Is this FTSE 100 stock an opportunity or one to avoid?

Jabran Khan delves deeper into this FTSE 100 stock and decides if he would add shares to his portfolio or avoid them by compilinga for-and-against argument.

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FTSE 100 incumbent Next (LSE:NXT) is a stock I am considering adding to my portfolio. At current levels should I buy or avoid shares? Let’s take a look.

FTSE 100 fashion

Next is often considered a newcomer to the UK retail scene with its first store opened in 1982. In 1986, it acquired mail order business Grattan and launched its directory business. I remember looking through the Next catalogue as a child. These days it operates 500 stores in the UK and 200 overseas. Next has an online presence, which is capitalising on the e-commerce boom but the pandemic affected its physical retail stores. Restrictions for many months caused issues across the retail sector.

As I write, shares in Next are trading for 7,978p. A year ago, shares were trading for 6,552p, which is a 21% return over 12 months. In the same time period, the FTSE 100 has increased only 13%.

For and against

FOR: Next has seen positive recent performance. Its Q3 update provided earlier this month made for good reading. Full price sales were up 17% compared to two years ago. Many firms are not comparing performance to last year due to the impact of the pandemic, which is understandable. The last five weeks of Q3 yielded 14% higher levels and was higher than the forecast 10%, which is encouraging. Full-year guidance is on course to be met with profit coming in at £800m.

AGAINST: Next is currently trading close to all-time highs. The FTSE 100 incumbent’s shares reached just over 8,000p a couple of months ago. My issue with this is any negative news or Covid-19-related restrictions could cause a share price drop. The threat of a market crash recently could also see its share price tumble.

FOR: Next’s historic track record, growth to date, and future prospects fill me with confidence. I understand that past performance is not a guarantee of the future. I see that revenue has increased for four years in a row and gross profit increased three years in a row apart from the pandemic-affected 2021. Next has also kept up to date with competitors in the way of e-commerce and online offering and continued to open new stores in strategic locations in the UK and abroad. I believe it will continue to grow and perform well consistently which could offer me a good return.

AGAINST: There are a number of macroeconomic and Covid-19 related issues that could affect Next. The supply chain problems as well as shortage of HGV drivers could impact operations. Furthermore, rising inflation and costs could impact margins and profitability too. Finally, a new variant of Covid-19 could see further restrictions, thus affecting its physical stores.

My verdict

Right now I would add Next shares to my portfolio. Its growth story to date is an admirable one. More importantly, I believe it will continue to grow and recent and historic performance back up my assertions that Next could be a good addition to my portfolio. There aren’t many better FTSE 100 firms out there in terms of quality in my opinion. I am not worried about short-term macroeconomic issues that I think will dissipate. 

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 considered so you should consider taking independent financial advice.

Jabran Khan 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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