Many in the investing community are talking about buying cheap FTSE 100 shares.
I reckon the main idea is to load up with the shares of high-quality businesses when they are down. If I do that and hold for the long term, there’s a good chance the underlying business will recover and grow over time. Successful investors such as Warren Buffett have shown the way with that kind of strategy.
Normally, I’d be looking at the shares of businesses with defensive, cash-generating operations. I’d measure the strength of a firm’s market niche by examining profit margins and returns measured against assets and capital invested. And I’d hunt for long and consistent trading and financial records. I’d attempt to make a judgement about the company’s opportunities and outlook. Then I’d see if the valuation made sense of a long- term investment in the shares.
Another strategy for cheap FTSE 100 shares
However, there’s another approach to investing strategy I’m keen on. And I think it has the potential to deliver me outstanding returns from some FTSE 100 shares over the coming years. The strategy involves looking at companies in cyclical sectors that have been knocked down by the current economic downturn. Indeed, I think the coronavirus crisis is just another economic slump. We’ve had many before and they’ll likely keep on coming in the decades to follow.
The opportunity is here now. Indeed, I think it’s evident which cyclical businesses have survived the crisis. And those survivors could go on to recover and thrive in the next cyclical economic upturn. Historically, many cyclical stocks have delivered a cracking performance for investors as they emerged from downturns. And I think hotel and restaurant operator Whitbread (LSE: WTB) is a top candidate now.
Today’s half-year results report covers the six-month period to 27 August 2020. And that includes the time the firm’s UK hotels and restaurants were temporarily closed from March. Reopening occurred from July and through into August. Most of Whitbread’s operations are in the UK, so today’s figures are dire and show the company made a big loss.
Building a financial cushion
However, it moved fast to cut costs. And measures included halting non-essential capital investment, taking advantage of government financial support packages, and trimming the directors’ pay. The shareholder dividend was also a casualty and won’t start up again until at least until March 2022, “as a condition agreed with Whitbread’s lenders and pension trustees.”
But with cyclical stocks, I reckon the biggest opportunity arrives when earnings have plunged along with the share price. To me, the axing of the dividend is another good sign — indeed, I reckon successful cyclical investing requires an unusual way of thinking about shares.
Whitbread also raised a net £981m in a Rights Issue to shore up the balance sheet. I think the company is well-placed to survive and thrive as a recovery in its sector gains transaction. On top of that, Whitbread has big plans to expand its fledgeling German business. So, my long-term holding in the shares could benefit from both recovery and growth in the years ahead.
Kevin Godbold has no position in any share mentioned. The Motley Fool UK 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.