The Restaurant Group (trades at 102p)

Leisure shares like The Restaurant Group (LSE: RTN) face some significant near-term challenges. Rocketing inflation is putting consumer spending under massive stress. The cost of ingredients and staffing is also rising sharply. The prospect of further coronavirus lockdowns can’t be ruled out either as Covid-19 endures.

As a long-term investor though, there are some good reasons why I’d still buy The Restaurant Group. The business has made huge strides in turning around its flagging chains such as Frankie & Benny’s and Chiquito in recent years. It also owns the massively-popular Wagamama brand, the success of which has been boosted by a positive reception to ongoing expansion of its vegan menus.

I also like The Restaurant Group because of changing priorities among UK consumers. Spending on material goods as a proportion of income has been steadily falling as the ratio on leisure pursuits has been rising. It’s a theme which this ‘almost’ penny stock, with its 400-odd restaurants across the country, is well-placed to exploit.

Everyman Media Group (trades at 127p)

Like The Restaurant Group, I think cinema operator Everyman Media Group (LSE: EMAN) should also benefit from rising leisure spending in the UK. Cinema attendances have bounced back strongly following Covid-19-related theatres closures. And I’m tipping them to continue increasing at an impressive rate, propelled by Hollywood’s conveyor belt of popular sequels, prequels and reboots.

But I wouldn’t invest in Cineworld to capitalise on this huge investment opportunity. I’d rather buy Everyman because of its considerably healthier balance sheet and its more sophisticated offering.

Everyman prides itself on its screening of independent and foreign movies, giving it a wider audience than mainstream operators. Its sites also incorporate bars and restaurants which give it extra ways to part people from their cash on a night out.

Its unique offering is particularly important given the growing popularity of streaming platforms from Netflix, Disney and Amazon. The huge investment these US media giants are dedicating to programming and technology poses a significant threat to cinema operators. Disney alone plans to spend $33bn on content just in 2022.

That said, trading numbers from Everyman give me cause to be optimistic. Business has been so strong at Everyman that last month the business hiked its full-year forecasts for 2021. Revenues more than doubled last year and, equally impressively, total sales came in at 75% of 2019’s record levels.

I think this ‘nearly’ penny stock has a winning formula and am encouraged by its plans to aggressively expand. It wants to have 41 new cinemas open by the end of 2022, five more than its current crop.

Screen idol

Investor interest in Cineworld is dwindling rapidly as concerns over the cinema operator’s hulking great debt pile — and what this could mean if rising Covid-19 cases mean it’s forced to close its doors again — gain traction.

This is perhaps a shame as box office data shows movielovers all over the world are returning to theatres in their droves.

I still think investing in this part of the leisure sector could be a good idea. Pleasingly, Everyman Media Group (LSE: EMAN) gives me the option to do this without having to worry about a debt-heavy balance sheet. Trading here has indeed remained extremely robust.

Everyman has hiked its full-year profit expectations, thanks to forecast-beating admissions. Encouragingly, the cinema giant has said that “the appetite for cinema remains strong” for next year, based on early indications.

I also prefer Everyman over Cineworld because it offers an experience that the mainstream cinema operators don’t. Its sites allow guests to grab a drink at a bar and sit down for a bite to eat before or after the showing starts.

Its film slate is also filled with independent and niche movies and shows in addition to the ticket-shifting blockbusters offered up by Hollywood. This makes it appeal to a wider audience than Cineworld, Odeon et al.

That’s not to say buying Everyman doesn’t come without risk, of course. The business isn’t expected to move back into profit until 2023, at the earliest. And that’s assuming that further Covid-19 lockdowns can be avoided.

Fresh waves of coronavirus cases could therefore have a serious effect on shareholder morale and cause Everyman’s share price to sink again. The cinema chain currently trades at 145p per share.

Business is revving up!

The severe supply problems that’s affecting new car production doesn’t seem to be going away. According to the Society of Motor Manufacturers and Traders, new auto sales in Britain fell to their lowest for 30 years in October.

