For me, the FTSE 250 Index is an excellent place to look for smaller (compared to FTSE 100 members) companies that can grow their businesses and their share prices and dividends. I hold the following three FTSE 250 stocks in my Stocks and Shares ISA portfolio. I think they work well together because stylistically, they bring different things.
A high-quality FTSE 250 stock
Indivior (LSE:INDV) manufactures treatments to help patients overcome opioid addiction. Opioid addiction, particularly in the US, is a growing problem. Indivior has also brought the first subcutaneous long-acting injectable treatment for schizophrenia to market. That is an essential step in diversifying the company’s revenues.
Indivior looks like a company that is high in quality to me. The company has been profitable in five of the last six years, with 2020 being the exception. Operating margins average a respectable 13.9% and are fairly stable. Trailing 12-month returns on capital and equity come in at 21% and 144%, respectively, which beats most companies in the same industry and indeed the wider market. However, I am mindful that the company is named in a class-action lawsuit related to the opioid crisis in the US and legal risks remain elevated.
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A good value mid-cap stock
FirstGroup (LSE:FGP) operates bus, coach, and train services in the UK and North America. First Group suffered large revenue and stock price drops during the pandemic, but it has survived relatively unscathed. Yes, balance sheet debt climbed during the pandemic. But the sales of US businesses in 2021 has softened the impact. These sales also explain why revenue forecasts for 2022 and 2023 are lower than pre-pandemic levels.
I think FirstGroup looks good from a value perspective. While its price-to-earnings ratio of 14.4 does not scream cheap, the stock’s price-to-book and price-to-sales ratios of 0.62 and 0.17 are well below industry and market averages. Ultimately, the stock’s fate will be decided by how well its operations bounce back from the pandemic. There is a concern that bus and rail services will never return to pre-pandemic volumes. In terms of non-work travel, I am not convinced. However, working from home is here to stay and will keep some workers off buses and trains some of the time.
A low-volatility FTSE 250 stock
The Twentyfour Income Fund (LSE:TFIF) holds a portfolio of UK and European residential mortgage-backed securities and collateralised loan obligations. The company aims to deliver a dividend yield of around 6% to its investors from this portfolio. In terms of yields, 6% is quite high, and it is not achieved without taking a commensurate degree of risk. Just shy of three-quarters of the portfolio is rated below investment grade, and the portfolio could be subject to large losses. This would particularly be true when there is stress in the markets.
However, on the whole, Twentyfour Income stock has shown low levels of volatility compared to other FTSE 250 members. A good deal of the fund’s portfolio is in floating interest rate securities. So, a rising interest rate environment should be good for the company’s stock price. This makes the stock different from other equities found in the FTSE 250 index, and that’s why I hold it in my portfolio.
