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Since the start of the year, the FTSE 250 is down around 6%. But shares in J. D. Wetherspoon (LSE:JDW) have had a terrific year, rising by 51%.
Despite this, the share price is still around 45% short of where it was five years ago and 60% below its pre-pandemic levels. The business is known for its cheap prices, but are its shares also a bargain?
Background
Making sense of the current share price involves understanding why the stock has been so volatile over the last few years. Mostly, this is the result of two things: the Covid-19 pandemic and inflation.
In 2019, the Wetherspoon’s share price reached £16.76. But as pubs were among the first businesses to close and the last to reopen, the stock dropped 57%, to £9.43 per share.
As pandemic restrictions ended, though, the stock began to recover. And by April 2021, the share price had reached £14 — within 20% of its 2019 levels.
Since then, though, the dominant theme has been inflation. As increased labour, food, and energy costs have weighed on margins, the stock has fallen around 51%, to £6.81.
All of this helps make sense of the position J. D. Wetherspoon finds itself in today. The business has faced a number of challenges, but I think there’s reason for investors to be optimistic.
Competition
None of these issues is specific to J. D. Wetherspoon — both the pandemic and the subsequent inflation have been headwinds for businesses across the sector. And I think this is important.
When there’s a crisis in an industry, it’s rarely the case that it affects all of the participants equally. Typically, the strongest businesses emerge with their competitive advantages over their rivals enhanced.
I think this is the case with Wetherspoon’s. The company’s big point of differentiation is the low prices it charges customers and this was exaggerated during the pandemic.
Where other firms elected to take savings brought about by tax cuts as profits, Wetherspoon’s passed them on to its customers. As a result, the gap between its prices and those of its competitors widened.
This is important — it gives the business room to raise prices to combat inflation, while remaining below its rivals. This is a marked contrast to the (seemingly unpopular) ‘surge pricing’ being introduced elsewhere.
A stock to buy
The pub industry in the UK has had a difficult few years. This makes it an unlikely place to go looking for investment opportunities.
It’s often the case, though, that the best places to look for stocks to buy are in areas of the market that other investors are overlooking. And I think that’s the case here.
With Wetherspoon’s shares, investors have a chance to buy into a business that has a powerful appeal to its customers. I expect the company’s low prices to be reasonably resistant to pressure in a recession.
It’s easy to see why the share price has been falling lately. But I think investors should seriously consider buying the stock while it’s some way from its pre-pandemic highs.
