Over the past month — as usual — I have been looking for attractively priced shares in great businesses. I have bought into some large blue-chip names but also cast my net wider. I ended up investing in some shares that are members of the FTSE 250 index, including the three below.
Here is why the investment case and share price for each attracted me.
Direct Line
For most people, the financial services company Direct Line (LSE: DLG) needs little introduction. Its iconic red telephone logo is ingrained in the mind of millions.
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That is good for the business: it currently has over 9m insurance policies in force. I like the economics of the general insurance business in which Direct Line competes. Demand for lines such as home and motor insurance tends to be resilient; motor insurance is mandated by law for most vehicles. If an underwriter has sufficient volume, it can usually predict claims volume as a percentage of policies and price its services accordingly.
That helps explain why Direct Line is profitable. It has a juicy 11.2% yield to boot. That has risen thanks to a 30% fall in its share price over the past 12 months.
Car price inflation hurting profit margins concerns investors. A fall in the number of policies in force also threatens sales and profits. But as a long-term investor, I hope Direct Line can overcome such difficulties and let its underlying business model help it perform well.
Dunelm
I owned homeware retailer Dunelm (LSE: DNLM) at the start of October.
The shares have fallen a third in the past year. Perhaps that is explained by investor concerns that consumers with less spare money will cut back on purchases for the home, hurting sales and profits at Dunelm. Revenue in the most recent quarter declined 8% compared to the same period a year ago. Gross margins also fell, which could be bad for profitability.
But Dunelm is a quality operator with a proven business model. It has maintained its guidance for the full financial year, of profit before tax in line with analysts’ expectations of £130m-£193m. That would be a decline from last year’s record results but still solidly profitable. A price-to-earnings (P/E) ratio of just 10 looks attractive to me. I bought more of these FTSE 250 shares this month.
ITV
What is the future for traditional television companies?
Maybe it is continuing to run old school operations, which can still throw off large advertising revenues. Perhaps it is utilising decades of expertise to expand business by producing content, both for themselves and other media properties. It could also be moving into the digital arena.
The UK broadcaster ITV (LSE: ITV) is doing all three. The FTSE 250 company remains solidly profitable, making more than a million pounds a day on average last year in pre-tax profit. The City seems not to like the company’s strategy, though, with ITV shares falling 36% in the past year.
I do think an advertising downturn could hurt revenues and profits at ITV. But the P/E ratio of under five, combined with a prospective dividend yield of almost 8% based on management guidance, make the shares very attractive to me. I increased my holding this month.
