With Brexit looming large over the horizon and no good exit deal in sight, as a rule, I am firmly of the view that all investments made should keep the prospect of a dip in economic conditions in 2019 in mind. To put it another way, a number of companies are likely to offer limited returns to the investor in the near term.
Making the right bets So what do I think are good investing bets for now? There are three kinds of plays in the present scenario. The first of these comprises companies that serve as a good hedge against softening equity markets. In this vein, I have written about the FTSE 100 stock, Randgold Resources (LON:RRS), in the recent past since it is a major gold-mining company. The second play is all about defensive stocks, companies whose products and services are so essential, the impact of a recession on them is relatively limited. FTSE 100 consumer goods major Unilever (LON:ULVR) is an example.
The third play is the ‘cyclicals’, the otherwise healthy companies, which are just facing the bad luck from the potential economic recession. But if bought at the present low prices, and held on to for a few years, they have the potential to give good investment returns. One such is the FTSE 250 company, Domino’s Pizza Group (LSE: DOM).
Sharp dip, solid financials This multinational pizza delivery business has witnessed, and continues to see, a decline of around 30% in its share price from the highs of 387p seen earlier in the year, in line with broader market sluggishness. But a look at the company’s financials suggests to me that the dramatic plunge is an overreaction.
Consider this. its revenues have only been expanding over the past few years, and the same is true for its earnings. In the latest quarter, ending in September, it reported a healthy 6% sales growth in the UK and is expanding in other European markets as well. While sales in the latter are still a small percentage compared to the UK market, this is a positive trend as the geographical diversification indicates potential for growth outside the UK, even if the largest market faces recession.
Future positive, reasonable pricing It is worth noting, though, that Domino’s management itself remains quite bullish on prospects in the UK as well. Some 42 stores have already been opened in 2018 up to September, and the company is confident of reaching the goal of 60 new stores before the year is up.
Despite all the positive news flow, Domino’s is not the priciest stock among its peers. It has a price-to-earnings (P/E) ratio of 19.8x, which is less than that of companies like Young and Co’s Brewery and Patisserie Holdings.
The upshot? It is a buy, I say. I’d buy now and hold until the storm has abated.
Manika Premsingh has no position in any of the shares mentioned. The Motley Fool UK owns shares of and has recommended Unilever. The Motley Fool UK has recommended Domino's Pizza and Patisserie Holdings. 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.