Since the start of the year, the FTSE 100 has outperformed the FTSE 250.
This is partly due to the performance of Rolls-Royce shares, which are up 150% since the beginning of January.
The engine manufacturer’s performance has undeniably been impressive. But there’s a different UK stock that I have my eye on for long-term returns.
J D Wetherspoon
The stock is J D Wetherspoon (LSE:JDW). Like Rolls-Royce, the company had a difficult time during the pandemic, but has been benefitting from a recovery since.
As a result, the stock is up 56% since the start of 2023. And I think there might be more to come going forward.
Like Rolls-Royce, J D Wetherspoon struggled during the pandemic. Travel restrictions weighed on the engine manufacturer and social distancing regulations made life tough for the pub chain.
Since then, though, things have been looking up sharply. And the company has some important competitive advantages going forward.
Competitive advantage
Wetherspoon’s is a well-known brand. Its customers know that the firm’s pubs will be consistent, decent quality, and cheaper than the competition.
This last point is important. It means the company is likely to be a bit more resistant to an economic downturn than most as its offerings continue to be relatively affordable.
Underpinning this is a business model that allows the firm to maintain lower costs than its competitors. Wetherspoon focuses on owning its pubs outright, meaning it doesn’t have leasing costs.
This is key to maintaining a low price point to customers. And the company has been consistently buying freeholds over the last few years and disposing of leasehold buildings to push this advantage.
Outlook
I think there’s more to come from Wetherspoon’s. Recently, the firm has had to battle high levels of inflation, which are a big issue for a business that attempts to maintain low prices for customers.
This headwind looks like it’s subsiding, though. I see the news from earlier this week that UK inflation fell to 4.6% as a significant positive for the company.
The biggest issue going forward to me looks like leverage. Since the pandemic, Wetherspoon’s has been operating with significant debt on its balance sheet, which investors will need to be aware of.
With interest rates looking set to stay at elevated levels, the company will need to find a way to manage its debt. But it’s in a strong position relative to its competitors, which I think should help.
The next Rolls-Royce?
Rolls-Royce shares have done terrifically well since the start of the year. But I’m struggling to see what the next catalyst for the company might be.
I think the post-pandemic tailwinds for the company might be wearing off. And the prospect of an economic recession might cause flying hours to fall going forward.
I’m much more optimistic for Wetherspoon’s, though. The firm’s competitive advantage should remain intact even through a potential recession.
Right now, I’d much rather buy shares in J D Wetherspoon than Rolls-Royce. For the long term, I think the outlook seems much brighter.
