Buffettology fund decides now is time to buy Next shares again

Three years after selling his stake in the retail giant, this fund manager has dived back in following the recent post-results sell-off. Here’s why.

Keith Ashworth-Lord today hailed the return of Next (LSE:NXT) shares to his Buffettology fund - three years after Covid lockdowns caused the retailer to be dumped from the portfolio.

The CFP SDL UK Buffettology manager hopes the investment won’t be an isolated one as he looks to get back on the front foot after a few difficult months dealing with outflows.

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Next joins other FTSE 100-listed companies London Stock Exchange Group (LSE:LSEG) and RELX (LSE:REL) in a 26-strong UK-focused portfolio that also includes Games Workshop Group (LSE:GAW), AB Dynamics (LSE:ABDP) and Jet2 (LSE:JET2).

In the £723 million fund’s monthly factsheet, Ashworth-Lord told investors that retail giant Next was sold in April 2020 in response to the first lockdown and its potential impact.

He said: “We were selling other consumer-facing businesses at the time and Next was a consistency call. People who have heard me discuss this in presentations know it is a decision that I was never comfortable with.”

Ashworth-Lord said the call to restore Next to the fund was made in the aftermath of the market’s “savage reaction” to full-year results on 29 March, when boss Lord Wolfson gave a typically cautious assessment on the 2023-24 outlook.

Shares fell 4% on the day to 6,434p, even though Next also said it had far more ideas and opportunities for long-term growth than it has had for some time.

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The stock went on a powerful run from 4,300p in October 2022 to more than 7,000p in early March, having been near 3,400p in the early days of the Covid pandemic in April 2020.

Ashworth-Lord believes Next is run by one of the finest management teams the UK has to offer, adding that the investment offers sector-superior margins, a 6.2% free cash yield, returns to equity of 65% and cash conversion currently 75%.

He said: “Trends in fashion and home retail are shifting. Physical competitors continue to disappear from the high street and pure online competitors such as ASOS (LSE:ASC) and Boohoo Group (LSE:BOO) are reorienting after a tough time.

“For Next, the retail store performance is no longer a constraint on profits and its estate has some of the shortest lease commitments in the sector.”

He pointed to the success of Next’s online business as a partner for other brands, while a new warehousing facility due to open in October should add 50% to fulfilment capability along with 40% lower marginal labour cost.

The fund’s allocation to retail is currently just 1.6%, compared with 16.3% in financial services, 12.1% for support services and 11.2% in leisure goods.

In March, the fund’s share price fell by 4.7% to 288.73p as strong performances by IT business Softcat (LSE:SCT) and London Stock Exchange were offset by big declines for video games developer Team17 Group (LSE:TM17) and cyber security business NCC Group (LSE:NCC).

Ashworth-Lord added: “I hope Next will not be an isolated purchase. After several difficult months dealing with outflows from the fund (a UK-wide phenomenon, not specific to Buffettology), I feel like we are getting back on to the front foot with a handful of potential decisions to invest coming on to the horizon.”