There is nothing like the starting the new year with a bang. Like these two stocks. Both released their trading updates earlier this week. These included upgrades to their performance outlooks and they are also ready to distribute special dividends. Does it get any better? I don’t think so. But just to be sure, I would like to take a closer look at both stocks before buying them.
Next: FTSE 100 high-performer
The first is the FTSE 100 retailer Next (LSE: NXT), which has just upped its guidance for pre-tax profit for the full year ending January 2022. It has also provided a positive first guidance for the next financial year. This follows a 15% increase in its full-price sales for the current year up to 25 December 2021 compared to the last pre-pandemic year.
I find the huge 49% jump in its online sales particularly notable. Considering that we could reasonably expect a permanent shift in favour of online purchases in the near future, I think it is good sign that Next has made headway in this regard. Further, it will also pay a special dividend, which takes its dividend yield up to 3.4%, slightly higher than the 3.3% yield for the FTSE 100 as a whole.
However, I think the stock is worth buying only if these positives are not already priced in. As far as I can tell, they are not. The stock’s price-to-earnings (P/E) ratio is a little less than 18 times, just below that for the FTSE 100 index as a whole. In other words, the stock is cheaper than the average index constituent and its prospects look good. It is a no-brainer stock for me to buy now.
What could go wrong
However, I will buy it knowing that things could go very wrong. The pandemic is still around, what with new variants creating repeated fresh chaos. At some point, this may well lead us to another lockdown and there might not be as much government support available the next time. This in turn could lead to lower consumer spending, affecting non-essential retailers. If we add high inflation into this mix, the results could be even more disastrous. This is hopefully an unlikely scenario, but one that I need to bear in mind nevertheless.
Greggs: FTSE 250 stock posts healthy growth
If this risk exists for Next, it does even more so for Greggs, the FTSE 250 bakery retailer. Unlike Next, which has seen massive growth in online sales, Greggs relies primarily on in-store sales. However, for now, things are going well for it. For the financial year ending 1 January 2021, the company reported a 5.3% increase in revenue from two years ago. Without providing any other details, it also said that the full-year outcome would be “slightly” ahead of previous expectations. It also expects to make a special dividend in 2022.
Unlike Next though, the stock is quite pricey with a P/E of over 40 times and its share price is at multi-year highs right now as well. Going by the potential risks it faces, I am slightly less confident about it than about Next. I do believe that its full-year results could indicate a profit level that justifies the current price. I will wait though before buying the stock right away.
Manika Premsingh 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.
