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Next shares are up 45%! Here’s why I’d keep buying

The Next (LSE: NXT) share price has staged a rapid recovery from the 52-week low of 3,311p, suffered during the stock market crash. At a last-seen level of 4,825p, Next stock has delivered a 45% gain for investors who caught the bottom.

It’s too soon to know how well the group is trading now its stores are reopening. But, as a long-term investor, I think there’s a good chance Next will continue to deliver market-beating gains for some years to come. Here are three reasons why.

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Strong foundations

Some retailers were already struggling before coronavirus struck. Next wasn’t. The group was highly profitable, with an operating margin of 20%. Net debt was reassuringly low, relative to earnings.

Best of all, Next already had a clear strategy for moving online and reducing its dependency on the high street. This plan was starting to deliver results and the group’s profits rose in each of the last two years, reversing earlier declines.

No one could have been fully prepared for the pandemic. But I think Next was in a much better position than many rivals.

Next shares have delivered impressive returns

The retail sector is a tough place to be at the moment. Even before the coronavirus lockdown, retailers were fighting to adapt to the shift online. These big changes mean investors face extra risks.

In a situation like this, I prefer to invest in companies with a good track record of looking after their shareholders. Next is a prime example, in my view. The group’s share price has risen by almost 150% over the last 10 years. During the same period, the FTSE 100 has only gained about 17%.

Shareholders have also benefited from regular dividends and share buybacks which have boosted their overall return. Although no returns are likely this year, analysts do expect Next to restart dividend payments in 2021.

The man with a plan

Another think I look for is a clear strategy. Next scores highly here too. Chief executive Lord Wolfson has developed a detailed plan to evolve the business from an own-brand retailer into an online marketplace with a high street presence.

Next even has a plan to close all of its stores and move online if necessary, although the company doesn’t expect to do this. Plans also include detailed financial projections, which Next has shared with its shareholders. When you know this much about a company, I find it’s much easier to trust management.

Next share price: I’d keep buying

Of course, these attractions aren’t a secret. Investors have admired Next’s excellent financial and operational performance for some years. Some of the good news is already reflected in Next’s share price. But I think the stock’s valuation is still low enough to be attractive, despite the uncertain outlook.

Analysts expect the firm’s earnings to fall to just 111p this year, from 460p in 2019/20. However, earnings are expected to rebound strongly in 2021/22, rising to 437p. With the stock trading at about 4,800p, that values Next shares at about 14 time forecast earnings.

For a company with such a strong track record, I think this looks like a decent level to buy for a long-term holding.

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Roland Head has no position in any of the shares mentioned. The Motley Fool UK owns shares of Next. 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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