With the vaccine rollout making good progress, investors are anticipating a reopening of the economy. In part, they’ve been rotating out of highly-rated tech companies and into travel, financial and high-street retail sectors.
A combination of economic stimulus from governments, central banks, and potential pent-up demand from cash-rich consumers should continue to drive these cyclical sectors.
Top of the reopening stocks
One of the best reopening stocks I’d consider is Next (LSE: NXT). I recently looked at this clothing and homewares retailer as my top stock in the FTSE 100. There’s much to like about Next. It’s an established brand that’s very well-managed, in my opinion.
Next took advantage of recent market opportunities by taking on several empty spaces from Debenhams stores to house its new premium beauty concept. And it took a 25% stake in upmarket fashion brand Reiss with the option for a controlling stake.
It also ticks many boxes for investors who particularly like high-quality businesses. At 18%, Next offers one of the highest return-on-capital figures in the FTSE 100. Considering its growth prospects, it also trades at an undemanding price-to-earnings (P/E) ratio of 18x.
Nothing is 100% certain, however. Risks remain in the retail sector — especially fashion — and consumer behaviour post-lockdown may change. Further risks for Next may come via competition from online-only retailers that manage to operate with lower costs.
Nonetheless, as the economy opens up, I reckon UK consumers will ramp up social activities and spending. Next looks well-placed to benefit and could be one of the most promising reopening stocks I’d consider.
A riskier play
Reopening stocks in the dining sector include The Restaurant Group (LSE:RTN). More commonly known for the brands that it runs, The Restaurant Group owns Wagamama and Frankie & Benny’s.
Unsurprisingly, with forced closures, it has been a difficult time for the dine-in market. Its recent annual results reflect the challenging environment with revenues for 2020 that more than halved.
On a positive note, in the periods when the company was allowed to open, Wagamama delivered trading well ahead of management expectations.
Earlier in March, the company proposed a £175m capital raise. This will be used to improve liquidity and the company’s ability to expand sites for Wagamama and its pubs businesses. This should allow the company to capitalise on future growth opportunities.
Looking ahead, the firm is confident in its abilities to deliver an accelerated reopening plan, once allowed to do so. I think restaurants should experience strong demand when lockdown restrictions are lifted. The trends in Covid cases suggest that the reopening plan is on track.
There are significant risks to this reopening stock if plans to reopen are delayed, however. This company also doesn’t have the strongest balance sheet.
The share price has almost doubled so far this year, so am I too late? I think share price strength could continue over the coming months, but it’s no doubt one of the riskier reopening stocks.
Harshil Patel 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.