These 2 FTSE 100 stocks have bags of recovery potential. Here’s what I’d do now

These are tough times for retailers with Arcadia Group and Debenhams going into administration, but some FTSE 100 stocks shares in the sector are better placed to thrive. In fact, they may even benefit, as competition on the high street shrinks.

I’m thinking of Primark owner Associated British Foods (LSE: ABF), and clothing chain Next (LSE: NXT). Both have shown their resilience in the pandemic, and this should stand them in good stead for the recovery. I’m considering adding these FTSE 100 stocks to my portfolio but are they too expensive right now?

The Associated British Foods share price tanked in March, falling 40% as Primark shut its doors in the lockdown. Its share price recovery has been slow, though. The most recent lockdown cost it £430m in lost sales, which is blow. The good news is that demand has since been “very strong” at stores that have reopened. It seems to have become a post-lockdown tradition to besiege Primark at the first change you get.

I like these retail sector survivors

ABF isn’t just about Primark and it also reported healthy trading in grocery, sugar, ingredients, and agriculture. Despite this, it still reckons profits will be higher than last year. With competitors like Topshop on the rack, this FTSE 100 stock has shown it has staying power. That’s particularly impressive given that it doesn’t sell online. It was also able to offset falling revenues in the lockdown, with a 25% drop in operating profits. Finding store space should not be a problem in future, either.

Sadly, this is another of those FTSE 100 stocks that does not offer a dividend right now, which was suspended earlier this year. What worries me more is that it looks expensive, trading at 29.1 times earnings. City analysts forecast that ABF’s earnings will grow 37% in the year to September 2021, so that valuation may be justified. On balance, I might check out these stocks instead.

Next has rebounded strongly from the March crash, with the share price jumping an impressive 84% from its lows. Once again, this underlines the benefits of buying shares in a market meltdown, as you can make big money when they rebound.

Next year should be better for these FTSE 100 stocks

The big attraction of Next is that it combines a thriving e-commerce operation with a legacy bricks and mortar business. This year has brought plenty of challenges, including closed stores, a plunge in formal wear sales, and capacity issues in its online warehouses. However, a 23.1% rise in Q3 online sales helped offset damage elsewhere.

In October, management forecast healthy full-year profit before tax of £365m, but warned that a two-week lockdown would reduce retail full price sales by around £57m. We will have to wait until its Q4 trading statement in early January to see the true damage, but I think Next is resilient. Investors will be hoping that shoppers remain free to spend in the run-up to Christmas.

My worry is that falling revenues have driven up the forward valuation to 30 times earnings. Again, there is no dividend. Next remains a top FTSE 100 retail stock and tempting buy, though.