The Motley Fool

Is this small-cap a contrarian buy or one to avoid? Here’s what I think

Image source: Getty Images

The Restaurant Group (LSE:RTN) operates a diverse group of restaurant brands. Despite the impact of Covid-19, could this restaurant group be a contrarian buy for your portfolio? Restrictions have eased, but it’s certainly not smooth sailing for the industry. I decided to investigate further.

Opportunity or one to avoid?

The Restaurant Group operates many popular restaurants you will have heard of and probably dined in. These include Wagamama, Frankie and Benny’s, Chiquito, and Garfunkel’s Restaurant. RTN has over 650 restaurants across the UK as well as 70 concessions outlets, most of which are in UK airports.

5G is here – and shares of this ‘sleeping giant’ could be a great way for you to potentially profit!

According to one leading industry firm, the 5G boom could create a global industry worth US$12.3 TRILLION out of thin air…

And if you click here we’ll show you something that could be key to unlocking 5G’s full potential...

The restaurant and bar trade has been battered by the economic downturn and market crash. Back in May, Bella Italia owner, The Casual Dining Group, plunged into administration. There have been well-documented issues with JD Wetherspoons and many others in the beleaguered industry. 

RTN saw its share price drop from 133p per share to a lowly 23p between 18 February and 18 March. This equates to a mammoth 82% decrease. At the time of writing, shares can be purchased at close to 55p a piece. This is a dirt cheap price but still, cheap prices do not always equate to value for money. The old adage, ‘you get what you pay for,’ springs to mind. A contrarian buy is probably not on the cards here.

Recent activity

In the downturn, RTN took steps to remain operational and weather the storm. At the height of the lockdown, it decided to slash costs by scrapping capital expenditures as well as raising close to £60m. These much needed funds strengthened a weakening balance sheet. The money was raised through a share placing as well as increasing revolving credit facilities (RCF).

Additionally, an update in July confirmed further reliance on its RCF, which added £10m of debt to the books. The government scheme to support with jobs has been utilised too, which is not a positive sign in my opinion, but necessary for many businesses such as RTN.

Approximately 60% of RTN’s restaurants are open at the moment, with a target of 90% open by the end of September. The Eat Out to Help Out  scheme will boost sales but the next trading update will tell us whether the impact is significant or not.

Better contrarian buys out there

Overall I am not convinced regarding RTN as an investment. It has relied heavily on government support and has increased debt levels to keep the lights on. I understand there will be pent-up demand for restaurants as restrictions continue to ease. For me, this is not enough to return the hospitality sector to its former glory.

The sector as a whole will experience demand, but with increasing costs and lower demand, the omens are not good. This is best portrayed by RTN’s full-year results prior to the downturn. 2019 was a loss-making year for RTN.

In my opinion there are better contrarian buys out there. I would stay away from hospitality stocks right now and veer towards fast-moving consumer goods and technology stocks. My Foolish colleague details how to be a good contrarian investor.

The high-calibre small-cap stock flying under the City’s radar

Adventurous investors like you won’t want to miss out on what could be a truly astonishing opportunity…

You see, over the past three years, this AIM-listed company has been quietly powering ahead… rewarding its shareholders with generous share price growth thanks to a carefully orchestrated ‘buy and build’ strategy.

And with a first-class management team at the helm, a proven, well-executed business model, plus market-leading positions in high-margin, niche products… our analysts believe there’s still plenty more potential growth in the pipeline.

Here’s your chance to discover exactly what has got our Motley Fool UK investment team all hot-under-the-collar about this tiny £350+ million enterprise… inside a specially prepared free investment report.

But here’s the really exciting part… right now, we believe many UK investors have quite simply never heard of this company before!

Click here to claim your copy of this special investment report — and we’ll tell you the name of this Top Small-Cap Stock… free of charge!

Jabran Khan has no position in any of the shares mentioned. 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.

Our 6 'Best Buys Now' Shares

Renowned stock-picker Mark Rogers and his analyst team at The Motley Fool UK have named 6 shares that they believe UK investors should consider buying NOW.

So if you’re looking for more stock ideas to try and best position your portfolio today, then it might be a good day for you. Because we're offering a full 33% off your first year of membership to our flagship share-tipping service, backed by our 'no quibbles' 30-day subscription fee refund guarantee.

Simply click below to discover how you can take advantage of this.