Why I believe buying these two stocks could make you a million
It seems as if nothing can stop the inexorable rise of JD Wetherspoon (LSE: JDW) and Greggs(LSE: GRG). Over the past decade, these two high street chains have not only taken over most high streets in the UK, but they have also achieved tremendous returns for shareholders while doing so.
Indeed, over the past 10 years, shares in Greggs have produced a total return of 13.3% per annum for investors while Spoon's has produced an average return of 15.4% per annum over the same period. In other words, if you had invested £1,000 in Greggs 10 years ago, today your investment would be worth £3,700. A similar investment in Spoon's would have grown in value to £4,531. For comparison, if you had invested the same amount in a FTSE 100 index tracker, your £1,000 investment would only be worth £2,000 at the end of the decade.
If Spoon's can continue to produce these returns for investors, it would be enough to turn a £10,000 investment into £1m within 30 years. And I believe that both companies can continue to achieve double-digit returns for shareholders going forward.
Investing for the future
Today, Greggs announced yet another strong year for 2017 with total sales up 7.4%, and like-for-like sales up 3.7% for the period. Thanks to this growth, operating profit excluding profits on the disposal of property grew 4.6% to £81.7m.
It looks as if 2018 is off to a good start as well with management reporting today that like-for-like sales grew 3.2% in the eight weeks to 24 February.
Throughout the rest of the year, management is planning to open a record number of stores for the group, which should only increase its dominance of the UK food scene. At the same time, 2018 is set to be "the peak year for investment in our supply chain" as the firm ploughs profits back into operations to improve performance and the customer experience. This investment is expected to translate into earnings per share growth of 7% for 2018, although I wouldn't rule out positive revisions to this forecast as the year progresses.
Unfortunately, the group's growth is not a secret and the shares trade at a relatively expensive multiple of 19.5 times forward earnings and support a dividend yield of only 2.7%. Still, if Gregg's can continue to grow same-store sales steadily, I believe this valuation is appropriate. Also, when the company's current capital spending programme is concluded, I would not rule out additional cash returns to investors.
When it comes to growth, Spoon's is going to face some severe headwinds this year including rising labour costs, rising business rates and the sugar tax.
Nevertheless, I believe its low-cost offering (its unique selling point) should continue to attract customers, giving it an edge over peers. New innovations such as table ordering through an app and the introduction of pizza to its menu should also help the company succeed where others are struggling.
City analysts are expecting the company's growth to slow to almost a complete halt in 2018, with an earnings per share rise of just 1.8% expected, which in my view is too pessimistic as this forecast leaves no room for upside if the pub group performs better than expected. It has also been returning more cash to investors via by share buybacks recently, and if top-line growth slows further, I expect this to continue.
However, the one thing shares in Spoon's lack is an attractive dividend yield. Right now, they only yield a disappointing 1%.
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Rupert Hargreaves owns no share 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.