The FTSE 250 has a whole range of stocks for investors to consider buying. But with the UK expected to slip into a mild recession, which ones will do well in 2024?
In a tough economic environment, I think a couple of things are going to be important. One is a strong balance sheet and the other is the ability to generate cash reliably.
Buy: Games Workshop
I’ll boldly predict that Games Workshop (LSE:GAW) won’t be a FTSE 250 stock by the end of 2024. I think it’s destined for the FTSE 100 and I’m looking seriously at buying it before it gets there.
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At a price-to-earnings (P/E) ratio of 24, the stock doesn’t look cheap. But I think the quality of the underlying business means it’s worth paying up for this one.
Games Workshop’s greatest strength is its intangible assets. It has a loyal customer base that is hard to disrupt and it is able to use this to earn huge returns on invested capital.
In 2023, Games Workshop generated £150m in operating income using £100m in fixed assets – a return of over 100% That compares well with pretty much any UK stock at the moment.
Even in the kind of recession that seems to be on the cards, I think the company will continue to attract its share of people’s disposable income. That’s why I’m expecting big things in 2022 from the stock.
Avoid: Aston Martin Lagonda
Aston Martin Lagonda (LSE:AML) currently has a market valuation of £1.8bn. And what investors get for that price – as far as I can tell – is mostly potential.
That’s not a sly way of saying ‘nothing’ – I think there is genuine potential here. The company has an enviable brand and some promising deals with other manufacturers for building electric vehicles.
What it doesn’t have, though, is cash. The business has been free cash flow negative for years and I find it hard to see that changing any time soon.
As a result, the company’s debt has been growing and its share count has been increasing at an alarming rate as it attempts to finance its cash burn. I’d be worried about this more if I were to buy the stock.
It might be that something impressive is on the horizon – the market clearly believes this based on the performance of the stock this year. But it’s way too speculative for me at the moment.
Winners and losers
The American writer Damon Runyon famously said that the race isn’t always won by the swift and the battle isn’t always won by the strong… but that’s the way to bet. That’s very much my thinking here.
Exactly what will happen in 2024 is hard to predict accurately. It seems there’s always something that makes forecasting share prices accurately impossible in the short term.
Over time, though, I think investing in stronger businesses will provide better returns. That’s why I prefer Games Workshop over Aston Martin Lagonda at the moment.