Many in the industry are now expecting the semiconductor shortages that are causing stock shortages to last into 2022 too.

This bodes extremely well for used-car retailers like Motorpoint Group (LSE: MOTR). Used-car values are going through the roof as people trade down to pre-owned vehicles, due to said shortages. This saw market revenues rocket 56.1% year-on-year between April and September, data this week showed.

The result was also helped by strong demand following last year’s Covid-19 lockdowns and encouragingly market share grabs.

But I am concerned by how a slowing UK economy could impact demand for Motorpoint’s big-ticket items in 2022. Still, this is a risk I believe is baked in at current prices of 349p.

Analysts think the retailer will enjoy an 85% increase in annual earnings in the current fiscal year (to March 2022). This means the business trades on a forward price-to-earnings growth (PEG) ratio of just 0.3.

According to Statista, more consumers were intending to spend more on culture and entertainment in the second quarter (with a net balance of +13%). What’s more, spending intentions for eating and drinking out were even stronger (with a balance of +16%). These played into the hands of Everyman, a cinema operator whose venues allow people to dine, drink and watch movies.

In fact trading has been better than even the firm expected since it reopened its 33 venues in mid-May. Admissions up to 1 July were at 66% of 2019 levels, even though social distancing requirements remained in place.

Everyman’s boutique cinemas offer a more distinctive experience than the likes of Odeon and Cineworld. This also helps it to fight off the threat posed by the streaming companies like Netflix better than the competition. I’d buy this ‘nearly’-penny stock despite the threat of fresh Covid-19-related lockdowns amid increasing infection rates.

Another ‘almost’-penny stock I’d buy

The amount that streaming companies Netflix, Disney, Apple and Amazon are spending on content is rocketing. Cash spend on the creation and licensing of fresh content soared to $220m in 2020 as these US giants fought for supremacy, according to Purely Streamonomics.

It doesn’t look like the party’s over, either. According to Purely: “Even more spending growth is on the short-term horizon as a new wave of ad-supported platforms start gaining a stronger foothold around the world.” Added to predicted spend from subscription-based services, Purely thinks total expenditure will surge to a new record of $250m in 2021.

All this bodes well for Zoo Digital Group (LSE: ZOO). This stock provides a range of services for streaming companies, broadcasters and movie studios. These include overlaying dubbing and subtitles on programming, managing script creation and ensuring that content is compliant across regions.

Revenues at Zoo Digital exploded “at least” 51% year-on-year between January and June, to $25m, the UK share’s latest update in August showed. It said that services to support the migration of existing shows onto streaming platforms, allied with the subsequent launch in new territories helped to drive the top line.

The former penny stock added that it had received orders related to new titles “in recent weeks.” And it said that it expects “the associated pipeline of work will build gradually over the coming months.” It’s worth remembering that business could cool if Covid-19 cases continue to rise and creative industries are forced to close down again. But this wouldn’t stop me buying Zoo Digital shares today. I think the future is very bright here as the streaming industry goes from strength to strength.

So, if you’ve entered a competition, paid for car parking, or donated to a good cause using your mobile phone (to name just a few examples), it’s possible that Fonix allowed you to.

In an increasingly-cashless and mobile-dependent society, this ‘nearly’ penny stock looks in good shape to thrive. The number of customers on its books grew 13% year-on-year during the 12 months to June 2021.

Fonix is also looking to take its expertise onto mainland Europe too to help give profits growth an extra boost. Its first foray onto foreign shores will see it launch in Austria in the near future.

I’d buy Fonix even though its dependence on a handful of key customers creates a risk to future profits.

In its 2020 financial year, the UK share generated 83% of gross profits from its top 10 clients. The loss of one or more of these businesses to a competitor could clearly have significant ramifications for profits. Fonix shares go for 167p a pop right now.

Another ‘nearly’ penny stock I’d buy

Everyman Media Group (LSE: EMAN) is another cheap UK share that’s attracting my attention right now. Unlike Cineworld, which is buried in debt and faces colossal competition from the likes of Netflix (more on this later), I think this cinema operator has a chance to thrive as Covid-19 restrictions are rolled back.

