With promising coronavirus vaccines continuing to hit the headlines, stock markets have been rallying strongly in November. Today, I’m covering two FTSE 250 shares I’ve been adding as part of my own buying spree.
FTSE 250 contrarian play
Like most in the market, online price comparison site Moneysupermarket.com (LSE: MONY) hasn’t had the easiest 2020 so far. In its most recent update, the FTSE 250 member revealed a 16% decline in revenue over Q3, due to travel restrictions and banks pulling products from the market.
But let’s not get distracted by a temporary period of troublesome trading — Moneysupermarket still ticks many boxes on a quality-focused investing checklist:
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- Sky-high returns on capital employed? Check.
- Huge operating margins? Check.
- A strong brand? Check.
- Net cash on the balance sheet? Check (£5m).
- Still paying dividends? Check.
In addition to all this, Moneysupermarket should benefit from a rush for travel insurance when people start flying again. Even those that aren’t so inclined to travel will still be wanting to use the site to save money on monthly bills.
Could I make greater gains buying battered travel and leisure stocks? Quite possibly. The issue with this strategy, however, is that many of these simply aren’t very good businesses when it comes to making money for their shareholders. And, as Warren Buffett would surely attest, it’s the quality of a business that really matters in the long run.
Assuming things do get back to normal next year, Moneysupermarket shares trade at 17 times forecast FY21 earnings. That still looks great value to me, considering the five-year average PE of 22.
Down but not out
A second battered FTSE 250 stock I’ve bought more of in November is high-performance polymer supplier Victrex (LSE: VCT). Like Moneysupermarket, recent trading hasn’t been great, due to the chaos caused by the coronavirus.
Last month’s update spoke of end markets remaining “subdued” after sales volume and revenue fell 26% (to 695 tonnes) and 27% (to £55,7m) respectively in Q4. Job cuts will help mitigate the company’s high fixed costs, but it’s hardly the sort of news to make investors bullish. There’s also Brexit to ponder.
As negative as this sounds, Victrex remains a classy operator. Let’s look at some of the attractions:
- High returns on capital employed? Check.
- High operating margins? Check.
- Operating in multiple industries. Check.
- A market leader in what it does? Check.
- Lots of net cash on the balance sheet? Check (£67.4m).
- Dividends? Check (a dividend for FY2020 is expected).
- Growth opportunities? Check.
Thanks to its exposure to the aerospace industry, I also think Victrex is another good ‘picks and shovels’ play on the recovery in travel. Tapping into the growing trend for green investments, the company’s lightweight thermoplastics help make aircraft more fuel-efficient and environmentally friendly.
Play the long game
Naturally, big gains won’t come overnight. As an investor however, it pays to distinguish between short-term hurdles and game-changing problems. The coronavirus, I submit, is the former.
A valuation of 24 times forecast earnings does look dear, given current headwinds, but this should reduce as profits recover over the next couple of years. Just like star UK fund manager Terry Smith, I think price is of secondary importance compared to buying a great company with solid growth prospects. This belief certainly hasn’t adversely affected the performance of his Fundsmith Equity Fund.
Victrex’s eventual rebound should be worth the wait.
