It looks like we might be heading into a market correction as the FTSE 250 mid-cap index is down by about 7.5% so far in October.
Market corrections can be uncomfortable, but if you own shares in good quality companies it’s often worth thinking about topping up your stock holdings, rather than selling.
Today I want to look at two FTSE 250 stocks that have fallen by far more than the wider index. Are these firms in trouble or could this be a buying opportunity for savvy investors?
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A tale of two halves
Shares of WH Smith (LSE: SMWH) were down by 13% at the time of writing this morning after the firm revealed said it would start closing some of its high street stores.
It’s no secret that its travel business has been powering the group’s growth for several years. Newsagents in airport and railway stations in the UK and overseas have delivered rising profits that have offset falling high street profits.
Today’s full-year results show that this shift is continuing. Travel profits rose by 7% to £103m, while high street profits fell 3% to £60m. Adjusted pre-tax profit rose by 4% to £145m, although statutory pre-tax profit — including one-off costs — fell by 4% to £134m.
Lots of cash
The high street division is a drag on profits, but this group still generates a lot of spare cash. Free cash flow fell by 8.6% to £96m last year, but that’s still equivalent to 87p per share.
All of this cash will be returned to shareholders through a 12% dividend increase to 54.1p per share and a new £50m share buyback.
The costs of exiting WH Smith’s high street shops are a potential concern — £9m was spent on this last year and the firm expects to spend a further £5m this year.
But the group’s exceptionally high return on capital employed of 60% suggests to me that the business should continue to generate plenty of cash. With the stock trading on 15 times forward earnings and offering a 3.1% yield, I’d consider buying during this market wobble.
I’m staying away
Online fashion retailer N Brown Group (LSE: BWNG) is down by 20% at the time of writing after reporting a 5% fall in half-year profits and a 50% dividend cut.
I suspect we know now why chief executive Angela Spindler stepped down in September.
Product sales fell by 3.1% to £304.5m during the half-year period. Group sales only eked out a 1% rise because of a 12.7% increase in financial services revenue — fees from customers who buy on credit.
The company also announced £65m of new impairment charges. These include £22.4m of compensation for PPI claims and £22m relating to store closures.
A deep value buy?
Interim CEO Steve Johnson said that full-year expectations are unchanged. But I suspect brokers will cut their profit forecasts after today’s 5% drop in earnings, which is below expectations for broadly flat profits this year.
I estimate that the shares currently trade on about 5 times forecast earnings with a 6.6% dividend yield. This could be a value opportunity, especially given the value of the group’s £677m loan book.
However, I’m not convinced by the quality of this retail business here and fear further problems. I’m going to stay away for now.