Box office takings are soaring in Britain right now. Vue was the latest large chain to release promising ticket sales data in late July. Then it said that UK admissions recently stood at 70% of the average recorded in the three years prior to Covid-19. This was despite capacity restrictions and social distancing when theatres reopened.

There are, of course, significant threats to cinema operators like Everyman. The Covid-19 crisis is far from over and any significant surge in infection rates could close the industry down again.

And, as I mentioned earlier, the US streaming giants like Netflix, Amazon and Disney provide significant competition for the cinema industry. Black Widow star Scarlett Johansson’s move to sue Disney as simultaneous streaming of the film decimated box office takings provides perfect evidence of this.

However, I think Everyman is in good shape to fight off the streamers. Its cinemas don’t just offer the chance to grab the latest mainstream movie. Its boutique venues offer a unique experience where visitors can also watch an independent or classic movie with a glass of red and some gourmet food.

Priced at 141p per share, this ‘almost’ penny stock is another great low-cost UK share I’d buy right now.

Cineworld share price: no mercy

Actually, ‘lost momentum’ is putting it kindly. By yesterday’s close, the Cineworld share price had plunged 33% in just one month.

One reason is a simple lack of demand at its sites, at least relative to how things used to be. Not that this is all that surprising. Despite screens being open for some time now, the movie slate has remained fairly subdued. Blockbuster Fast & Furious 9 is perhaps the only film that’s really brought people back. Production of some nailed-on successes, like Mission Impossible 7, has also been delayed. Again. 

On top of this, the once-mighty mid-cap has all that debt creaking away on the balance sheet in the background. Even the rise and rise of meme stock and industry peer AMC Entertainment across the pond can’t revive the Cineworld share price by association.

However, it’s not necessarily all doom and gloom. The new James Bond film should provide a welcome boost to revenue when it finally arrives in September. A sequel to Top Gun should hit screens in November.

One might also say that the ongoing heavy shorting of Cineworld shares may work in the favour of those already invested if the company is able to surprise on the upside. Should this happen, a ‘short squeeze’ would be very likely, further boosting the Cineworld share price.

The key word there is ‘surprise’. Right now, I’m not exactly optimistic. 

A better bet?

If I were looking to invest in an eventual rebound in cinema visits, there is another option available to me on the London market: 33-site independent cinema group Everyman Media (LSE: EMAN).

In contrast to the Cineworld share price, Everyman’s shares have also held up fairly well recently. They’ve traded around the 150p mark since March this year and are up almost 40% since July 2020. The fact that the firm doesn’t appear to be in quite the same level of distress as its larger peer might be a reason. 

On the flip side, it’s clear that Everyman still faces similar hurdles to Cineworld. The popularity of streaming services offered by Amazon and Disney shows no signs of abating. In fact, a rise in infection levels could force people back to their TVs in the evenings. The good weather we’re experiencing is also pushing people outdoors, making a trip to a dark, enclosed space less attractive.

A further risk to owning Everyman stock is the firm’s small-cap status. As a general rule, minnows tend to be more volatile than large-cap stocks. This is especially true for stocks with a small free float (the percentage of shares available on the market). At 43%, this is very much the case with Everyman.

Horror show

Faced with a choice, I’d probably be more inclined to buy Everyman stock at the current time. Even so, I can’t help thinking there are far less frightening destinations for my cash right now. Undervalued or not, Cineworld remains in my ‘too scary’ pile. 

I’ve written recently about two FTSE 350 firms I’d be happy to buy ahead of 19 August’s ‘Freedom Day’. Here are three smaller companies I believe are similarly set to come out of the pandemic even stronger than when they went in.

Pre-pandemic momentum

Cinema chain Everyman Media Group (LSE: EMAN), fitness chain The Gym Group (LSE: GYM) and pubs and hotels chain Young & Co (LSE: YNGA) all had good business momentum before the pandemic. This is clear from their pre-pandemic trading updates.

