The most overvalued stocks in the FTSE 250?

Bilaal Mohamed explains why investors should exercise caution before buying these two shares.

| More on:

The content of this article was relevant at the time of publishing. Circumstances change continuously and caution should therefore be exercised when relying upon any content contained within this article.

When investing, your capital is at risk. The value of your investments can go down as well as up and you may get back less than you put in.

Read More

The content of this article is provided for information purposes only and is not intended to be, nor does it constitute, any form of personal advice. Investments in a currency other than sterling are exposed to currency exchange risk. Currency exchange rates are constantly changing, which may affect the value of the investment in sterling terms. You could lose money in sterling even if the stock price rises in the currency of origin. Stocks listed on overseas exchanges may be subject to additional dealing and exchange rate charges, and may have other tax implications, and may not provide the same, or any, regulatory protection as in the UK.

You’re reading a free article with opinions that may differ from The Motley Fool’s Premium Investing Services. Become a Motley Fool member today to get instant access to our top analyst recommendations, in-depth research, investing resources, and more. Learn More.

Property investment group Derwent London (LSE: DLN) reported a strong set of figures yesterday when it issued its latest business update for the third quarter of its financial year. The FTSE 250 firm said it had surpassed its previous record for lettings with 495,300 sq ft in the year to date, securing £28.3m per annum of rental income. Interestingly, £11.6m per annum, or 41% was secured after the end of June, with these latter deals achieving rents 2.8% higher than June 2016 estimated rental values (ERV).

Show me the dividends

The London-focused group also revealed that on average, lettings had been secured at 6.9% ahead of December 2015 ERV, with vacancy rates remaining low at just 3.3%. Meanwhile Derwent is continuing to make progress with its major development programme under construction, of which 400,000 sq ft is due for completion by the second half of next year, with 66% already pre-let. An additional 620,000 sq ft is due for completion in 2019, including the Brunel Building in Paddington, central London.

In the second half of the year Derwent sold three properties for a total consideration of £130.1m, and on average these have been in line with June 2016 book values. But the company has admitted that the EU referendum introduced considerable market uncertainty, and together with the rise in Stamp Duty Land Tax in March, and recent confirmation of the higher business rates from April 2017, it has had a negative impact.

Derwent London has been operating as a Real Estate Investment Trust since 2007, but despite shareholder payouts being increased every year, the dividends have failed to keep up with the soaring share price, resulting in disappointing yields for income seekers. Derwent’s shares have looked expensive for quite some time, and at the end of 2015 the company’s was trading at 52 times actual earnings.

The prospective yield looks far healthier at the moment following this year’s share price slump, but at just 2% is still well below what I would expect from a property investment firm. In my view, there are plenty of other property investment firms out there with more modest valuations and healthier yields.

Premium valuation

Trading systems provider Fidessa Group (LSE: FDSA) is another mid-cap firm that has recently highlighted the uncertainty it faced as a result of the Brexit vote. However, the Woking-based software firm derives more than 60% of its revenue from outside Europe, and believes it remains well positioned to benefit from any continued weakness in sterling, providing further support for its strong cash generation and dividend policy.

The software group, which provides trading, investment and information solutions to the financial community, has seen little or no earnings growth over the last four years, and yet commands a premium valuation. And although market consensus suggests a return to growth this year, this will be no more than single-digits, and certainly not deserving of its high P/E rating of 28.

Should you invest, the value of your investment may rise or fall and your capital is at risk. Before investing, your individual circumstances should be assessed. Consider taking independent financial advice.

Bilaal Mohamed has no position in any shares mentioned. The Motley Fool UK has recommended Fidessa. We Fools don't all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors.

More on Investing Articles

Young female business analyst looking at a graph chart while working from home
Investing Articles

Why I think Rolls-Royce shares will pay a dividend in 2024

Stephen Wright thinks Rolls-Royce shares are about to pay a dividend again. But he isn’t convinced this is something investors…

Read more »

Investing Articles

1 of the best UK shares to consider buying in April

Higher gold prices and a falling share price have put this FTSE 250 stock on Stephen Wright's list of UK…

Read more »

Person holding magnifying glass over important document, reading the small print
Investing Articles

The market is wrong about this FTSE 250 stock. I’m buying it in April

Stephen Wright thinks investors should look past a 49% decline in earnings per share and consider investing in a FTSE…

Read more »

Black father and two young daughters dancing at home
Investing Articles

1 FTSE 250 stock I own, and 1 I’d love to buy

Our writer explains why she’s eyeing up this FTSE 250 growth phenomenon, and may buy more shares in this property…

Read more »

View of Tower Bridge in Autumn
Investing Articles

The FTSE 100 is closing in on 8,000 points! Here’s what I’m buying before it’s too late!

As the FTSE 100 keeps gaining momentum, this Fool is on the lookout for bargains. Here's one stock he'd willingly…

Read more »

Investing Articles

3 ideas to help investors aim for a million-pound Stocks & Shares ISA

The UK has a growing number of Stocks and Shares ISA millionaires, and this plan may be one of the…

Read more »

Illustration of flames over a black background
Investing Articles

2 red-hot UK growth stocks to consider buying in April

These two growth stocks are performing well, but can they continue to deliver for investors through 2024 and beyond?

Read more »

Charticle

Is JD Sports Fashion one of the FTSE 100’s best value stocks? Here’s what the charts say!

The JD Sports Fashion share price remains a wild ride during the first quarter. Could it be one of the…

Read more »