At fresh 52-week lows, is this the best value stock in the FTSE 250?

Jon Smith considers a value stock that’s currently at low levels due to recent news, but he feels it shouldn’t remain this low for long.

| More on:
Hand of person putting wood cube block with word VALUE on wooden table

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.

A value stock is a company where the share price has fallen below its long-term fair value. It’s not an exact science to find a value stock, as it can be subjective to say where a share price should be in coming years. However, I’ve spotted one company that just hit 52-week lows that I think could be a contender.

Reasons for the fall

The company I’m referring to is JD Wetherspoon (LSE:JDW). It hit lows below 600p yesterday (5 November), putting the stock down 12% over the past year.

One of the short-term factors at play was the recent UK Budget announcement. The rise in employer national insurance contributions, increase in the living wage and other measures will put up the cost base for the firm. Wetherspoons founder Sir Tim Martin said that the increase to the company would be substantial, with a figure of £60m being used as the potential added annual cost.

Of course, all businesses are impacted by this, but the hospitality sector is seen as one of the most negatively impacted.

Another concern is the debt levels, which rose from £1.06bn last year to £1.07bn in its annual results out last month. With a debt-to-equity level of 2.71, this is well above the figure of 1 that’s what most companies aim for.

Why I think it looks cheap

When you consider the financial results from the past year, it might seem odd that the share price is trading at such low levels. For example, in the latest trading update out today, it showed that sales for the first 14 weeks of the financial year were 5.9% higher than the same period last year.

Aside from a slight fall in hotel room sales, all areas of the business were up. This included bar sales increasing by 5.7%, food by 5.7% and slot machines by 13.5%. This shows a diversified income stream, rather than relying on one area to drive growth.

I also think it looks cheap when I consider the income potential going forward. The business recently reinstated the dividend. At 12p per share, it’s nothing to write home about right now. However, I expect this to increase in coming years in line with financials. So to have the potential to receive more generous dividends based on the current share price looks attractive to me.

Finding the value

I do think that the stock should bounce back over the coming year, based on investors looking past the Budget news and focusing on the core financials. However, I wouldn’t say it’s the best value stock in the index, given that the price-to-earnings ratio at 12.31 is around my fair value target already. Therefore, I’m thinking about allocating a small amount of money here, but not a lot.

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.

Jon Smith has no position in any of the shares 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.

More on Investing For Beginners

Investing For Beginners

2 cheap shares that are at 52-week lows

Jon Smith reveals what he believes to be two cheap shares that have been oversold in the current market and…

Read more »

Three signposts pointing in different directions, with 'Buy' 'Sell' and 'Hold' on
Investing For Beginners

The Barclays share price keeps surging! Was I wrong to sell the stock?

Jon Smith explains why the Barclays share price is still rising, even though he feels that further gains could be…

Read more »

Investing Articles

2 ISA mistakes I’m keen to avoid

Looking to make the most of your ISA? Here are two errors Royston Wild thinks all savers and investors need…

Read more »

Investing Articles

Are stocks and shares the only way to become an ISA millionaire?

With Cash ISAs offering 5%, do stocks and shares make sense at the moment? Over the longer term, Stephen Wright…

Read more »

Chalkboard representation of risk versus reward on a pair of scales
Investing For Beginners

Up 40% in a month, what’s going on with the Burberry share price?

Jon Smith points out two key catalysts for the move higher in the Burberry share price, but questions whether anything…

Read more »

Investing Articles

1 ISA mistake to avoid

This commonly overlooked investing mistake can cost ISA investors tens of thousands of pounds over time. Here's how I'd try…

Read more »

Investing Articles

Vodafone share price forecast: here are the latest analyst predictions

The Vodafone share price takes another tumble as earnings fail to impress, but is this now a buying opportunity? Here’s…

Read more »

Close-up of British bank notes
Investing Articles

Where could the Barclays share price go in the next 12 months? Here are the latest forecasts

The Barclays share price is up 70% since January, with another 34% gain potentially on the horizon, say analyst forecasts.…

Read more »