The coronavirus has walloped the prices of a huge number of UK stocks. Some have recovered, but others still have some way to go. Today I’m going to look at two firms in the latter category that could turn out to be canny contrarian buys for new investors with long investing horizons (which should really be all of them!).
Contrarian UK stock
Pre-pandemic, shares in Premier Inn owner Whitbread (LSE: WTB) struck me as being rather too expensive. While it remains the most popular hotel brand in the UK, I still think last year’s sale of Costa Coffee to Coca-Cola was a mistake. It did, after all, offer the company some earnings diversification in better times.
Now that the share price has been hammered back to levels not seen for roughly seven years, however, the probability of making money from this top-tier UK stock has surely increased markedly.
My chief reason for thinking this is that Whitbread has acted fast to tap investors for new funds. A £1bn, deeply-discounted rights issue back in May provided the company with cash to cover outflows while its hotels remained shut.
More importantly, this money should also allow Whitbread the financial firepower to increase its market share by taking advantage of “enhanced structural opportunities” in both the UK and Germany. In other words, Whitbread is ‘buying the dip’. It’s intending to purchase assets on the cheap to reap the rewards later down the line.
Of course, the recovery for hoteliers is unlikely to be swift in the absence of a vaccine. Then again, I don’t think this should trouble Fools too much. The philosophy we endorse is the same as that of many brilliant investors such as Warren Buffett and the UK’s own Terry Smith: buy great shares at a reasonable price and sit back for value to be recognised.
Whitbread certainly isn’t the best business I’ve ever come across. Then again, the value on offer suggests those investors looking for FTSE 100 bargains could do worse than run their slide rules over it.
I fortuitously sold my holding in broadcaster ITV (LSE: ITV) just before March’s market crash. I’ve now begun rebuilding my position.
Like Whitbread, the £2.5bn cap has its problems — the ongoing reduction in advertising revenue being one example. Although some of this is temporary and coronavirus-related, many businesses are now opting to use sites such as Facebook to promote their products and services.
Another issue has been ITV’s ongoing struggle for viewers with US streaming services such as Netflix, Amazon Prime and Disney+. There’s no sign that this will get any easier going forward.
On a more optimistic note, ITV has form among UK stocks when it comes to bouncing back from cyclical setbacks. At the height of the last financial crisis, for example, shares fell as low as 25p each. Once the storm had passed, they climbed as high as 250p.
So long as the company’s Studios arm can get back to work, online revenue continues to grow and demand for its Britbox subscription service continues, I suspect (hope) history may repeat itself once the pandemic is truly over.
This is, of course, unless a deep-pocketed suitor decides to bid for the company beforehand. At only 64p per share, such an outcome wouldn’t surprise me.
Paul Summers owns shares of ITV. The Motley Fool UK has recommended ITV. 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.