EMAN reported record sales and a big uplift in its market share of the UK box-office. GYM announced another year of strong growth in members and revenue. YNGA delivered good growth against tough prior-period comparatives and increased its dividend for the 23rd consecutive year.

All three businesses were knocked for six when the UK went into lockdown. However, I was impressed by how their managements handled this period of unprecedented turmoil (“the most challenging in our 189-year history,” in YNGA’s case). Furthermore, I believe they’re now very well-positioned to regain the strong business momentum they had before the pandemic struck.

Pandemic management

EMAN, GYM and YNGA moved quickly to strengthen their balance sheets in the first months of the pandemic. All three were backed by shareholders willing to inject fresh capital into the businesses. Lenders were also very supportive.

The financial backing enabled EMAN, GYM and YNGA to continue a limited amount of expansionary capital spend. Since the first lockdown, the companies have opened a smattering of new sites, as well as invested in targeted refurbishments and staff retainment and training.

I suspect this has put them in a stronger position for coming out of the pandemic than some of their less financially-robust competitors.

Post-pandemic plans

EMAN is “looking forward to unveiling an enhanced venue experience in the coming months.” It’s going cautious on expansion of its 35 sites this year but has a pipeline of seven new venues for 2022/23.

GYM has recently done another equity fundraising to accelerate site rollout. It believes “the Covid-impacted commercial property market provides a unique opportunity to increase the company’s pipeline of attractive sites on favourable commercial terms.”

Meanwhile, YNGA has just announced it’s selling its tenanted estate. This will provide it with “additional firepower” to upgrade its managed freehold pubs and hotels. And also “capitalise on attractive acquisition opportunities that may come to the market.”

My UK stocks to buy come with risks too

There’s an obvious risk for me investing in EMAN, GYM and YNGA right now. Namely, a new virus variant that produces a return of restrictions or lockdowns. Or, in the absence of government diktats, a reluctance of consumers to visit leisure and hospitality venues. In either of these scenarios, my investment would surely suffer — certainly in the short term.

However, I’m prepared to accept this risk. I think the momentum in these businesses before the pandemic, the continuing support of their shareholders and lenders through it, and their current levels of liquidity mean they’ll ultimately emerge stronger than more financially-constrained competitors.

The three companies I’ve got my eye on right now had bright growth prospects before the pandemic struck. They’ve been battered by lockdowns. However, I think they’re strong businesses and are soundly positioned for recovery in a full reopening of the economy.

My stocks to buy list

Cinema company Everyman Media Group (LSE: EMAN) suffered severe disruption in 2020. It saw just 10 weeks of normal trading conditions against 17 weeks of restricted trading and 25 weeks of full closure. Much of the first half of 2021 has been a washout too.

Thanks to vaccines and the UK’s roadmap out of lockdown, EMAN shares have risen from their lows of last year. Nevertheless, the business is still priced at a discount to its pre-pandemic value. Clearly, there’s a near-term risk the stock’s recovery could stall if I were to buy now and we see a delay to the 21 June D-Day, or even renewed lockdowns or restrictions. Beyond this, there’s competition from other cinemas and streaming services like Netflix.

However, I think Everyman can thrive due to its differentiated premium offering. It has atmospheric venues, and quality food and drink. And its programme of content ranges from mainstream and independent films to theatre and live concert streams.

Another premium leisure brand

Fuller, Smith & Turner (LSE: FSTA) also ranks highly on my list of stocks to buy in June. As you’d expect, this premium pubs and hotels group is another business that’s been hit hard by the pandemic. Its pubs were open on only 27% of the 388 days between 20 March 2020 and 12 April 2021.

As with EMAN — and also with my third stock to buy in June — FSTA shares have risen from their lows of last year, but remain at a discount to their pre-pandemic value. Like the cinema chain, the recovery of the FSTA share price could stall in the event of renewed lockdowns or restrictions. Also, with its significant focus on London, Fullers could potentially be held back by a slow return of tourists to the capital and workers to city offices.

