Spread Bet Next Shares: Next Rolling Daily
Next Plc, the number 2 clothing and household goods seller, has seen some action of late. Next’s store- store-based clothing business, and a high-growth directory/online operation has driven positive Next Brand LFL gross profit trends over the last three years. In fact the company appears to be going from strength to strength with their online and overseas operations helping. For those who watch, there has been some insider trading worth noting…
To be clear, not all insider trading is actionable. In particular, if the insider is selling this may mean nothing at all. A month or two before the BP disaster in the Gulf of Mexico, the CEO, Tony Hayworth, sold about half his shares. Was this a premonition? No, he merely wanted some cash to pay off his multimillion pound mortgage. An insider may sell for any reason at all, and not for any motive to do with the company and its future performance.
But when highly paid executives of a company use their own money to buy shares, you can be sure that they expect to make a profit, and the more they spend the more significant the event can be. The Chief Executive of Next Plc, Steve Wolfson, spent £400,000 buying shares in May, and fellow board member Andrew Varley spent nearly £200,000 on the following day.
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You can see from the chart that despite having hit record highs in April, the stock was definitely on a decline at the end of May. Amazingly, it turned around the week after the insider trading, and gained 6%. As a record had already been set, and the stock was trending down, this was in no way a marked trade.
A word on Next’s buyback share programme: I can see the logic of a NXT spread bet short and am surely tempted myself as I see they are advertising their sale on TV which begs me to believe that sales are falling. But it is risky business shorting NXT when they continue buying back and cancelling shares – at the time of writing (August 2012), NXT’s shares are about to breakout to an all time high. The buyback programme is a strategy that can only enhance EPS and stablise P/E ratio and Yield. However, if the buy-back cannot be financed out of profits then eventually the reserve cash funds will run out. On the other hand, if they are highly profitable and cash generative then one wonders why the cash earnings are not being used to generate more profit for the business rather than share buy-backs. It’s a delicate balance; share buyback is okay as a temporary measure to stabilise volatile a share price but not as a suitable long-term strategy. Looking at the price graph the fall in 2009 from 2400 to 600 looked very scary; 2400 seems to be a strong resistance level; remains to be seen if they can push it above that by their buy-back program. The more the price rises, the more expensive the buy-back program gets. Think if I was going to short I’d wait for the bad news first in the way of a profit warning, and if the uptrend breaks short in to a falling trend.
In its last markets update, Next stated that it is now expecting pre-tax profits of about £575 million to £620 million for the year up to to January 2013, up from its previous guidance of between £560 million and £610 million, despite the gloomy retail environment. Next overtook its arch-rival Marks & Spencer as Britain’s most valuable clothing retailer in 2012. Next’s CEO, Lord Wolfson forecasted an even better picture for 2012. He stated that by the second quarter of next year they should start seeing some recovery in the consumer sector. However, he also warned that a spending recovery will take a long time and remains at risk from financial shocks resulting from the ongoing European sovereign debt crisis.
The group’s directory online business managed a 15.1 per cent increase in sales and this coupled with low cotton prices seems to be holding Next up. What I fail to understand is how Next can avoid a downturn in sales in the current climate. Most are suffering the high inflation combined with pay freezes and job losses. Many will cut back and although we need clothes and other items, many will look in the wardrobe and say to themselves “do I really need more stuff”. Investors cannot go wrong or so it seems. You could pick this up for less than a tenner three years back. Has any FTSE 100 share performed as well over this period? [up to August 2012] Unbelievable considering the dire situation most people are in. It seems a straight forward punt on Christmas. Is Joe public going to unfasten the purse strings for christmas or keep it tight and only buy a few bits in the sales?
Must say I have always been burnt by this stock as a short but getting tempted to have a spar again. It’s a quality stock in sector but its rising against a crap retail market. During the dotcom period share prices shot up sky-high unsupported by fundamentals. With hindsight we all know it all ended with an almighty crash. However, short sellers who got in too early must have been badly hurt unless they had lots of cash, extreme patience and nerves of steel. At the moment NXT stock seems to continue its rise due to share buyback and many small traders buying purely on momentum . The long-term graph of NXT shows a past share price crash which looks truely scary. It could happen again but when?
Next PLC’s stock price rose from 800 in 2002 to 2400 in 2007.
It then crashed in 2007 from 2400 back to 800.
From then it rose to the current lofty height of 3200 with only very minor corrections on the way.
Clearly ,the shares of this company are not for investments by widows and orphans.
