| Sam Volkering | 29 May 2020 |
Is it too late to buy these six pub stocks?
Social media post-Covid-19
Donald Trump is mad at Twitter for fact-checking one of his tweets. But the stock of Twitter doesn't seem to be affected. What impact could the upcoming US elections and easing of lockdowns have on social media stocks?
| | Dear Subscriber,
Full lockdown began on 23 March. That means we've been under social restrictions (house arrest) for 67 days and counting. On Monday it'll be ten weeks flat.
Incredible stuff. Never in my lifetime have such draconian measures been enforced on a society.
Nonetheless, thems the rules. It's what we're dealt with. And there's nothing you or I can do to change what's happened or what the political decision makers and their cronies decide on the rules going forward.
However, while we can't affect their decisions, we can do our best to work with what we've got to maximise what we might have later on…
You see while 23 March 2020 was the first real start of lockdown, an opportunity presented itself three days earlier, on Friday 20 March 2020.
It was on that day that Prime Minister Johnson announced that all pubs, bars, restaurants, cinemas, gyms and leisure centres would close.
It was in effect a swift demolishing of an industry in one single announcement.
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As you turn the corner, you get punched in the face
For many pubs and bars across UK it was a death sentence.
According to the Guardian last week,
| More than 30,000 pubs, bars and restaurants may remain permanently closed because the coronavirus shutdown has sent a wrecking ball through the UK's hospitality trade.
| | This comes just five months after the Office for National Statistics (ONS) said that to the end of March 2019 the hospitality industry saw the first net gain in pubs in the UK since 2010.
The ONS estimated that at the end of March 2019 there were 39,135 pubs in the UK, a net rise of 320 from the year prior. After nearly a decade of a slow downturn in pubs in the UK, there was finally some light at the end of the tunnel.
This downturn had of course been a part of a wider pub industry trend as pubs moved away from just being "boozers" to delivering a better customer experience. And the rise of the "gastropub" had moved its way through the industry.
I'd seen this thing happen before in Australia – you can barely find a "traditional" pub in Oz these days.
Most now have a food menu straight out of the MasterChef finals to accompany your pint of whatever boutique craft beer your local hipster microbrewery happens to be making at the time.
The same thing has been taking place in the UK. And just as things began looking up and that changeover was paying off for the pub industry, it all came crashing down around their feet.
And all of the listed pub companies took a massive hit to their stock prices.
All. Of. Them.
What else would you expect though?
Forcibly shut by the government, hundreds of thousands of workers furloughed or made redundant… and many unlikely to come back to a job after this all winds off. No customers equals no revenues, no revenues equals no business.
Also if you think small, independent brewers and pubs were battling against the bigger players before, it's going to be twice as hard as we come out of all this.
However, with the entire industry hammered from the coronavirus crisis, you've got to ask the question, "Are pub stocks a good buy?"
If you're not looking for opportunities from crises like these, then you probably don't belong in the investment game. That's not diminishing the plight of those out of work, nor the pubs that have to close.
But you didn't do it, didn't force it, didn't make the decisions that made the situation as it is.
You've just been dealt the hand that you have. Now you want to do the right thing for yourself, your family and your long-term wealth, right?
Anyone that says they don't want to make smart decisions for the better financial future of their family… well I just don't know what you'd say to those people. I don't think they exist anyway.
Is it already last drinks or happy hour?
That means if you're an investor, and you've got a long-term strategy, then you must be looking at industries that've been hit from the coronavirus crisis. And you've got to ask are they investment opportunities right now, are the pubs a good buy?
Well, quite possibly.
When we look at the pub stocks, we go straight to JD Wetherspoon, Fuller Smith & Turner, Young & Co's Brewery, Marston's, Mitchells & Butlers and The City Pub Group.
They were all trading higher in January than they are now.
They're all also trading higher than the mid-March lows as peak fear really took hold of the market.
Of course investing in mid-March would have been ideal.
For example, on 19 March you could have picked up JD Weatherspoon stock for around 500p. Yesterday it was trading up around 1,200p – a 140% gain from the March lows.
Likewise, in mid-March you could have easily picked up Marston's stock for around 20p. In trading yesterday it was floating around 66p – a 230% gain from the March lows.
It's a similar story for all those companies.
And when you see the bounce from those lows you might think to yourself, "I've really missed the boat…"
Maybe. But instead of wallowing on what's already happened, why don't we look at the bigger picture?
The bigger picture being, where they are now to where they were just a few short months ago at the start of the year. Could they potentially head back to the kinds of prices we saw before this crisis really kicked off?
Here's what that bigger picture looks like, - JD Wetherspoon (LSE:JDW) – 2 January 2020 price 1,678p – yesterday trading around 1,200p. Potential upside to January price = 39.83%
- Fuller, Smith & Turner (LSE:FSTA])– 2 January 2020 price 960p – yesterday trading around 706p. Potential upside to January price = 35.97%
- Young & Co's Brewery (LSE:YNGA) – 2 January 2020 price 1,627.50p – yesterday trading around 1,138.50p. Potential upside to January price = 42.95%
- Marston's (LSE:MARS) – 2 January 2020 price 129.60p – yesterday trading around 67p. Potential upside to January price = 93.43%
- Mitchells & Butlers (LSE:MAB) – 2 January 2020 price 456.50p – yesterday trading around 195p. Potential upside to January price = 134.10%
- The City Pub Group (LSE:CPC) – 2 January 2020 price 211.86p – yesterday trading around 81.50p. Potential upside to January price = 159.95%
Now, if you're of the view these stocks are set to head back to those January levels, are those kinds of numbers appealing?
Yeah, I know it's not the kind of mind-blowing returns that you might have got had your timing been so amazing that you perfectly picked the bottom of the market.
But you don't need to perfectly time the bottom in markets like these.
Not many investors do exactly time market bottoms. And back then, the risk that many of these companies might not even make it out of all this was a real and present danger.
But now we have a clearer picture of the pathway out. And there's the possibility pubs may reopen in July (with some restrictions we might add). Quite suddenly the uncertainty is starting to fall away from the industry.
That's not to say these companies are completely out of the woods just yet.
We're not just going to flip the switch back to "normal" instantly. And the risk of further lockdown is still present – which would smash these stocks all over again. That's a risk you've got to realise.
However, when you take the time to look at each company on their merits, their positions with their balance sheets, and their relationship with their lenders and debt covenants (if they have them) you get a much clearer picture of what the long-term view of these companies and the potential upside might be.
I'm just saying that when it comes to buying pub stocks I don't think last drinks have been called by any stretch. In fact, I think it might still be happy hour.
In fact, pub stocks might just end up being one of the better industries to come out of the back of this crisis – and these are all stocks that investors should be looking at with much greater focus.
Regards,
Sam Volkering
Editor, Southbank Investment Research
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