Private Investor: The restaurant sector's making me feel queasy

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The Independent Online

The most experienced investors say that the best investment decisions are the ones that make them feel the queasiest.

Well, I'm feeling quite ill now, I can tell you. I just went a bit mad and bought some shares in two very unsuitable companies: The Restaurant Group and Alliance & Leicester. If you could name two areas that are going to do especially badly from the current downturn they would indeed be eating out and property. The credit crunch will inflict serious, stomach-turning damage there. And yet, it could still be that the shares have been oversold. There are signs of hope with both my purchases.

First, The Restaurant Group. Having taken a long-term view that restaurants are a good place to be, especially the "mid-market" sector, I bought into quite a few restaurant companies last year. The Restaurant Group runs the likes of Garfunkel's, and earlier this month revealed trading results that were surprisingly upbeat. I wish I'd bought them before that, but you can't have everything, I suppose.

Now, you have to remember that the economic slide has hardly begun, so that may not persist, but the logic behind this particular group is fairly compelling.

With the effects of the credit crunch, people trade down in the short term from more expensive groups, and in the long term there's a trend towards more and better spending on leisure – families over time moving from McDonald's and KFC to the likes of The Restaurant Group's brands of Garfunkel's, Frankie & Benny's and Chiquito. The Restaurant Group plans to open 30 to 35 new restaurants this year, and they already own four at Terminal 5, Heathrow. They also avoid high street sites, preferring to operate in rural areas, leisure parks and through airport concessions. In addition, the group has kept its prices up.

I think that the £10 to £15 restaurants do have a decent future, provided they get though this storm, and it may be that some economists are exaggerating the pain we are all going to feel.

The key thing is unemployment, and so far the jobs market has proved notably flexible. In other words, even if we're facing a bit of a squeeze, families will still eat out for as long as they're confident that they'll have a wage coming in. That might change, but it would be wrong to assume that it will necessarily do so. And, long term, the restaurants/eating out story is a good one. Just think how much you enjoy it.

In the case of Alliance & Leicester, I feel slightly more unwell. Maybe I should mention that this purchase is actually a repurchase, because I sold my windfall shares in the mortgage bank a couple of years after it demutualised, and they went for a good deal more than the price I recently paid for them; over £8, I think, rather than the 422p a share I shelled out last week.

I also bought some more a couple of years ago when there was some hot gossip about them being taken over by a French bank for £15 a share. That never happened, and I sold them at a small loss. Alliance & Leicester peaked at more than £12 at the height of the takeover speculation.

Anyway, let bygones be bygones; each investment decision has to be examined afresh. It's fairly easy to press the case against A&L, and I have done so in these pages before.

On top of the welter of arguments to avoid the banking sector as a whole, the smaller players suffer a bit from what I would term Northern Rock Syndrome – that is, they are distrusted simply because they, like the Rock, are demutualised, smaller institutions, and therefore some of the Rock's infamy has rubbed off on them. They, too, relied too much on wholesale fund-ing, though not to anything like the same degree, and they too pursued a policy of expansion, though again not with the reckless-ness displayed at the Rock. Furthermore, they too lack the experience of the major banking groups and the size and diversity to weather problems.

All true. But, as I wrote a couple of weeks ago, it may well be that, even after all those factors are taken into account, the problems are "in the price".

The possibility of rights issues and yet more write downs of losses are already being accounted for in the share valuations of the likes of Alliance and Leicester and Bradford and Bingley, an even cheaper but frightening prospect where the shares hover not much higher than the rights. By the way, I've also recently taken the opportunity to top up my holding in Barclays.

So, yes, I do now think the banks are generally oversold. But buying into banks and restaurants is giving me a little indigestion. Pass the Rennie's.

s.ogrady@independent.co.uk

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