A FTSE 100 stock I’m avoiding like the plague

Royston Wild looks at a FTSE 100 (INDEXFTSE: UKX) stock investors need to keep avoiding.

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The market breathed a sigh of relief in Thursday trading after a much-needed batch of good news for the retail sector.

To say that sales data has been underwhelming in recent months can be considered something of an understatement as a cocktail of rising inflation, frozen wages and deteriorating consumer confidence has taken a bite out of retailers’ takings.

But in a rare bright spot, the Office for National Statistics declared today that retail sales in the UK rose 1.6% month-on-month in November, with Black Friday promotions giving the total a firm kick higher.

Still, analysts haven’t exactly been hanging out the bunting, with many saying that the sales event had simply caused shoppers to bring forward purchases they would have made in the months ahead.

Indeed, with the economic and political turbulence enveloping Britain looking set to intensify next year, many of the country’s retailers should be braced for fresh sales stress.

In a bother

One share I remain fearful for is clothing and homewares colossus Next (LSE: NXT).

In its latest trading statement in November the FTSE 100 share once again highlighted the difficulties washing over the sector. It advised that full-price sales had dipped 0.3% during February-October, and added that a similar fall is expected in the final quarter of the fiscal year.

While the firm’s Next Directory catalogue and online division may have steadied the ship more recently, it is far too early to say the unit is in recovery as its competitors enhance their own multichannel operations and the aforementioned macroeconomic issues bite.

With Next also facing a terrific battle to cut down its colossal fixed-cost base, City analysts are expecting it to report earnings drops of 7% in the year to January 2018. An extra 1% drop is predicted for the following year to underline expectations of sustained profits problems.

Given the huge obstacles it faces to get earnings chugging higher again, I for one would forget the company’s low forward P/E ratio of 10.8 times (as well as its 7.7% dividend yield) and steer well clear.

Too risky?

Speaking of dangerous retail shares, I reckon Ocado (LSE: OCDO) should also be avoided today.

On Thursday the online grocery giant rose 3% at pixel time after releasing a positive batch of sales numbers. Retail revenues rose 11.6% in the 14 weeks to December 3, while the number of orders it completed rose 11.1% to 280,000 per week. The average basket size swelled by a less impressive percentage however, rising 0.3% to £106.11.

It has been a decent couple of weeks for Ocado, the supermarket’s share price going gangbusters in late November after it announced that it had finally made good on plans to build a platform in an international market. The firm said that it had signed a deal with Groupe Casino to allow the French company to use its systems, signalling its long-awaited move from the grocery stage to providing technology to other retailers.

This seismic shift could be considered a necessity by some given the increasing fragmentation of the UK supermarket sector. But there is no doubt that Ocado is taking a big leap here, and arguably the company’s eye-watering forward P/E ratio of 361.9 times (created by an anticipated 8% earnings decline in the year to November 2018) fails to reflect the risks the business faces in transitioning over.

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.

Royston Wild 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.

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