In an industry where everyone appears to have an edge, how can retail investors possibly compete with the professionals? Armed with £24k terminals, orders updated in microseconds, and quarterly conference calls with directors, the resource divide between professional and private investors has always been daunting. That was until famed American investor Peter Lynch took the retail world by storm when he released his guide on how to become a great investor, and make the most of your own edge. The premise was simple: invest in what you know.
I tried to think of which FTSE 350 companies would best support the idea of investing in what you know, and of course the usual supermarkets, clothing companies, and online retailers all fit the bill. Yet there is just one place that truly unites the generations, and whose infamy and loyalty is appreciated by all swathes of the British public. I am, of course, referring to shares in J D Wetherspoon (LSE:JDW). A place that, for better or worse, has truly become a staple of British life since its founding over 40 years ago. From a quiet breakfast meeting place for OAPs, a post-work drinking hotspot, or even a fresher’s filled student nightclub, Wetherspoons caters for it all.
It should come as no surprise, then, that the pandemic was not kind to Wetherspoons, and despite what looked like a strong recovery in the summer of 2021, the share price has continued to suffer, down 55% since its year high, and 70% from pre-pandemic levels.
This has undoubtedly been a difficult time for shareholders in this beloved institution, as the continued fall in share price appears almost at odds with the high-level performance of the chain. Pubs are no longer shut due to Covid-19, sales have reached pre-pandemic levels, and management continues to increase the freehold portion of the pub portfolio.
Despite these positive factors, and it is important to stress these are certainly encouraging signs, the company is struggling to perform at the same level as before the pandemic. Labour and marketing costs have increased dramatically, driving down margins and leading to an expected loss of £30m, post-IFRS (International Financial Reporting Standards), for the current financial year. Likewise, the cost of pub refurbishment has taken a significant chunk out of the 2022 profits, owing to the minimal levels of repair that was possible during the pandemic.
It’s for these reasons that I’ll be the first to admit that Wetherspoons is certainly a mixed bag, and although investing in what you know sounds easy, the reality is that in order to find the best opportunity, you often need to be willing to wait. The company is, of course, going through a tough period, yet is well capitalised after raising close to £100m at the beginning of 2021, and consequently has boosted its liquidity and reduced the impact of this negative profit environment.
The question, therefore, is whether the current negative factors impacting the share price today are likely to persist three, five, or 10 years into the future, and I do not believe that to be the case. We are in a unique time period, with elevated inflation, reduced economic growth, and huge amounts of market uncertainty, yet I believe patience — and investing in what you know — may be the key to market outperformance over the next few years, so I am strongly considering adding J D Wetherspoon shares to my long-term investment portfolio.
