“Utterly hated” – a contrarian call from my London dinner

What's the biggest danger when investing in UK takeover targets?

Which business sector in Britain is currently "utterly hated"?

And how can investors take advantage of the opportunities in the UK market – without falling into a common trap?

These were some questions discussed at my latest London dinner in early December, which brought together 20 Undervalued-Shares.com readers.

It turned out to be the perfect setting to debate British stocks – quite literally, in a pub.

A great time to discuss British stocks (in a pub!)

When Undervalued-Shares.com hosts a reader dinner in London, it brings together a truly unique group – often from locations as far as Germany, Croatia, and even the US. Around 60-80 readers have attended these dinners more than once, making London the most established and best-connected circle I host.

Thanks to London's enduring role as one of the world's leading financial centres, this group benefits from exceptional access and insight. Through it, I am probably one degree of separation away from almost anyone in the City.

What did we discuss?

One idea I particularly liked emerged from a discussion about a common investing mistake.

Yours truly is certainly guilty of suggesting bets on individual takeover targets within sectors undergoing consolidation. In the UK market, M&A has been the dominant catalyst for exits and re-ratings. Low valuations combined with ongoing takeover activity have made this approach quite lucrative.

Bid premia in the UK used to average around 20%. In recent years, they have risen to 48%. That is a remarkable number by international standards. To put this into perspective, a UK small- and mid-cap fund manager can currently expect over 10% of their portfolio to receive a takeover bid in any given year.

The problem, of course, is obvious. You can be right about the sector, and still not own the companies that get bid for.

What to do about it?

There are situations where you might not want to own just an individual stock, but an entire sector.

As the London dinner discussed, publicly listed UK pub chains may lend themselves particularly well to this approach.

The next sector to take a closer look at

As ever, with hindsight everything looks obvious.

One sector where many investors now regret not getting in earlier is British banks. Over the past few years, British bank stocks have turned into stellar performers. Including dividends, NatWest is up ≈150%, Barclays around ≈175%, and HSBC ≈125%.

NatWest.

A few years ago, these companies had what looked like the perfect set-up: low valuation multiples, attractive dividend yields, and potential for earnings growth.

Yet most investors were paralysed by the prevailing narrative.

"Banks? In Brexit Britain? You have got to be kidding me!".

I wrote about British bank stocks in 2022 and again in 2024, pointing out that they were trading at just 6-7x earnings, with the potential for significant earnings upgrades further down the line. It seemed boring at the time and, admittedly, the catalysts needed a bit more time to materialise. However, it was an asymmetric bet where the waiting was rewarded with generous dividend yields.

This raises an obvious question: could British pub chains be next?

British pub chains now also trade at single-digit earnings. They are not just considered boring but widely hated. In fact, one dinner participant summed it up succinctly: they are "utterly hated". The prevailing perception is that pubs are a dying industry.

Since 2000, the number of pubs in Britain has fallen from 60,000 to just 38,780. In other words, somewhere in Britain a pub has closed its doors for good every ten hours for the past 25 years.

In the last five years alone, 2,283 pubs disappeared. The trend continued into the first half of 2025, with another 229 closures. Pub closures have become widely accepted as a secular, seemingly unstoppable trend.

Over the past few years, the industry has had to contend with a proverbial perfect storm:

• In 2020/21, the trade was hit by Covid lockdowns. Even generous government support didn't make up for lost sales, and most pub chains had to take on additional debt just to survive.
• When the lockdowns eased in mid-2021, rising living costs put pressure on average spend per visitor.
• Since February 2022, higher energy costs have added yet more pressure.
• Since July 2024, the Labour government has been piling additional taxes onto the sector. Publicans across the country began banning Labour MPs from their premises.

Source: The Morning Advertiser, 10 December 2025.

It makes for dramatic headlines, but this may be precisely the moment when a contrarian bet makes sense.

While the headlines focus on political anger, 2025 has already delivered meaningful improvement for the sector.

In the first half of 2025, average weekly pub sales were 15% higher than pre-pandemic levels (in nominal terms). Pub closures are now forecast to slow from 2026 onwards, according to Lumina Intelligence, a specialist for the food and drinks sector.

Source: Lumina Intelligence.

More importantly, the industry is expected to return to growth. For 2026, sector-wide revenue growth of 2% is forecast – the strongest rate since the pandemic. Revenue growth of 2% p.a. is then expected through 2028, exceeding the average growth seen in the three years before Covid hit. Larger chains are likely to outperform as they continue to take market share from smaller operators.

Once a new earnings cycle begins to form, the key question becomes: which pub company should you own?

The basket approach to investing in British pubs

There is no right or wrong answer.

Some investors prefer exposure to an interesting sector through just one particular stock. Others prefer a strategy of buying an entire basket of stocks.

Either way, anyone looking to allocate capital to the UK market could do worse than to consider pub companies.

One of the untold stories of the sector is how many larger chains have now returned to sustainable profitability. Several operators have reduced outside financing from 8-10x EBITDA to a far more manageable 3-5x.

The London market offers not just one or two candidates, but an entire range of listed pub companies to pick from.

Some of the lesser-known names in the sector include:

• Daniel Thwaites (ISIN GB0008910779, AQUIS:THW), a family-controlled chain of over 200 pubs. Its share trades at GBP 1 despite a net asset value of GBP 4.50.
• Marston's (ISIN GB00B1JQDM80, UK:MARS) is down over 80%. Trading at 60 pence, the net asset value per share is GBP 1.25.
• Shepherd Neame (ISIN GB00BMQX2R72, AQUIS:SHEP), a chain of higher-end, boutique pubs in London. The stock has lost nearly 70% and trades at GBP 4.60 despite a net asset value of GBP 15.

The bear case is straightforward: many of these companies may simply be too small to attract meaningful attention, particularly from US investors – who have become an important marginal buyer of UK equities.

For investors who share that concern, there are also larger pub companies to consider.

One such company is the subject of my latest research report, just sent to Undervalued-Shares.com Members. The 27-page report examines the sector in greater detail than today's Weekly Dispatch, and analyses one of the larger pub companies.

That company can benefit from:

• An ongoing return of capital to shareholders now that Covid-era debt has been reduced.
• The rapid growth of a new "asset-light" franchise division.
• The founder and major shareholder who may be considering an exit over the medium term.

For readers who prefer individual stock ideas, the report provides a focused way to gain exposure to the sector through a widely recognised, operationally excellent company – trading at a valuation that fits the ethos of Undervalued-Shares.com.

Alternatively, the report can serve as a starting point for analysing the entire sector and constructing a basket approach.

Many roads lead to Rome

Do you always have to be that selective about your investments?

Or can owning the entire sector sometimes be the better strategy?

At Undervalued-Shares.com, I aim to do both:

• Identify the "right" sectors (and countries).
• Highlight specific stock ideas.

The goal is not to provide investment advice, but to surface unloved and undervalued assets that warrant deeper research.

As James Grant of Grant's Interest Rate Observer once observed: "Successful investing is having everyone agree with you… later."

With British pub companies, I suspect the story may rhyme closely with what we saw in British banks.

Don't say you weren't told about it in time.

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