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Trader Talk is produced by a team of active traders, analysts and various derivatives professionals from multiple organisations. Trader Talk provides comment on equities, commodities, and other financial instruments based on both technical and fundamental analysis.
Change of fashion at Next
Persistent concerns over Eurozone sovereign debt and latest data released compounded recent fears about the global economy, whilst expectations of further stimulus ensured the recent volatility continued.
Worries over the ability of European leaders to solve the debt crisis were heightened after Germany’s top court handed its country’s parliament a greater say over Eurozone bailouts. The decision means that further aid may have to be approved by parliament, adding complications to further bail-outs, sending the Euro to a three week low against the dollar.
Italian bond yields started to rise again despite the ECB’s record government bond purchases, designed to prevent a disastrous jump in Italian and Spanish yields, amid fresh doubts about its government’s commitment to austerity reforms. Greek yields continued to rise as the markets grew increasingly sceptical of further aid towards the country.
Mixed economic data fuelled investors uncertainty over global growth, following last Friday’s key non-farm payroll figures that showed no jobs were created in August, compared to an expected rise of 75,000 and its lowest performance since September last year.
The latest round of purchasing managers data on the service sector added to last weeks disappointing manufacturing figures. UK services PMI tumbled to 51.1 last month from 55.4 in July, the biggest monthly fall for over a decade and well below expectations. Meanwhile China’s service sector grew in August at its slowest pace on record.
The dominant US services sector, however picked up steam unexpectedly last month with the Institute for Supply Managers index rising to 53.3 from 52.7 in July, snapping a three month trend of slower growth, helping to dispel some of the gloom.
The German manufacturing sector also remained robust as industrial production jumped 4% in June, its biggest rise in a year and well ahead of the 0.5% gain analysts had expected. As Europe’s largest economy, the numbers are encouraging as they suggest Germany is not on the brink of a recession, with economists still expecting around 3% growth this year.
Technical analysis indicates the start of a new uptrend with this week’s low of 5092 being formed inside the retracement zone of the recent range between 4791 and 5449. This suggests that traders are keen to buy the weakness despite the recent downside volatility. The oscillators are also trending higher, indicating a pick-up in momentum that has supported the market this week.
A break of 5450 is needed to confirm this with the next target seen at 5600, although a close below 5000 may trigger a re-test of Augusts’ low at 4791, which would negate this trend.
In conclusion, these are extremely uncertain times and any number of possible developments could continue to generate dramatic effects on the market. Should Eurozone sovereign debt deteriorate further and economic data worsen it is likely to create additional downward pressure on equities. Conversely, any new stimulus measures or moves to secure sovereign debt, such as the issuance of a Eurobond, could send the market materially higher.
I am inclined to suggest the volatility will continue for the foreseeable future and investors should continue to trade the new range between 5000 and 5400, but stay alert to announcements and remain nimble.
Domestic data during the week showed retail sales fell in August as consumers grow increasingly concerned about the economy and their jobs. According to the British Retail Consortium (BRC), like-for-like sales declined by 0.6% last month compared to a 2.8% rise last year. Consumer confidence also fell for a third consecutive month as a deteriorating economic outlook, high inflation and the persistent squeeze on personal finances weigh on morale.
British high street retailer Next (LON:NXT) has so far defied the gloom helped by a first-half update on the 3rd August that revealed sales of its clothing and homewares had risen 3.2% and reiterated its full year profit guidance. With elevated consensus forecasts, is the good news already priced in?
As can be seen from the above chart of Next, the shares have fallen less than 5% from their recent highs and multi-year resistance above 2400p. Meanwhile the sector average has dropped 15% and their closest rival Marks & Spencer, has lost almost 20% of its value during the same period.
The oscillators appear to be rolling over with the stochastic intersecting and declining, while the MACD histogram steps lower, indicating the shares could be losing momentum.
Next currently trades on 10x earnings, which is comparatively more expensive than the sector average and with single digit growth forecast next year, it puts it on a PEG of over one. This compares to a more competitive 9x earnings at Marks & Spencer and slightly higher forecast growth rates. Next also only pays a 3.8% dividend yield to shareholders while Marks offers closer to a 6% annual return at current prices.
Marks & Spencer also has a much higher tangible asset backing than Next, with a sizeable property portfolio accounting for circa 94% of the company’s market capitalisation. In comparison, Next rent the majority of its stores and their tangible assets represent less than 15% of the market capitalisation.
Next is however perceived as a more attractive, robust business, but given the economic backdrop and reasons discussed above, I believe this immunity from the recent market weakness is unjustified. As investors increasingly look for fundamentally attractive companies with strong asset backing, I deem Next as too highly rated and investors may wish to consider a short Next / long Marks & Spencer pair’s trade.
At the time of writing the share price is 2348p and near term targets are seen at 2223p, 2152p and 2114p, with a stop loss set marginally above this years high at 2461p.
This report was written by Mark Allen – Head of derivatives at Simple Investments Stockbrokers. The writer does not hold a position in Next, but client accounts may. The material in this report has come from Simply Charts and Next’s corporate website.
