JD Wetherspoon and Carnival shares: is now the time to buy ahead of a second lockdown?

Carnival and Wetherspoon shares look they’re destined for further falls. I’d steer well clear, ahead of a possible second lockdown, writes Thomas Carr.

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Investors in JD Wetherspoon (LSE: JDW) and Carnival (CCL) shares have already had a year to forget. Now, with some of the country poised for tighter lockdown restrictions — akin to a second lockdown for millions of people — things look like they’re about to get even worse.

Tighter restrictions mean that pubs will now close in the highest-risk areas. Nobody knows how long these restrictions will last. Likewise, with Covid cases escalating rapidly in most of Europe, companies that rely on travel look set for a prolonged bout of misery. There are now very few places abroad that UK citizens can travel to freely.

While this undoubtedly affects a great many companies, Wetherspoon and Carnival could be impacted immediately. If I held either of these two FTSE 250 shares, I reckon I’d sell out now and invest in something that would help me sleep a bit better at night.

Last orders

Wetherspoon was quick to reopen after the initial lockdown closed all of its pubs back in March. By the end of August, more than 95% of its pubs had reopened. But not even Rishi Sunak’s Eat Out to Help Out scheme was enough to maintain revenues at last year’s levels. From the beginning of July to mid-August, like-for-like sales were 17% below the prior year.

Following lengthy pub closures and the erosion of profit margins, the company expects to make a loss for this year. That’s not exactly surprising. But Wetherspoon’s shares still look overpriced, in my opinion. The shares trade at 16 times last year’s earnings, a period that was unaffected by Covid. That wouldn’t be cheap in a normal year. New restrictions mean the group will remain unprofitable for longer and will take longer to recover. In my mind, that’s still not reflected in the Wetherspoon share price.

Carnival shares have further to sink

Carnival has been more affected by Covid than most, with its cruise business effectively shut down for six months. Only in the last month has the company resumed a very small number of its cruises. This is reflected in its financial performance. In the nine months to the end of August, the group made a whopping net loss of over £6bn, with revenue down 67% from the year before.

A deteriorating Covid outlook has forced the group to cancel the majority of its cruises until next spring. It still has £6bn in cash, but a monthly cash burn of over £500m means that might not last long. What’s more, the group has borrowed so much just to survive the next year that repayments are going to eat into profits for the foreseeable future. It owes £5bn in repayments in 2023 alone. The Carnival share price has already fallen over 70% this year, but I think it’s got further to fall yet.

Holding Wetherspoon or Carnival shares isn’t just about whether the companies will survive the next year or two. It’s also about what the travel and hospitality sectors will look like in a few year’s time. I have no doubt that the hospitality sector will eventually recover. But I do have doubts about what the cruise industry will look like in the future. For a good night’s sleep, I think it’s best to sell shares in these companies now. There are so many better companies to invest in.

Should you invest, the value of your investment may rise or fall and your capital is at risk. Before investing, your individual circumstances should be assessed. Consider taking independent financial advice.

Thomas has no position in any of the shares mentioned. The Motley Fool UK has recommended Carnival. Views expressed on the companies mentioned in this article are those of the writer and therefore may differ from the official recommendations we make in our subscription services such as Share Advisor, Hidden Winners and Pro. Here at The Motley Fool we believe that considering a diverse range of insights makes us better investors.

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