[date-today format='F j, Y']

Here’s a beaten-up FTSE 250 stock I’m buying as a long-term investor

The FTSE 250 is throwing up some bargain stocks recently as financial markets are volatile. Here's one that I'd buy today as a long-term investor. The...
black electrical tower
Photo by Shane Rounce

It’s been a volatile start of the year for stock markets. When volatility does strike, I look to see if there are any bargain buys in the indexes, such as the FTSE 250. There are currently 211 stocks in this index that have fallen so far this year, so I may find a company that’s been oversold.

Here’s one that I’d buy today as a long-term investor.

A FTSE 250 stock that looks oversold

The company I’ve been looking at is Homeserve (LSE: HSV), a provider of home repair services across the US and Europe. It offers a subscription service to customers for emergency repairs. In addition, the company also owns platforms such as Checkatrade that connects tradespeoples to homeowners.

Overall performance at the company looks to be improving. For example, Homeserve is expected to achieve an adjusted net income margin of 11.5% in fiscal year 2022 (FY22, the 12 months to 31 March 2022). This would be an improvement on the 8.7% net income margin it achieved in FY21.

Revenue for FY22 is also forecast to increase by over 9%. This is great to see as a potential shareholder: growing revenue and improving profit margins. There’s a good chance that the share price will rise if this continues!

However, the share price has done exactly the opposite recently. Over one year, the stock has plunged 29%. The FTSE 250 has dipped by almost 0.4% across this time, so the Homeserve share price has significantly underperformed.

The reason is the valuation. Based on a forward price-to-earnings (P/E) ratio, Homeserve is valued on a multiple of 14 today. This time last year the stock was trading on a P/E of 19. And before the pandemic, the P/E multiple was an even higher 30.

So, although the overall financial performance of the business looks to be improving, investors have been willing to pay less for Homeserve shares recently. This could be a sign that the stock has been oversold as markets have fallen this year.

Why I’m buying as a long-term investor

Another reason why a company’s valuation can decline is due to uncertainty about its future. I think this has been another factor that has led to the underperformance of Homeserve shares. Indeed, the company is undergoing a “transformation plan to stabilise its UK business and return it to growth”. This is a key risk for the business as the UK is its most established market. In fact, operating profit across Homeserve’s UK business fell over 10% in FY21 compared to the prior year.

Things are starting to improve though. In the most recent half-year results to 30 September, operating profit across the UK grew by 3% over the same period in 2020. Homeserve also said: “There has been good early progress on initiatives to transform and broaden the UK business”.

The investment here isn’t without risk. However, I like the early signs of improvement with Homeserve’s UK business. The overall performance, particularly in the key North American market, has been excellent, too.

Taking everything into account, I do think Homeserve has been oversold recently. I also view the risks for its UK business as having been fully priced into the share price. Therefore, I’d buy the stock today as a long-term investor.

The post Here’s a beaten-up FTSE 250 stock I’m buying as a long-term investor appeared first on The Motley Fool UK.

FREE REPORT: Why this £5 stock could be set to surge

Are you on the lookout for UK growth stocks?

If so, get this FREE no-strings report now.

While it’s available: you’ll discover what we think is a top growth stock for the decade ahead.

And the performance of this company really is stunning.

In 2019, it returned £150million to shareholders through buybacks and dividends.

We believe its financial position is about as solid as anything we’ve seen.

Since 2016, annual revenues increased 31%
In March 2020, one of its senior directors LOADED UP on 25,000 shares – a position worth £90,259
Operating cash flow is up 47%. (Even its operating margins are rising every year!)

Quite simply, we believe it’s a fantastic Foolish growth pick.

What’s more, it deserves your attention today.

So please don’t wait another moment.

Get the full details on this £5 stock now – while your report is free.

More reading

5 top dividend stocks I’d invest £1,000 in for 2022 and beyond

Dan Appleby has no position in any of the shares mentioned. The Motley Fool UK has recommended Homeserve. 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.





© 2022 The Daily Encrypt. All Rights Reserved. This article is provided for informational purposes only. It is not offered or intended to be used as legal, tax, investment, financial, or other advice.

Latest News