome potential future economic or industry-related challenges. Last year's return on equity figure of 44pc, meanwhile, highlights the company's strong competitive position and indicates it is well placed to capitalise on an upbeat long-term outlook for UK consumers.
Indeed, inflation is expected to experience only a temporary spike. It is likely to fall to the Bank of England's 2pc target thereafter and ultimately provide scope for a brisk pace of monetary policy easing that should boost wage growth. In turn, this is likely to prompt a further increase in spending power among UK consumers, especially amid a period of modest inflation, thereby supporting sales growth and profit margins across the retail sector.
As a result, the long-term outlook for Next's financial performance, as well as its share price, remains upbeat. The company's competitive advantage and solid financial position suggest it is in a good position to overcome potential short-term challenges and subsequently deliver further capital growth and index outperformance.
Long-term investors who can cope with the prospect of additional periods of elevated volatility should, therefore, continue to view the stock as a highly worthwhile purchase.