High Street stalwart Next (LSE: NXT) has given shareholders the jitters in recent months, but the latest update from the CF Woodford Equity Income Fund explains why master investor Neil Woodford continues to believe in the company — and has averaged down as the share price has fallen.

As well as backing the FTSE 100 retailer, Woodford has recently bulked-up a number of the fund’s other holdings, including pharma group AstraZeneca (LSE: AZN) and outsourcing specialist Capita (LSE: CPI).

“Exceptional retailer”

Shares of Next were trading as high as £80 last autumn, but began to fall towards the end of the year as unseasonably warm weather persisted ahead of a trading update in early January. There was further weakness following the update, then another big leg down after the company announced its annual results last month.

The results were actually in line with expectations, but the outlook statement sent the market into a tizz. Management highlighted signs of uncertainty in the consumer economy and said its “instinct” was “to prepare ourselves for what could be a difficult year”. As a result, the company revised down its guidance for sales and profits.

Woodford and his team have an interesting take: 

“We see the comments from Next’s management team as negative for the wider retail sector and indeed for consumer cyclical stocks more broadly. But, as far as Next itself is concerned, we think that the market has reacted inappropriately to the update”.

If Woodford is right, you shouldn’t be worried about Next, but you should be worried if you hold shares in other retailers and consumer cyclical stocks generally!

Describing Next as “an exceptional retailer”, Woodford and his team continue to believe the company will deliver “a very attractive long-term total return through a combination of its current dividend yield and continued growth in its free cash flow generation”.

At a share price of around £54.50 — over 30% down from last year’s high — the consensus analyst forecasts give a bumper yield of 7.2% and an attractive price-to-earnings (P/E) ratio of 12.5.

“Groundless share price weakness”

Woodford has been bearish on the oil and mining sectors for a number of years, and is far from convinced that the recent rally is sustainable. He continues to avoid this area due to structural over-supply, the prevailing economic headwinds and his fear that the outlook for Chinese economic growth will further deteriorate.

However, the market’s recent enthusiasm for the oil and mining sectors, has enabled Woodford to add to some stocks in sectors he favours that have seen “groundless share price weakness”. AstraZeneca’s shares have declined by 10% since the start of the year — from above £46 to around £41.50 today. The company is still battling falling sales and earnings, as a result of patent expiries, but Woodford strongly believes that the longer-term future is bright. Astra looks decent value on a P/E of 14.8 with a dividend yield of 4.7%.

In February, Capita reported good results for 2015 and a solid start to the current year, but this is another company whose shares have been weak of late, and one the equity income fund has “continued to build” a position in. Again, with the shares rather depressed at around £10.40, the valuation looks attractive. The P/E is 14 and while the dividend yield of 3.3% isn’t the highest around, consistently strong earnings growth has underpinned a nicely rising payout.

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G A Chester has no position in any shares mentioned. The Motley Fool UK has recommended AstraZeneca. We Fools don't all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors.