Questor: a tale of two stocks – BT, the market’s ne’er-do-well, and Next, its enduring winner

Questor share tip: how can one firm fail to capitalise on its near monopoly and another triumph in the most cut-throat of sectors?

Richard Evans 1 November 2020 • 5:00am

Next store — Next has a clear, consistent, simple, well-communicated strategy Credit: Yui Mok/PA

Wouldn’t it be great to pick stocks without having to read any income statements or balance sheets?

Look no further. It is this column’s view, founded on discussions with numerous professional money managers, that there exist many different ways to invest successfully and not all depend on skill with a spreadsheet.

In fact, at the risk of sounding heretical, Questor’s belief is that the most important things to know about a business, the most significant determinants of its likely success, are never found in the numbers.

They are to be found in the company’s culture.

Two prominent British businesses that reported last week on their recent progress, BT and Next, illustrate the point. I’m not going to break the promise I made in the first paragraph and look in detail at the numbers they reported. True investing, as opposed to gambling, has to be a long-term game. The real value of a business shows itself in performance over years and decades, not months.

Let’s look at the long-term performance of shares in BT and Next. According to the London Stock Exchange, BT’s share price has gone from 295p in May 1991, the earliest data on its website, to 101.4p on Friday. Next’s share price over the same period has risen from 25.5p to £58.40.

For much of that period BT was in effect a monopoly. Even today in many parts of the country it has no realistic competitors for the provision of broadband. The past three decades have seen an explosion in demand for communications and few were better placed to meet it than BT. It had the priceless advantage of a network already in being and a huge number of captive customers.

Next, by contrast, operates in one of the most competitive sectors you can find. Far from its physical assets – its shops – being an invaluable benefit and a source of competitive strength, a retail estate is these days seen as a burden: a burden not shared by online rivals.

How then has Next managed to grow its shareholders’ wealth so spectacularly while BT has all but destroyed it?

Purpose, simplicity, clarity and consistency. It does one thing, it does it well and it aims always to keep doing it better. It communicates how it intends to improve with great clarity and detail to investors and staff, as Questor can attest from years of covering the stock.

And these strengths are there from year to year, helped hugely by the long tenure of the chief executive. The business evolves, like any successful organism, in step with its environment. It does not seek dramatic change, either by branching out into new markets or by large acquisitions.

How many of these attributes does BT share? It does not, it seems to this column, have one clearly articulated purpose that has endured. It started one mobile network and sold it, then bought another. It has branched out into broadcasting. Its overseas operations have waxed and waned. And it has had numerous bosses.

It may have a strategy now – it may even have communicated it well – but how much faith can investors or staff have that it will last?

Questor is convinced that BT will never deliver for investors for any sustained period. Arguably its shares are cheap and they may well be due a recovery of sorts. Inspirational new managers may breathe some new life into it for a time. But the culture of so vast a firm tends to outlast any one boss. And the effects on the share price over the past three decades are there for all to see.

Next has very different prospects. It will undoubtedly emerge from the pandemic as one of the high street winners. It has quietly and patiently built a platform for the sale of other brands’ clothing as well as its own, in overseas markets as well as at home. It can be relied upon to grow those parts of its business prudently and profitably.

There is no reason why it can’t, in time, double in size and double again.

Not every Questor share tip will ignore all the numbers. But we think every investor, before he or she commits money to a stock, should take a long look at its culture.

Questor says: avoid BT, buy Next

Tickers: BT.A, NXT

Share prices at close: 101.4p, £58.40