On balance though, I reckon Fullers’ well-invested estate and ownership of some of London’s most iconic pubs should serve it well.

My travel stock to buy

Travel is another sector that’s endured a severe adverse impact from the pandemic. But National Express (LSE: NEX) is one stock in the sector I’m keen on right now. Like Everyman and Fullers, National Express has strengthened its balance sheet with an equity fundraising and secured additional liquidity from supportive lenders.

Nevertheless, the NEX share price could suffer should there be a slower-than-expected full reopening of the economy. Beyond this, the company also faces the challenge of moving to a fully zero-emissions fleet for a cleaner and greener future.

However, with its scale and good history of innovation, I think it’s well placed to meet the challenge. As such, NEX also makes it onto my list of stocks to buy in June.

A FTSE 100 favourite

I’d happily buy B&M European Value Retail (LSE: BME) for my ISA next month. Britons’ love of a good bargain helped propel the low-cost retailer into the FTSE 100 during the autumn. And I’m expecting full-year financials released on June 3 to confirm that trading has remained strong.

Recent news from B&M suggests to me that this could be one of the best retail stocks to buy today. The business increased its earnings expectations for the fiscal year to March 2021 a couple of months back thanks to “strong” trading during the final quarter. I’m expecting sales to have remained robust as well since then as the successful coronavirus vaccine programme has encouraged Britons to get out and about again and wander through B&M’s doors at the expense of online retailers.

That being said, remember that B&M’s lack of e-commerce operations could weigh on earnings growth in the longer term. The online shopping segment ballooned in the 2010s, and the recent public health emergency has hastened the adoption of internet shopping by new users and increased online activity from existing surfers. Still, I like B&M’s massively-popular, value-led proposition and expect its store expansion programme to deliver handsome rewards. Indeed, the company announced it was accelerating its site-opening drive back in September following strong recent trading.

One of the best leisure stocks to buy

I think Everyman Media Group (LSE: EMAN) could be another of the best stocks to buy next month. Cineworld’s latest trading update this week revealed how moviegoers have returned to its cinemas in their droves following the recent lockdown easing. I think luxury cinema operator Everyman could put out cheery news too when it releases its own trading update soon.

Cineworld’s share price spiked after releasing that encouraging commentary recently. Yet Everyman’s has remained static in the days following the release. I think the market could have missed a trick here. I’d certainly rather buy the latter’s shares instead of Cineworld’s. I think the higher-end experience that it offers — where visitors can dine and catch indie movies alongside more mainstream films — gives it a clear purpose to exist in the streaming age of Netflix and Amazon Prime. And Everyman doesn’t have the colossal debt pile that Cineworld does.

A word of warning, though: a fresh flaring up of Covid-19 cases, and the subsequent risk of cinemas being closed again, isn’t the only risk that Everyman faces. Box office sales are dependent on the quality and the popularity of the movies being shown. A weak release slate could have a huge negative impact on this UK share’s bottom line.

Of course, investors need to be extremely careful before buying these stocks. The global pandemic remains far from beaten, and many UK shares carry huge debt piles following earlier lockdowns. Still, I think there are great opportunities for those who do their research before buying reopening stocks.

A ‘picture perfect’ reopening stock

I’ve explained in detail why I’d be reluctant to buy Cineworld shares today. The company’s gargantuan debt pile, allied with the growing threat posed by streaming services like Netflix, make this particular UK reopening stock a risk to far for me.

That said, I’m considering buying Everyman Media Group (LSE: EMAN) before the upcoming ISA deadline. This is because this operator’s cinemas offer a more luxurious viewer experience than the bog-standard theatres the likes of Cineworld can. It’s therefore much better placed to tempt people off their sofas following Covid-19 lockdowns to catch a movie.

As analyst Susannah Streeter of Hargreaves Lansdown comments: “The footprint of the large cinema chains is set to contract further and there is likely to be a refocus on smaller more luxury venues, providing a high-end cinema experience people are unable to get at home.”

