Trading Strategies: can this blue-chip keep outperforming FTSE 100?
Everyone knows this company, and it’s become well-known in the City for consistently underpromising and overdelivering. Analyst Robert Stephens studies its investment potential.
25th September 2025 12:04
by Robert Stephens from interactive investor
Persistent doom and gloom regarding the UK’s economic prospects presents buying opportunities for long-term investors. Indeed, several UK-focused firms trade on attractive valuations that do not reflect either their capacity to deliver strong earnings growth over the coming years or their solid fundamentals. This means that investors can purchase a range of high-quality companies at relatively low prices, thereby potentially benefiting from the impact of upward re-ratings over the long run.
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Upbeat prospects
Furthermore, the UK’s economic outlook is far more positive than many investors may realise. While annualised GDP growth currently amounts to a rather humdrum 1.2%, which is significantly lower than the US economy’s current annualised growth rate of 3.3%, this is better than the market valuations of several UK-focused firms suggest. In fact, in some cases, they are priced as though the economy is currently flatlining or even in recession.
Given that time lags mean the 125 basis points of interest rate cuts implemented by the Bank of England thus far are yet to have their full impact on the economy’s performance, GDP growth could substantially improve over the medium term. Two further 25 basis point interest rate cuts are currently anticipated over the next year, according to data included in the Bank of England’s latest Monetary Policy Report, which could have a further positive impact on the economy’s growth rate.
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Certainly, inflation is relatively high and, according to the central bank, is set to rise by 20 basis points to 4% by the end of the year. However, the Bank of England forecasts that it will then fall to around 2% within the next 15 months. This should provide scope for additional interest rate cuts beyond those anticipated in the next year, should they be deemed necessary, that provide a further catalyst for the UK’s economic growth rate. This should create improved operating conditions for domestically focused firms that leads to higher profitability.
Omnipresent risks
Of course, it’s impossible to know exactly when both the economy’s performance and investor sentiment towards UK-focused stocks will improve. In the short run, threats such as uncertainty surrounding the upcoming Budget and the tax rises it may contain, as well as the ongoing global trade war, could further harm investor sentiment. This may equate to elevated volatility that leads to paper losses over the coming months.
While this may dissuade some investors from purchasing domestically focused firms, their wide margin of safety suggests upcoming threats have already been priced in. Furthermore, risks are omnipresent and, in some cases, cannot be accurately identified or forecast before their occurrence. This means that there is never a perfect time to invest in any stock, whether it’s dependent on the UK economy or not.
A contrarian view
Moreover, an uncertain near-term outlook has been present for some time and yet a number of UK-focused firms have been able to deliver strong sales and profit growth over recent months. Such companies almost exclusively have strong balance sheets that contain modest amounts of debt, with interest payments well covered by profits. They are also highly likely to have a sustainable competitive advantage, whether in the form of lower costs than rivals or a higher degree of brand loyalty, that enables them to deliver stronger and more consistent profit growth across a range of trading conditions.
Investors who are able to focus on such companies are likely to benefit over the long run. Doing so may represent a contrarian position at present, given that investor sentiment towards UK-focused firms is particularly weak. But with inflation due to fall, interest rate cuts set to boost the economy, and market valuations being highly appealing, their popularity, and share prices, are likely to rise in the long run.
Strong performance
Performance (%) | |||||||
Company | Price | Market cap (m) | One month | Year to date | One year | Forward dividend yield (%) | Forward PE |
Next | 12035p | £13,984 | -1.6 | 26.7 | 19.3 | 2.6 | 16.8 |
Source: ShareScope on 25 September 2025. Past performance is not a guide to future performance.
For example, Next (LSE:NXT)’s recently released half-year results showed that it is performing well at present. The FTSE 100 retailer delivered a 10.3% rise in sales during the first six months of the year, with pre-tax profits increasing by 13.8% versus the same period of the previous year. This rate of growth is substantially higher than that recorded by many internationally focused firms over the same period, which highlights that the UK economy’s performance may be stronger than many investors realise.
Indeed, Next expects to produce full price sales growth of 7.5% and a rise in pre-tax profits of 9.3% in the current year. An anticipated gradual fall in inflation to the Bank of England’s 2% target by the first quarter of 2027, moreover, is likely to have a positive impact on consumer spending. When coupled with the positive effect of previous, and pending, interest rate cuts on wage growth, it is likely that consumer spending power will continue to rise after having increased consistently since April 2023. This bodes well for the firm’s operating environment and suggests that it can maintain a brisk rate of profit growth beyond the current financial year.
Sound fundamentals
In the meantime, the company’s solid financial position means it is well placed to overcome potential risks. For example, its net debt-to-equity ratio stood at 85% at the time of its half-year results in July, while net interest costs were covered 12.7 times by operating profits in the first six months of the current financial year. This latter figure suggests that even a material decline in profitability, which is not currently forecast, would be unlikely to prompt severe financial challenges for the business.
A solid financial position, moreover, means the firm can invest in growth opportunities. For instance, although it remains UK-focused and generated 82% of its sales in the domestic economy during the latest financial year, the company continues to expand internationally. In the first half of the current year, for example, its international full price sales grew by 28%. This not only boosts its bottom line, but also diversifies the business so as to further reduce overall risk for investors.
Value for money
Since first being discussed in this column during August last year, Next’s share price has risen by 26%. This represents a 13 percentage-point outperformance of the FTSE 100 index over the same period.
Following their recent rise, the company’s shares now trade on a price/earnings (PE) ratio of 18.9. This is relatively rich, even at a time when the wider index trades close to a record high. It is particularly expensive given the firm’s overwhelming reliance on the UK economy at a time when domestically focused companies are relatively unpopular among investors.
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However, the recent performance of the business and its future prospects suggest that it still offers good value for money. After all, its bottom line is currently growing at a brisk pace that could persist as its operating conditions improve. This means that the company’s shares may deliver further attractive capital gains even if its earnings multiple fails to move significantly higher. And with a solid balance sheet alongside a strong market position, the company’s relatively elevated market valuation can further be justified.
Clearly, Next’s share price is unlikely to experience a smooth ascent amid elevated geopolitical uncertainty in the UK and abroad. But for long-term investors who can look beyond short-term threats, the company’s solid fundamentals and upbeat outlook mean it continues to offer investment potential.
Robert Stephens is a freelance contributor and not a direct employee of interactive investor.
These articles are provided for information purposes only. Occasionally, an opinion about whether to buy or sell a specific investment may be provided by third parties. The content is not intended to be a personal recommendation to buy or sell any financial instrument or product, or to adopt any investment strategy as it is not provided based on an assessment of your investing knowledge and experience, your financial situation or your investment objectives. The value of your investments, and the income derived from them, may go down as well as up. You may not get back all the money that you invest. The investments referred to in this article may not be suitable for all investors, and if in doubt, an investor should seek advice from a qualified investment adviser.
Full performance can be found on the company or index summary page on the interactive investor website. Simply click on the company's or index name highlighted in the article.
Disclosure
We use a combination of fundamental and technical analysis in forming our view as to the valuation and prospects of an investment. Where relevant we have set out those particular matters we think are important in the above article, but further detail can be found here.
Please note that our article on this investment should not be considered to be a regular publication.
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