The FTSE 250 index can be a great place to find attractive stocks. In this area of the UK stock market, many companies are growing rapidly yet still operate very much under the radar.
Here, I’m going to highlight two FTSE 250 stocks I’d buy for my own portfolio today. I believe both stocks have the potential to deliver the winning combination of capital gains and dividends in the long run.
Britons are spending their Covid-19 savings here
One FTSE 250 stock that strikes me as a ‘buy’ right now is Howden Joinery (LSE: HWDN). It’s a leading supplier of fitted kitchens that has over 730 depots across the UK.
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Howden Joinery posted a solid set of full-year 2020 results last month. For the year ended 26 December 2020, sales only fell 2.3%. That’s pretty impressive given that the UK experienced the worst economic conditions in 300 years.
However, what stands out to me is that second half sales were actually up a huge 16% compared to the equivalent period in 2019. This reinforces my view that a large chunk of the money Britons have saved over the last year on lockdown is going to flow into home renovations.
It’s also worth noting that Howden Joinery declared a special dividend of 9.1p for the year, in lieu of the cancelled final dividend for 2019. This suggests to me management is confident about the future.
There are risks to be aware of here, of course. In its full-year results, management said that given the economic uncertainties, it remains “cautious” about underlying market conditions.
Overall however, I see a lot of investment appeal here. The stock currently trades on a forward-looking price-to-earnings (P/E) ratio of 22, which I feel is quite reasonable given the growth potential.
One of the best FTSE 250 growth stocks
Another FTSE 250 stock I like right now is Softcat (LSE: SCT). It’s a leading IT infrastructure company that provides solutions in relation to cloud computing, cybersecurity, and data analytics. Its customers include the likes of Virgin Money, Nuffield Health, and Henry Boot.
Softcat is seeing strong demand for its services at the moment due to the enormous amount of digital transformation that’s occurring within the UK. Over the last two years, for example, revenue has jumped 35%.
Looking ahead, I expect the company to keep growing at a healthy clip. Analysts expect revenue growth of about 10% for the year ending 31 July. That’s followed by top-line growth of 9% the next year. Given its broad exposure to the technology industry, I see the stock as a great ‘picks-and-shovels’ play on the technology theme.
Softcat is quite an expensive stock. Currently, its forward-looking P/E ratio is about 36.6. This adds some risk to the investment case. If future performance is disappointing, the stock could fall significantly.
However, Softcat appears to be a high-quality business that’s both very profitable (three-year average return on equity of 60%) and financially strong. So, I’m comfortable paying a higher valuation for this FTSE 250 stock.
