JD Wetherspoon: why investors should head to the pub

It has been a dismal two years for pubs and restaurants. They were closed for long periods in 2020 and early 2021, and when they did reopen they faced various restrictions that were only gradually phased out. Then in the summer the “pingdemic” caused staff shortages before supply-chain difficulties dampened autumn trading.

To add insult to injury, the emergence of the new Omicron variant has led to calls for more restrictions, including masks in restaurants and possibly even closures and lockdowns, to be reintroduced.

Shareholders in pub chain JD Wetherspoon (LSE: JDW) have experienced a particularly bumpy ride. After doubling between March 2016 and March 2020, the share price plunged by 60% during the first wave of the crisis.

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It then staged a partial rebound as restrictions were lifted only to fall again during the autumn of 2020. The news of the vaccine sparked a second rally, propelling the stock back to levels near its pre-crisis high this spring. However, since then the shares have slipped by a third.

A sea of troubles

Wetherspoon, like its competitors, has been hit by a range of problems, including the slow pace at which older customers are returning to the pub and the impact of the homeworking revolution on sales of lunches.

Medium-term shifts in the labour market and rising food prices may also mean that margins will come under pressure. Still, all the indications are that people are starting to become more confident about returning to work and going out in general.

While there have been many false dawns over the past two years, what we know so far suggests that even in the worst-case scenario, the Omicron variant is more likely to delay, rather than derail, a complete return to normality, especially since new Covid-19 pills, which are set to become widely available early next year, are likely to slash hospitalisation and death rates.

In the longer run, Wetherspoon has several advantages. These include a strong brand name and a loyal following among its many fans. Its focus on beer and good-quality, affordable food underpinned sales growth of around 6%-7% a year between 2016 and 2019, while the company earned a solid 10% return on capital invested (a key gauge of profitability).

Even in the most conservative scenario, sales are expected to return to their pre-pandemic level by 2023, although profits may take a little longer to bounce back. Overall, this justifies the stock’s 2022 price/earnings (p/e) ratio of 15.

At the moment, the market is clearly moving against Wetherspoons, as shown by the fact that it is trading well below its 50-day and 200-day moving averages. I’d therefore wait until it has gone up by 10% from its current price of 857p to 945p before pulling the trigger. Once that happens, I’d go long at £2 per 1p, with a stop loss of 450p, which would give you a total downside of £990.