Image source: Getty Images
Since the beginning of the year, the FTSE 100 has surpassed FTSE 250.
This is due in part to the performance of Rolls-Royce shares, which are up 150% since the beginning of January.
Without a doubt, the engine manufacturer’s performance has been impressive. But there is another UK stock I have my eye on for long-term returns.
JD Wetherspoon
the action is JD Wetherspoon (LSE:JDW). Like Rolls-Royce, the company fell on hard times during the pandemic but has since benefited from a recovery.
As a result, the stock is up 56% since the beginning of 2023. And I think there could be more to come.
Like Rolls-Royce, JD Wetherspoon struggled during the pandemic. Travel restrictions hit the engine maker and social distancing rules made life difficult for the pub chain.
However, since then things have been improving drastically. And the company has some important competitive advantages going forward.
Competitive advantage
Wetherspoon’s is a well-known brand. Its customers know that the company’s pubs will be consistent, of good quality and cheaper than those of the competition.
This last point is important. It means the company is likely to be a little more resilient to an economic downturn than most, as its offerings remain relatively affordable.
The basis for this is a business model that allows the company to maintain lower costs than its competitors. Wetherspoon focuses on owning its pubs outright, meaning it has no leasing costs.
This is key to keeping the price low for customers. And the company has been steadily buying freehold properties over the past few years and disposing of leasehold buildings to boost this advantage.
panorama
I think there is more to come from Wetherspoon’s. Recently, the company has had to battle high levels of inflation, which are a big problem for a company trying to keep prices low for customers.
However, this headwind appears to be fading. I consider the news earlier this week that UK inflation has fallen to 4.6% to be a significant positive for the company.
The biggest problem I have ahead of me seems to be leverage. Since the pandemic, Wetherspoon’s has been operating with significant debt on its balance sheet, something investors will need to take into account.
Since interest rates look set to remain high, 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 performed excellently since the beginning of the year. But I’m struggling to see what the next catalyst for the company could be.
I think the post-pandemic tailwinds for the company could be fading. And the prospect of an economic downturn could cause flying hours to decline in the future.
However, I am much more optimistic about Wetherspoon. The company’s competitive advantage should remain intact even during a possible recession.
Right now, I’d rather buy JD Wetherspoon shares than Rolls-Royce. Long term, I think the outlook looks much brighter.
