Why I think now’s the time to buy these FTSE 250 stocks

These unloved FTSE 250 (INDEXFTSE: MCX) could be poised for a return to growth, says Roland Head.

The content of this article was relevant at the time of publishing. Circumstances change continuously and caution should therefore be exercised when relying upon any content contained within this article.

When investing, your capital is at risk. The value of your investments can go down as well as up and you may get back less than you put in.

Read More

The content of this article is provided for information purposes only and is not intended to be, nor does it constitute, any form of personal advice. Investments in a currency other than sterling are exposed to currency exchange risk. Currency exchange rates are constantly changing, which may affect the value of the investment in sterling terms. You could lose money in sterling even if the stock price rises in the currency of origin. Stocks listed on overseas exchanges may be subject to additional dealing and exchange rate charges, and may have other tax implications, and may not provide the same, or any, regulatory protection as in the UK.

You’re reading a free article with opinions that may differ from The Motley Fool’s Premium Investing Services. Become a Motley Fool member today to get instant access to our top analyst recommendations, in-depth research, investing resources, and more. Learn More.

sdf

It’s been a long road for broadband provider TalkTalk Telecom Group (LSE: TALK), whose share price has fallen by more than 70% over the last four years. But as I’ll explain, I think this unloved FTSE 250 company may finally have reached a stage where it could be a decent investment.

Why I’ve changed my mind

If you’ve read my previous coverage of TalkTalk over the last few years, you’ll know that I’ve been avoiding the stock. So what has changed?

I think the plans set out by founder Sir Charles Dunstone when he returned to the firm in May 2017 are starting to deliver results. The main thrust of the strategy is for it to be a large-scale value provider of fixed broadband only.

Passive income stocks: our picks

Do you like the idea of dividend income?

The prospect of investing in a company just once, then sitting back and watching as it potentially pays a dividend out over and over?

If you’re excited by the thought of regular passive income payments, as well as the potential for significant growth on your initial investment…

Then we think you’ll want to see this report inside Motley Fool Share Advisor — ‘5 Essential Stocks For Passive Income Seekers’.

What’s more, today we’re giving away one of these stock picks, absolutely free!

Get your free passive income stock pick

Figures released today suggest that progress is steady. The company reported a net increase of 490,000 subscribers for fibre broadband. Total customer numbers rose by 150,000 to 4.3m and the firm has now seen nine consecutive quarters of growth.

Of course, it’s easy to win customers by slashing prices. So is TalkTalk becoming more profitable as well?

Rising profits

Today’s figures are mixed. Underlying revenue rose by 2.2% to £1,544m, while operating profit excluding certain one-off costs rose by 46% to £89m. Much of this gain was due to lower operating costs, which the firm says will be a continued focus.

Restructuring and network upgrades are continuing to absorb much of the firm’s spare cash. But even if we include all costs, TalkTalk moved from an operating loss of £44m to an operating profit of £47m last year.

More importantly, cash generation improved, leaving the dividend covered comfortably by free cash flow. Net debt remains a concern, at £781m. But no significant repayments are due until 2022, by which time costs should be lower and income higher.

TalkTalk shares don’t look cheap, with a 2019/20 forecast price/earnings ratio of 18 and a forecast dividend yield of 2.8%. But if earnings continue to recover, I think the current price could offer good value. If I wanted to add TalkTalk to my portfolio, I’d certainly consider buying after today’s results.

Powering up for growth?

Temporary power solutions provider Aggreko (LSE: AGK) is another firm that’s been through a long decline. This company rents out generators to provide power for large events and also operates in emerging markets, where it can provide additional grid power to meet growing demand for electricity.

The shares have fallen by about 65% since September 2012. However, Aggreko’s latest figures confirmed my view that this business is on the mend. The group’s underlying revenue rose by 8% to £1,760m while underlying pre-tax profit was 10% higher, at £182m.

I am generally cautious about companies’ underlying figures, which include adjustments designed to flatter profits. But I’m comfortable with Aggreko’s adjusted numbers. The only real changes relate to exchange rates and fuel costs, which are passed through to customers.

My calculations indicate that the firm’s operating profit margin rose from 10.8% to 12.4% last year. There were also improvements in free cash flow and underlying earnings. Analysts’ forecasts suggest modest growth in 2019 followed by bigger gains in 2020, when the company will provide power for the next Olympic Games.

The shares currently trade on 16 times 2019 forecast earnings, with a 3.4% dividend yield. I think this could be a decent entry point for long-term buyers.

Is this a top choice for growing wealth now?

Before deciding, we think this pick is another must-see.

Discover ‘One Top Growth Stock from The Motley Fool’ absolutely FREE.

Though past performance does not guarantee future results, over the past 5 years, it’s seen consistent double-digit revenue growth. ‘Return on capital’ - a key measure of business quality - is a colossal 57%. That’s almost 6 times higher than the UK average!

Best of all, it has a cult-like following. Customers who’re raving fans, potentially spending more money, more often - whatever the economy.

In our experience, discoveries like this are extremely rare.

So please, don’t leave without seeing, ‘One Top Growth Stock from The Motley Fool’, which includes both the Risks and opportunities.

Claim your FREE copy now

Should you invest, the value of your investment may rise or fall and your capital is at risk. Before investing, your individual circumstances should be assessed. Consider taking independent financial advice.

Roland Head has no position in any of the shares 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.

More on Investing Articles

Finger clicking a button marked 'Buy' on a keyboard
Investing Articles

Analysts have upgraded this FTSE 100 stock to Buy. What should investors do?

Associated British Foods shares have been uninspiring for some time. But is it finally time to consider buying the FTSE…

Read more »

Man changing battery on electric bicycle
Investing Articles

Prediction: in 12 months the sizzling National Grid share price could turn £10,000 into…

It's been another solid year for the National Grid share price and the dividend yield is decent too. So why…

Read more »

Businessman using pen drawing line for increasing arrow from 2024 to 2025
Investing Articles

Up 185% in 3 years, why does the market love this FTSE 250 stock

Over the past three years, this stock has vastly outperformed the FTSE 250. Dr James Fox takes a closer look…

Read more »

A handsome mature bald bearded black man in a sunglasses and a fashionable blue or teal costume with a tie is standing in front of a wall made of striped wooden timbers and fastening a suit button
Investing Articles

Looking for growth, dividends, or value? These 3 ETFs could be smart ideas to consider

Exchange-traded funds (ETFs) provide a way for investors to spread risk without sacrificing the possibility of huge long-term returns.

Read more »

Happy couple showing relief at news
Investing Articles

Is the Rolls-Royce share price fast becoming a joke?

The FTSE 100 engineering titan has done brilliantly in recent years. But our writer wonders whether the Rolls-Royce share price…

Read more »

Middle-aged white male courier delivering boxes to young black lady
Investing Articles

Is there a ‘best age’ to start buying shares?

Christopher Ruane weighs some possible pros and cons of waiting to start buying shares for the first time, versus starting…

Read more »

piggy bank, searching with binoculars
Investing Articles

Is it time to look again at the FTSE 250’s worst performers?

Our writer considers the prospects for two of the worst-performing shares on the FTSE 250, with falls of at least…

Read more »

A handsome mature bald bearded black man in a sunglasses and a fashionable blue or teal costume with a tie is standing in front of a wall made of striped wooden timbers and fastening a suit button
Investing For Beginners

Down over 40% in the past year, I think investors should consider these value shares

Jon Smith points out two value shares that have fallen heavily over the past year but are starting to look…

Read more »