Monday, April 30, 2007

The UK slowdown should begin soon...shorting a retailer (Next)

Sold ~£24,000 of Next today, the high street clothing retailer. Stock up significantly lately on private equity speculation, but I don't think this happens as it has been talked about for years with nothing happening. So I am viewing the recent spike as a great entry point to get short. Stock trading about £23.50, pretty close to the all-time high.

Not only am I not convinced by the quality of the company, it seems to me that the UK slowdown should start soon. House prices are clearly peaking, with the final burst higher in recent months thanks to City bonus money piling into property, despite the fact that these supposedly intelligent people in the markets should be able to see the speculative bubble that has formed. Once house price growth stalls, I don't see much to keep consumer spending going at a decent pace, as income growth has been fairly stagnant in the UK for the last few years, especially due to immigration from Eastern Europe holding wages down. In this scenario, retailing should be a sector that suffers.

Click here for details of the stock. Market cap £5.33bn, P/E ~16.1

Looking to take about 10% out of this trade, so first target is around £21.00.

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