I think there are some great opportunities for investors in the FTSE 250 at the moment. One example is J.D. Wetherspoon (LSE:JDW).
With a market cap of around £1bn, it’s too small for Warren Buffett. But for someone like me, there are a lot of reasons to be positive about the stock – which is why I’ve been buying it for my portfolio.
A FTSE 250 gem
In my view, Wetherspoon’s has a lot of the features that Buffett looks for in a stock to buy. It has a competitive advantage, is easy to understand, and should benefit from strong long-term demand.
The firm’s pubs have a clear brand – people associate them with decent food, good beer, and lower prices than everyone else. I think this is a significant asset, especially in a cost-of-living crisis.
Evidence of this comes from the company’s revenues growing at roughly double the rate of the wider sector at the moment. And lower prices don’t automatically mean lower profits.
Wetherspoon’s owns around 70% of its pubs outright. With limited lease commitments, there’s little chance of the firm having to pass on increased costs by raising prices.
The biggest challenge for the business, in my view, is inflation. I think the company does have some scope for passing this on while maintaining its competitive pricing, but this isn’t unlimited.
The Bank of England, though, is prioritising tackling inflation over growing the economy. I think that’s a good thing for a company that can withstand a recession better than rising costs.
I think the chances of Warren Buffett buying shares in J.D. Wetherspoon are close to zero. But there are some specific reasons for that, none of which apply to investors like me.
One is that the company’s operations are mostly in the UK. That’s no problem, but I think it’s much easier for local investors to appreciate the position the company has in the minds of its customers.
Buffett’s knowledge of Coca-Cola and American Express helps explain his investment in those stocks. But it’s harder for the Berkshire Hathaway CEO to understand a UK pub chain.
Another is the company is just too small. Berkshire Hathaway generates around $31bn per year in operating income and Wetherspoon’s makes £106m per year.
That means the firm doesn’t make enough money to make a meaningful difference to Buffett’s operation. And it’s not easy to see how it could be turned into something that would.
Neither of these issues is a concern for me, though. I know Wetherspoon’s well from a customer perspective and to say I’m not limited by size like Buffett is would be a huge understatement.
In general, I think there can be great opportunities in UK shares. Where companies have less attention from analysts, the chance of finding under-the-radar bargains is much higher.
This is especially true of the FTSE 250. The smaller index can be a great opportunity for UK investors like me to use their local knowledge to find stocks to buy.