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Should I buy Next shares for 2021?

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Next (LSE: NXT) shares have been among a few UK stocks that look likely to end the year close to where they started it, with a year-to-date fall of only around 2.5%. Yet despite this, the stock has actually been extremely volatile since the start of the Covid-19 pandemic. It lost more than 50% of its value in March and early April, but then started to move back towards pre Covid-19 levels. 

As such, the stock’s impressive recovery has convinced me to take a closer look at the company and see if it might be a good investment for the next year.

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Next share price performance

When the UK went into lockdown in March, Next had to close more than 500 stores and rely on its online business alone. That led to a drop of 33% in sales for the half-year ending in July. Moreover, the company scrapped its dividend payment amid the huge drop in sales, which raised concerns about the financial stability of Next. However, it has embraced the Covid challenge, and quickly made the necessary adjustments in order to adapt to the new normal. Consequently, after April and May, Next’s online sales soared and the share price moved from its yearly low of 3,390p to above 6,770p. 

This helped Next raise its full-year pre-tax profits expectations to £365m – an increase of £65m from the company’s initial expectations. In the same Q3 earnings report, it reported an increase of 2.8% from the previous year in full-price sales and a 1.4% increase in total sales, including markdown sales. 

What’s next?

Looking ahead, there is some ‘good’ news coming for Next. The collapse of Arcadia and Debenhams, two of the largest UK clothing and fashion retailers, is sad on many levels, but it could help increase Next’s market share. And the company is taking active steps to boost this share too. Earlier this year, it acquired a major stake in Victoria’s Secret’s UK business, which shows that the company has the financial clout to expand in the most difficult economic environment since 2008. Another reason for optimism is the UK’s announcement about starting its Covid-19 vaccine rollout this week. Finally, there’s no doubt in my mind that the stock will get a strong push higher when Next resumes paying dividends, particularly when taking into account that Next has been an attractive dividend stock for the past decade. 

Are Next shares a bargain right now? 

Overall, I think Next shares are at a critical point right now. The fact that the fashion retailer was in demand during the Covid-19 crisis and that the share price has made a strong rebound make me believe that it could be a top-performing stock in the next year. In the best-case scenario, I reckon it could regain its all-time high of 8,176p (last seen in December 2015) next year. That would be an upside of around 20%. I’d buy.

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While COVID-19 may have thrown the company a curveball, management have acted swiftly to ensure this business is as well placed as it can be to ride out the current period of uncertainty… in fact, our analyst believes it should come roaring back to life, just as soon as normal economic activity resumes.

That’s why we think now could be the perfect time for you to start building your own stake in this exceptional business – especially given the shares look to be trading on a fairly undemanding valuation for the year to March 2021.

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Tom Chen 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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