I snapped up these cheap shares this week after a 42% fall

Our writer has increased his position in a well-known UK company. Here’s why he thinks he managed to buy truly cheap shares despite recent results.

| More on:

The content of this article was relevant at the time of publishing. Circumstances change continuously and caution should therefore be exercised when relying upon any content contained within this article.

A man with Down's syndrome serves a customer a pint of beer in a pub.

Image source: Getty Images

When investing, your capital is at risk. The value of your investments can go down as well as up and you may get back less than you put in.

Read More

The content of this article is provided for information purposes only and is not intended to be, nor does it constitute, any form of personal advice. Investments in a currency other than sterling are exposed to currency exchange risk. Currency exchange rates are constantly changing, which may affect the value of the investment in sterling terms. You could lose money in sterling even if the stock price rises in the currency of origin. Stocks listed on overseas exchanges may be subject to additional dealing and exchange rate charges, and may have other tax implications, and may not provide the same, or any, regulatory protection as in the UK.

You’re reading a free article with opinions that may differ from The Motley Fool’s Premium Investing Services. Become a Motley Fool member today to get instant access to our top analyst recommendations, in-depth research, investing resources, and more. Learn More.

I am always on the lookout for cheap shares I can add to my portfolio. By cheap, I do not simply mean those that have a low price. Rather, I am focused on value.

When buying a share, one is buying a tiny stake in a company. So if its long-term value is likely to be significantly higher than the price one pays for it today, allowing for the cost of tying money up over time, I would see that share as cheap. In a nutshell, that is what is known as the discounted cash flow model of valuation.

Director purchase

One of the shares I already owned in my portfolio was well-known pub chain J D Wetherspoon (LSE: JDW). Its performance has hardly been a reason to pour a celebratory pint lately. Quite the reverse — the shares have lost 42% in value over the past year.

Should you invest £1,000 in J D Wetherspoon Plc right now?

When investing expert Mark Rogers has a stock tip, it can pay to listen. After all, the flagship Motley Fool Share Advisor newsletter he has run for nearly a decade has provided thousands of paying members with top stock recommendations from the UK and US markets. And right now, Mark thinks there are 6 standout stocks that investors should consider buying. Want to see if J D Wetherspoon Plc made the list?

See the 6 stocks

Yet I noticed that the company’s chairman dipped into his own pockets at the start of this month to buy more of its shares when they were trading at £4.57 each.

It was not just pocket change he used. The insider bought 2.6m shares, meaning he spent close to £12m. He now owns over 30m Spoons shares, so I imagine he feels pretty confident about its outlook.

Since then, the shares have moved up by 13% in a matter of weeks. Cheers!

Created with Highcharts 11.4.3J D Wetherspoon Plc PriceZoom1M3M6MYTD1Y5Y10YALLwww.fool.co.uk

But could there be more to come?

Cheap shares

I think so, which is why I bought more of the shares myself this week.

Looking at the company’s valuation metrics, these may not obviously look like cheap shares. Last year’s post-tax profit was just £19m, meaning that Wetherspoons trades on a price-to-earnings (P/E) ratio of 34. That hardly screams value. On top of that, in the previous couple of years, the company had made heavy losses.

Remember though, I define cheap shares relative to what I think their future earnings potential is. Clearly, Spoons has had a tough few years due to enforced closures of hospitality venues, soaring costs and tightening consumer budgets. The last two remain clear risks. But the direction of travel has been positive. The company is profitable again and I think the earnings could grow.

The current P/E ratio may look high. But in 2019, the chain earned £73m after tax. The current market capitalisation is only around nine times that amount.

I’m buying

That is why I see these as cheap shares.

Over time, I believe Wetherspoons can overcome current difficulties and get back to making money on a grand scale. It has proved in the past that it can do that, has an effective business model, deep experience and a customer proposition that could make it even more popular in economically difficult times.

All of that adds up to a recipe for possible future success, in my view. I think today’s valuation suggests too pessimistic an outlook for this successful business — and have been putting my money where my ale should be!

Should you buy J D Wetherspoon Plc shares today?

Before you decide, please take a moment to review this first.

Because my colleague Mark Rogers – The Motley Fool UK’s Director of Investing – has released this special report.

It’s called ‘5 Stocks for Trying to Build Wealth After 50’.

And it’s yours, free.

Of course, the decade ahead looks hazardous. What with inflation recently hitting 40-year highs, a ‘cost of living crisis’ and threat of a new Cold War, knowing where to invest has never been trickier.

And yet, despite the UK stock market recently hitting a new all-time high, Mark and his team think many shares still trade at a substantial discount, offering savvy investors plenty of potential opportunities to strike.

That’s why now could be an ideal time to secure this valuable investment research.

Mark’s ‘Foolish’ analysts have scoured the markets low and high.

This special report reveals 5 of his favourite long-term ‘Buys’.

Please, don’t make any big decisions before seeing them.

Claim your free copy now

Should you invest, the value of your investment may rise or fall and your capital is at risk. Before investing, your individual circumstances should be assessed. Consider taking independent financial advice.

C Ruane has positions in J D Wetherspoon Plc. 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.

Like buying £1 for 51p

This seems ridiculous, but we almost never see shares looking this cheap. Yet this recent ‘Best Buy Now’ has a price/book ratio of 0.51. In plain English, this means that investors effectively get in on a business that holds £1 of assets for every 51p they invest!

Of course, this is the stock market where money is always at risk — these valuations can change and there are no guarantees. But some risks are a LOT more interesting than others, and at The Motley Fool we believe this company is amongst them.

What’s more, it currently boasts a stellar dividend yield of around 8.5%, and right now it’s possible for investors to jump aboard at near-historic lows. Want to get the name for yourself?

See the full investment case

More on Investing Articles

Man putting his card into an ATM machine while his son sits in a stroller beside him.
Investing Articles

Forecast: in 1 year, the Lloyds share price could be…

The Lloyds share price has surged more than 40% over the last 12 months, but can this momentum continue? Or…

Read more »

Investing Articles

Down 22%, this FTSE stock offers a 9.3% dividend yield for investors

This unloved renewable energy giant controls 6% of the UK’s wind power generation, offering one of the highest dividend yields…

Read more »

Warren Buffett at a Berkshire Hathaway AGM
Investing Articles

Now more than ever, this Warren Buffett quote’s one to remember!

With President Trump’s tariffs causing stock market turmoil across the globe, our writer reflects on a famous piece of advice…

Read more »

Investing Articles

UK stocks are still where the discounts are! Here’s what I’m buying

As the stock market sells off after the latest tariff news, UK stocks are still cheap compared to their US…

Read more »

Investing Articles

How much passive income could an investor earn if they put £200 a month in an ISA?

Millions of Britons use the Stocks and Shares ISA as a vehicle to build a large pot of money and…

Read more »

Investing Articles

2 ‘safe-haven’ defensive shares to consider buying as tariffs hammer the stock market

Inflation fears are sending the prices of shares down, creating potential buying opportunities for investors. But which ones are likely…

Read more »

The flag of the United States of America flying in front of the Capitol building
Investing Articles

Forecast: here’s how far the S&P 500 could crash in 2025

S&P 500 stocks are getting sold off as investors panic over economic uncertainty. But how far could the index fall?…

Read more »

Investing Articles

Is the FTSE 250 about to surge by 45%?!

The FTSE 250’s trading at a massive discount versus historical levels. Could the underappreciated growth index enjoy an upward correction…

Read more »