I have been hunting for bargains in the FTSE 250. The index has fallen 22% in the past year. The economy is weakening and some smaller firms may be less well-placed to deal with that than larger FTSE 100 companies. But I think a lot of businesses are well set up for success even in a tough economy. Here are two I would consider buying for my portfolio.
Domino’s Pizza
Shares in the fast food company Domino’s Pizza (LSE: DOM) are down 39% over the past year. That reflects concerns that tightening spending by consumers will lead to less demand for pizzas cooked away from home.
But is that the case — and if so does it mean business performance will get worse? After all, Domino’s has been streamlining its operations in the past several years and focussing on its most successful market. It has also been buying back its own shares.
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That could mean that even a downturn in revenues does not necessarily mean a drop in earnings per share. Last month’s interim results make the point – although revenues slid 5.6% compared to the same period the prior year, post-tax profits and statutory basic earnings per share both rose.
Buffett thinking applied to a FTSE 250 share
Investor Warren Buffett talks about the benefit to a business of having a moat that can give it a competitive advantage. Domino’s benefits from a strong brand and established network of supply depots and branches. That would be hard for a competitor to replicate cost effectively. That helps explain why in the second quarter of the year, the firm’s share of the UK takeaway market grew from 6% to 6.6%. In a market facing the risk of weakening customer demand, the strongest operators are more likely to survive – and I see Domino’s as one of them.
The shares have a dividend yield of 4%. I think the share price fall means they are now a bargain for my portfolio, trading on a price-to-earnings (P/E) ratio of 14, so I would consider buying them.
Cranswick
Shares in food producer Cranswick (LSE: CWK) have lost a quarter of their value in the past year.
Like Domino’s, I see Cranswick as a high-quality business with attractive competitive strengths. It has built deep relationships with many customers and figured out how to add value to meat products by processing them, enabling attractive profit margins.
Cranswick’s financial record is stellar. Revenue last year grew 5.8%. Basic earnings per share grew 11%. The company raised its dividend by 8%, marking 32 years of unbroken growth in shareholder payouts at the company.
Past performance is no guarantee of what may happen next and the company does face risks. For example, rising input and energy costs could hurt profit margins. But I see this as a great quality business. The P/E ratio of 16 is not exactly cheap in my view, but I do think it is good value for such a firm. I would happily add the shares to my portfolio.