Of course, Everyman isn’t immune to the dangers posed by the streamers. What’s more, this reopening stock’s near-term recovery might take an awful whack if a fresh wave of coronavirus infections prompts further lockdowns and previously-eager movie lovers choose to stay away.

Encouragingly though, the business has just boosted its debt facilities to help it ride over any near-term speedbumps. And I think the company’s dedication to provide a premier viewing experience allows it to bounce back strongly when the pandemic passes.

Bowled over

I believe that Ten Entertainment Group (LSE: TEG) is another attractive reopening stock to buy before April’s ISA deadline. I’ve tipped this particular UK share before because the popularity of ten-pin bowling has ballooned in recent years. And by the looks of things, this renaissance remains in very rude health despite the pandemic. Ten Entertainment said this week it experienced “strong demand in the summer when the business reopened after [the] first lockdown.”

Like Everyman, this UK share has a very robust balance sheet to help it sail through any further pandemic-related problems. It had £18m of liquidity headroom as of last week.

It’s quite possible that the current bowling craze could run out of steam once more. But I think this popular form of entertainment has more life left in it. Besides, Ten Entertainment has invested huge amounts in its network to keep the punters rolling in.

Today, I’ll explain why I remain bearish on the stock. But hey, it’s not all negativity. I’m also going to compare and contrast Cineworld with a growth stock I’d be very happy to buy.

The pre-pandemic Cineworld share price

Cineworld’s shares had been weak well before the pandemic hit. Between spring 2019 and the end of the year they declined 32%.

Maybe the market shared my concerns about the company’s accounting and governance, or my scepticism about its debt-fuelled empire building. Particularly its entry into the North American market, where movie-theatre attendance has been in decline for two decades. Its mega-purchase of US number-two chain Regal smacked of a vanity acquisition to me.

By contrast, I’ve found nothing particularly perplexing about Cineworld’s small-cap peer Everyman Media (LSE: EMAN). Its largely organic growth strategy has been well-paced and prudently managed. As such, its financial position coming into 2020 was far stronger than Cineworld’s.

Everyman’s balance sheet had tangible shareholders’ equity of £44.9m. And its net debt (excluding lease liabilities) of £9.9m was a modest 0.8 times its £12m EBITDA. Cineworld’s tangible shareholders’ equity was negative to the tune of $3.1bn. And its net debt (excluding lease liabilities) of $3.5bn was a scary 3.5 times its $1bn EBITDA.

Mayhem at the movies

When the pandemic hit, Everyman moved early to further strengthen its balance sheet. It raised £17.5m of new equity in an oversubscribed placing. Cineworld’s solution, with its dangerously debt-heavy balance sheet? Borrow more money.

Everyman has served cinema-goers well through the year, opening its venues whenever legally possible. Meanwhile, Cineworld closed its cinemas across the UK and US in early October until further notice.

Last month, the Financial Times claimed Cineworld is looking at “cutting rents and permanently closing UK screens,” via an insolvency process under a CVA (Company Voluntary Arrangement).

Even if it goes down this route, I’m not convinced it’ll be enough to boost results or the Cineworld share price. Given the enormity of its debt, I think a wholesale financial restructuring of the group will be required sooner or later, with painful consequences for existing shareholders.

Cineworld share price versus Everyman share price

Cineworld’s shares are currently trading at a 72% discount to their 52-week high. This compares with Everyman’s discount of 51%. However, for the reasons I’ve discussed, I’m not tempted by the ‘cheap’ Cineworld share price. It remains firmly on my list of stocks to avoid.

Meanwhile, I think Everyman’s 51% discount share price is very attractive. The company’s relative financial robustness, its premium independent positioning, and strong pre-pandemic growth all appeal to me.

I think Everyman would have little difficulty in doing another equity fundraising, if necessary. Indeed, there may be opportunities for it to acquire some attractive venues from, ahem, financially distressed operators. Personally, I’d be happy to buy Everyman shares at their current price, but the Cineworld share price isn’t for me.