The FTSE 250 index can be a source of lucrative investment opportunities. In this area of the UK stock market, there are a lot of companies growing at a healthy rate, and delivering strong returns for shareholders in the process.
Here, I’m going to highlight two FTSE 250 shares I’ve been buying for my ISA. I think these stocks have the potential to provide me with both capital gains and dividends in the years ahead.
Long-term growth potential
Let’s start with Softcat (LSE: SCT). It’s a technology company that helps other organisations get their IT infrastructure up to speed. With a market-cap of around $3bn, it’s currently one of the larger companies in the secondary index.
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There are a number of reasons I’ve been buying this stock. One is that I expect it to benefit from the digital transformation trend in the years ahead. All across the UK, businesses are embracing technology (cloud computing, data analytics, artificial intelligence, etc) in an effort to become more efficient. Softcat should benefit from this. For the year ending 31 July 2024, analysts expect revenue growth of around 10%.
I also like the financials. This is a company that’s very profitable and has a strong balance sheet. And it pays a dividend. Currently, the prospective yield here is about 2.7%.
Finally, I like the fact that after a significant pullback (like many tech stocks, Softcat got a bit ahead of itself during Covid), the stock is now rising again. I prefer to buy stocks that are rising as trends often continue for a while.
On the downside, the valuation here is elevated. Currently, the forward-looking P/E ratio is about 26, which is well above the market average.
I see Softcat as a high-quality company though. So I’m happy to pay a higher price for it.
A high-quality business
The other FTSE 250 company I’ve been investing in recently is Kainos (LSE: KNOS). It’s similar to Softcat in that it helps other organisations with technology. However, it’s a little different in that it has two distinct business segments. One side of the business is focused on digital transformation solutions (it helps the NHS here). The other side is focused on business management software.
Kainos strikes me as one of the best companies in the FTSE 250 index. Its growth is impressive. Last year, revenue climbed 24%. This year, analysts expect 12% growth.
Meanwhile, it’s also very profitable. Over the last five years, return on capital (a key driver of long-term investment returns) has averaged 43%.
And like Softcat, it pays a dividend. At present, the yield here is around 2%.
This is another stock that isn’t particularly cheap. Currently, the forward-looking P/E ratio here is about 28. This adds risk to the investment case.
However, this has always been an expensive stock. And that hasn’t stopped it from generating fantastic long-term returns for investors. Over the last five years, it’s up about 250%.
I reckon there are more gains to come.