Take care and hedge your bets . The first company announcement that sales growth is stalling could trigger a sell-off.
Trader Opinion: Next never ceases to amaze me – I can’t believe that their profits keep going up and they out-perform the sector. The stores that I know of seem to generally be fairly empty most of the time. Their online side is supposedly very good but I don’t share the experience – I’ve probably bought for 7 or 8 online retailers in the past months – off the top of my head, Next, Play.com, Amazon , John Lewis, Screwfix, asos.com and even the Argos website and I would say the worst of the lot was Next both in terms of ease of ordering and quality of delivery (i.e. the only one not arriving on time was from Next).
Visitor Observation: Steve in Exeter on Saturday only 7 customers (only 1 person buying) in the very large Exbridges store in Exeter. Next door in TK Maxx store half the size with about 40 customers and a long queue of customers buying goods. Customers are looking for the same quality or better at cheaper prices including Ralph Lauren, DKNY, French Connection, Crew, Lyle & Scott, Tommy Hilfiger…etc were all in stock and selling well.
Visitor Observation: Seems joe public is happy to spend for value rather than snob value. pair of ‘skinny’ chinos in next at 30 squid. Primark price 10 squid. Same colours, same styling, seemingly same weight and quality of cotton. Personally I like primark in retail sector, unfortunate cant buy into them as a pure retail play. About a year ago, JJB was quiet, empty floor space. In contrast, SportsDirect was heaving with stock and customers. Needless to say which of those two have been the success story over recent months.
Visitor Observation: My take is that NXT have strong cashflows…but they won’t invest them in expanding the business when the high-street is weak…they could leave the cash on the balance sheet earning minimal interest but I suspect they think it more efficient to run a net debt position (given the protection of their strong balance sheet, this isn’t a problem) and shrink the number of shares in issue.
I also think that once companies start buying back their shares it is the thin end of the wedge – seen it a lot in Japan and here in recent years. Companies run out of ideas of what to do next and share buy-backs are a great way to support the price (and therefore director holdings, share options…etc)
Leaving aside this excursion, which seems from the chart to be lacking in staying power, how has Next been performing, and what other opportunities are there for spread betting on the stock?
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You can see from this weekly chart that Next Plc had a rough time in 2007/8, somewhat pre-empting the general market slump. This meant that when most shares were falling, Next held its value because it had already been discounted. Recent quarterly figures have been good, with reported sales up, giving a boost to the share price in 2010. This has been attributed to the home shopping business. Sales at its 500 retail outlets have been steady if not declining.
But the insider trading suggests that any downturn is not expected to last. Insiders do not trade but invest, as regulation prevents them from buying and selling too frequently. There’s a possible symmetrical triangle forming, although it is too early to be sure. If it is and it breaks out to the upside, then a target price between £23 and £24 would be reasonable, and this would accord to the previous high in April, reinforcing it as a potential target and resistance level. Next is continuing a share buyback program and focusing on efficiencies and improved margins.
To set against this optimistic outlook, Next Plc is in a tough market sector which is getting tougher. While the Directors may feel that they are capable of doing what is necessary internally to emerge winners, forces outside their control may also play a part. If you are positive about Next as a company but pessimistic about the wider retail industry as a whole you could at least partly hedge the downside exposure by coupling a long Next trade with a short position on the FTSE 350 general retailers index at the same time. This should help to mitigate part of the risk should another recession hit consumers and sink shares across the whole sector.
Remember Next goes ex-dividend on November 23rd so you will be liable to pay that if you’re still holding the short position the day after. I’ve tried shorting Next recently and lost out every time! You don’t short quality, simple as that. Short the weakest in the sector or short the best when it’s obvious that it’s failing – example Marks & Spencer a number of years ago. But there’s never been a good time to short NEXT in recent times, it’s got a competent management team who are genuinely committed to shareholder value. That was a point in time when the whole market crashed. And you’d have made more money than by shorting the poorly run low quality retailers who’ve subsequently gone bust.
If it is the spread bet you short at the market price – and the dividend will be adjusted on the day it goes ex. So if it goes ex 30p dividend you have to pay 30p per share to cover the dividend on the short which gets debited to your account. In an ideal world of course you should be expected to be no worse off as the share price should drop by the dividend amount to compensate.
If you short on a future spreadbet it should already be accounted for. So if it’s a 30p dividend and spot is 2800 then you will actually get quoted Dec contract at 2770 to account for the dividend in the period.
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