The FTSE 100 index slumped by more than third between the start of the year and the trough at the end of March. Even after a modest rally, the market is still 20% off its peak, so many solid stocks that were previously too expensive are now priced much more affordably. One is the pub chain J D Wetherspoon (LSE: JDW).
Wetherspoon is not exactly a fashionable brand: it is widely deemed to be the Ryanair of its particular trade. However, just as Ryanair has dominated short-haul travel, Wetherspoon has been one of the few success stories in the pub retail trade. It has focused relentlessly on what its customers want: decent food and drink at an affordable price.
Unlike its competitors, it has avoided the perils of over-diversification, staying focused on its branded pubs and a handful of hotels instead of trying to branch out into other areas. Between 2014 and 2019 total sales grew by an average of 5% a year, while earnings per share more than doubled.
Subscribe to MoneyWeek
Subscribe to MoneyWeek today and get your first six magazine issues absolutely FREE
Sign up to Money Morning
Don't miss the latest investment and personal finances news, market analysis, plus money-saving tips with our free twice-daily newsletter
Don't miss the latest investment and personal finances news, market analysis, plus money-saving tips with our free twice-daily newsletter
Despite its continued success, the problem with Wetherspoon in recent years has been a very high valuation. It traded at a price/earnings (p/e) ratio of more than 20 while its competitors were far cheaper. As a result, I’ve avoided it in the past as too expensive, and even recommended that you short it in March 2017. However, given that it is now down by a third from its price on 1 January, it is much more affordable. It currently trades on a 2021 p/e of 15.
Of course, the big reason for this fall is that Wetherspoon, like all pubs and restaurants, is currently shut down as part of the lockdown and not due to re-open until July at the earliest. There is also a worry that even when it is allowed to open again, the combination of a weakened economy and a cautious public will lead to a dramatic fall in earnings over the next few years.
Ripe for a rebound
However, while revenue will clearly take a short-term hit from the ongoing closures, the increase in the number of people flocking to beaches and parks in the last fortnight suggests that there is plenty of pent-up demand for pubs.
Possible changes to the social-distancing rule (the safe gap could be reduced from 2m to 1.5m) and a surge in “staycations” this summer owing to travel restrictions could accelerate the recovery.
Wetherspoon has already doubled since its low in late March, so market confidence appears to be returning already. However, I think the shares have room to rise further.
I recommend going long on Wetherspoon at the current price of 1,114p at £4 per 1p. Put the stop-loss at 850p, compared with IG Index’s minimum of £1 per 1p, for a total downside of £1,056.
-
RICS: Housing market subdued in May but outlook brightens as sales stabiliseThe property market lost momentum after April’s stamp duty hike, but sentiment is improving
-
The most underrated places to buy a home in the UKHouse prices tend to be sky-high in some of the most desirable parts of the UK. We look at ten underrated areas which boast great amenities without an outsized price tag.
-
The Burberry share price looks like a good betTips The Burberry share price could be on the verge of a major upswing as the firm’s profits return to growth.
-
Why you should short this satellite broadband companyTips With an ill-considered business plan, satellite broadband company AST SpaceMobile is doomed to failure, says Matthew Partridge. Here's how to short the stock.
-
It’s time to sell this stockTips Digital Realty’s data-storage business model is moribund, consumed by the rise of cloud computing. Here's how you could short the shares, says Matthew Partridge.
-
Netflix has plenty of life in it yet – here's how to trade the sharesTips Netflix still has plenty of scope for growth, says Matthew Partridge, and the shares are reasonably priced. Here's how to play the Netflix share price.
-
Trading: Dunelm will keep growing, here's how to play itTips Furniture retailer Dunelm surged during the pandemic, but its shares have since fallen back. But it is well placed to take more market share from rivals, says Matthew Partridge. Here, he explains how to play the Dunelm share price.
-
Ashtead – a building equipment rental firm on solid foundationsTips The prospects for Ashtead, the building-equipment rental firm, are auspicious. Matthew Partridge explains the best way to play the share price.
-
A recruitment firm to bet on as the world gets back to workTips Recruitment consultant Hays has been volatile, but results are strong and trends encouraging. Matthew Partridge explains the best way to play the share price.
-
What is next for interdealer broker TP Icap?Analysis TP Icap has struggled in a declining market, but there’s still a role for its services. Bruce Packard explains what that is.
