One of Warren Buffett’s most famous quotes reads “It’s far better to buy a wonderful company at a fair price than a fair company at a wonderful price”. So what stocks listed on UK markets do our contract writers believe match this description right now?
Compass Group
What it does: Compass provides food catering services to schools, offices, hospitals and military facilities in the UK and abroad.
By Mark David Hartley. Compass Group (LSE: CPG) provides catering and food services on an international scale, employing half a million people across Europe. Growth over the past four years has been strong and consistent, with the 147% growth between October 2020 and November 2024. That’s an annualised return of over 25% per year! It’s also a solid dividend payer, with over 20 years of consecutive growth (barring a brief cut during Covid).
Sure, the share price isn’t on the cheap side. But considering the recent growth, I believe they’re fairly valued. Similar growth stocks typically have a high price-to-earnings (P/E) ratio. 33 at the time of writing, Compass’ is relatively low and with earnings forecast to grow, it will probably decrease. The risk is that, when trading so high, any slip in earnings or an economic downturn could send the shares spiralling. Plus, by operating across 50 countries, it’s exposed to political, regulatory and foreign exchange risks.
Mark David Hartley owns shares in Compass Group.
Greggs
What it does: Greggs is a food-on-the-go retailer known for baked pasties and sausage rolls with over 2,500 stores across the UK.
By Zaven Boyrazian. Despite appearances, the UK’s favourite bakery chain, Greggs (LSE:GRG) has long been a cash-generating machine! Demand for pasties and sausage rolls has propelled the business to become the industry leader by market share when it comes to breakfast takeaway.
Total revenue over the first nine months of 2024 is up 12.7%, with like-for-like sales increasing by 6.5%. Yet shares have taken a double-digit tumble in recent weeks following the reveal of the UK government budget.
With around 30,000 workers on Gregg’s payroll, the incoming hikes to minimum and living wages are a hefty blow. Deutsche Bank has subsequently predicted £97m in increased labour costs over the next two years.
That’s a big hit on margins if Greggs is unable to pass on the higher costs to customers. But this isn’t the first time Greggs has had to raise prices. And while its pricing power does have limits, the bakery chain has so far defied pricing expectations.
With the shares now trading lower, a buying opportunity has emerged, in my opinion.
Zaven Boyrazian does not own shares in Greggs.
IG Group
What it does: IG Group is a global financial technology company, providing online trading platforms for clients.
By Paul Summers: IG Group (LSE: IGG) shares have long traded at a valuation far below the average among UK stocks. That looks attractive to me considering this business consistently posts great operating margins and returns on capital employed – two ‘quality’ metrics I pay a lot of attention to.
In addition to this, it’s worth noting that IG makes money in both good and bad times. For example, revenue rose 15% to almost £279m in the three months to the end of August as fears grew about a US recession.
There are risks, of course. Not unreasonably, this part of the market is often a target for regulators. IG also faces an ongoing battle to keep clients from switching to rivals.
As things stand, however, it remains the market leader in what it does and boasts a robust balance sheet. There’s a chunky dividend as well.
Half-year results are due on 23 January.
Paul Summers has no position in IG Group
J D Wetherspoon
What it does: J D Wetherspoon is a leading operator of pubs throughout the UK and also has a hotels business
By Christopher Ruane. With a price-to-earnings ratio of 16 at the time of writing, J D Wetherspoon (LSE: JDW) may not be cheap — but it looks fairly priced to me.
It is easy to focus on the downside. Pubs continue to decline in numbers nationally. Spoons reckons that taxes and business costs could rise £60m following the recent Budget. That is above the £49m in post-tax profit the firm posted last year. Clearly, there are risks.
But I think Spoons’ reputation for cheap drinks works to its advantage in this regard. The whole sector will likely need to raise prices following the Budget. So while Spoons may charge its customers more than before, its relative position as the cheapest boozer in many places could become attractive to even more punters.
It has a proven business model, loyal and large customer base and long, deep experience in operating hundreds of pubs. A move into franchises in student unions offers a new avenue for growth.
Christopher Ruane owns shares in J D Wetherspoon.
