UK Markets closed

£5k to invest? 2 shares I’d buy for an ISA that have fallen 50%

Roland Head
Business accounting concept, Business man using calculator with computer laptop, budget and loan paper in office.

The market crash has caused many well-known stocks to fall by 50% over the last six months. However, I think that some of these shares are long-term winners that’ll bounce back quickly. In this piece, I want to look at two shares I’d buy today for my Stocks and Shares ISA, before the tax year ends on 5 April.

I’d buy shares in this market leader

I’m naturally quite careful with money. So you won’t be surprised to know I’m a regular guest at Premier Inn hotels. Shares in the chain’s owner — Whitbread (LSE: WTB) — have fallen by 50% so far this year.

The company has yet to issue an update on the impact of Covid-19, but hotels have now joined pubs on the list of compulsory closures. So I think we can expect the news to be bad.

However, Whitbread does have some advantages. It’s the largest hotel operator in the UK, with a strong brand and a freehold property estate that was valued at more than £5bn in 2018. I’m pretty confident bookings will recover quite quickly when life returns to normal.

A second advantage is the group’s balance sheet is fairly healthy. Net debt, excluding leases, was just £88m at the end of last August. Although the group has lease obligations valued at £1.4bn, I believe landlords will have no choice but to be flexible during this difficult period.

With hindsight, Whitbread’s 2018 sale of Costa Coffee for £3.9bn was wonderfully timed. I don’t think the group could get such a strong price today.

I believe Whitbread’s growth is likely to slow if the coronavirus pandemic leads to a recession. But the group offers a popular, affordable service and has a strong, national brand.

Historically, this business has generated a return on capital employed of more than 10%. That’s quite good for this sector. I believe Premier Inn will remain one of the dominant brands in the budget hotel market. With Whitbread shares now trading below their last-reported book value, this is a stock I’d buy today.

I’d double up with this stock

For much the same reasons as with Premier Inn, I’m also a regular customer of JD Wetherspoon (LSE: JDW). I’m a little tired of founder and chairman Tim Martin’s views on politics and healthcare. But I’m tempted to buy shares in his pub chain, which I think is a very well-run business indeed.

From an accounting perspective, I admire Martin’s consistent focus on the free cash flow generated by his pubs. This might be because he owns nearly 32% of the stock. Unlike hired bosses, he’s not tempted to bamboozle investors with optimistic measures of adjusted profit.

Another attraction is that, unlike some rival pub chains, Wetherspoon’s finances are in reasonably good shape. Although the group has quite a lot of debt, the situation looks much safer to me than at rival groups Marston’s and Mitchells & Butlers.

I understand this is a difficult time for pub staff and my thoughts are with them. But at the risk of sounding insensitive, I do think this is likely to be a good time to buy shares in Wetherspoons.

The stock has halved since the start of March, but I expect the business to recover strongly when pubs are allowed to reopen.

The post £5k to invest? 2 shares I’d buy for an ISA that have fallen 50% appeared first on The Motley Fool UK.

More reading

Roland Head 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.

Motley Fool UK 2020