Down 23%, this FTSE 250 stock could have further to fall

Shares in JD Wetherspoon are falling as higher costs threaten to wipe out the FTSE 250 firm’s profits. So why is our author buying?

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Shares in JD Wetherspoon (LSE:JDW) have underperformed the FTSE 250 this year. The stock’s down 23%, compared to a 7% gain for the index. 

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There are reasons for this and I think the share price could have further to fall. But I won’t keep anyone in suspense – I’ve been adding to my investment at today’s prices. 

Profit warning?

The Budget isn’t the only reason the stock has been under pressure, but it has been a big factor. Chairman Tim Martin told the Financial Times he expected around £60m in cost increases. It’s easy to see why investors viewed this negatively. It isn’t a profit warning as such, but with the exception of 2019, £60m is Wetherspoon’s highest annual net income over the last 10 years.

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At first sight, it looks like the company’s profits might go to zero, but it’s not as straightforward as this. The most obvious strategy for offsetting higher costs is increasing prices to customers. This is a risky business though, especially for a company with a brand built on customer value. And that’s why the shares have been falling recently. 

Is it all bad?

Higher costs aren’t good for any business, but the Wetherspoon’s chairman said something else that caught my attention. It was the following:

“All hospitality businesses, we believe, plan to increase prices as a result.”

He might be right — both Fuller, Smith & Turner and Young & Co’s Brewery have warned of price increases. But this indicates to me that the company’s competitive position isn’t under threat.

In my view, the firm’s long-term success comes down to its ability to charge lower prices than its competitors. So the rest of the industry having to increase prices is a big help with this. Wetherspoon already has a price gap to its nearest competitors. And this gives it more scope to increase prices than its rivals without compromising its position as the best value around. 

Long-term investing

The key to all of this is the fact I’m not taking a guess about where the share price is going over the next couple of months, or even years. I’m investing for the long term. 

It wouldn’t surprise me at all if Wetherspoon’s shares continued to fall in the short term. Sales have been growing and margins have widened, but investors haven’t been excited by this. 

Fair enough – they don’t have to be. But I think the share price is attractive at the moment given the company’s long-term strengths, so I’ve been adding to my existing investment. 

I’ve no idea how far the stock might fall, but that isn’t important from my perspective. What matters is whether the stock’s cheap enough right now to ultimately provide a good return.

I’m a buyer

I think shares in JD Wetherspoon offer good value at the moment, which is why I’ve been buying. The short-term challenge is real and investors shouldn’t underestimate this. 

Equally though, it would be a mistake to miss the bigger picture here. In my view, this is that the company’s competitive position is strengthening, which should be a long-term advantage.

But here’s another bargain investment that looks absurdly dirt-cheap:

Like buying £1 for 31p

This seems ridiculous, but we almost never see shares looking this cheap. Yet this Share Advisor pick has a price/book ratio of 0.31. In plain English, this means that investors effectively get in on a business that holds £1 of assets for every 31p they invest!

Of course, this is the stock market where money is always at risk — these valuations can change and there are no guarantees. But some risks are a LOT more interesting than others, and at The Motley Fool we believe this company is amongst them.

What’s more, it currently boasts a stellar dividend yield of around 10%, and right now it’s possible for investors to jump aboard at near-historic lows. Want to get the name for yourself?

See the full investment case

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.

Stephen Wright has positions in J D Wetherspoon Plc. The Motley Fool UK has recommended Fuller, Smith & Turner P.L.C. 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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