In the last year, the Next (LSE: NXT) share price has risen by 29%. While the FTSE 100 has also made gains in the same time period, it is up by a rather less impressive 4%.
This 25% outperformance has come at a time when retailers have experienced a hugely challenging period. Consumer confidence has been weak, with inflation being ahead of wage growth.
However, the company has enjoyed a strong stock price recovery after a period of disappointment. Could it be worth buying alongside another potential recovery stock that reported disappointing news on Monday?
Next’s recent update showed that the company has been able to generate resilient performance despite tough trading conditions. In fact, its first quarter sales and profit performance was ahead of expectations, and this helped to lift investor sentiment.
Of course, this should not come as a major surprise for investors. The company was able to generate profit growth in the years following the financial crisis when inflation was also ahead of wage growth. As such, it seems to have a resilient business model that enjoys a competitive advantage over sector peers. Consumers appear to be loyal to the Next brand and with it having a strong balance sheet, this could lead to outperformance of the wider sector and index over the long run.
With inflation now being below wage growth, retail stocks such as Next could enjoy a more prosperous period. This could mean that they are able to beat sales and profit guidance over the medium term, which may help to justify higher valuations.
Although Next already has a price-to-earnings (P/E) ratio of around 15, it is forecast to post positive earnings growth in each of the next two years. As such, and with it offering greater resilience than many of its sector peers, it appears to have an attractive investment outlook. After a period of disappointment which saw its share price decline by 53% from November 2015 to July 2017, it seems to be on the road to recovery.
Also offering the potential to deliver a successful turnaround is computer vision technologies specialist Seeing Machines (LSE: SEE). It released a profit warning on Monday, due to there being delays in the shipping of a number of its products.
This is because of a global shortage in traditionally short-lead-time parts such as capacitors and power supply which are used in its second-generation fleet product, Guardian Gen 2. As a result, Seeing Machines anticipates that sales for the current year will be between A$30m and A$35m, which is down from previous guidance of A$38m to A$43m.
Despite this, the company remains upbeat about its future prospects. It appears to have highly-relevant technology and could generate high growth across multiple transport sectors. As a result, it could be worth buying after today’s 9% share price fall, with its underlying performance continuing to be relatively upbeat in what remains a sector with high growth potential.
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Peter Stephens 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.