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Are these 2 FTSE 250 stocks simply too cheap to pass up?

Photo: Betty Longbottom. Cropped. Licence: http://creativecommons.org/licenses/by-sa/2.0/

Shares of one-time investor favourite Sports Direct (LSE: SPD) are down more than 50% from their price as recently as summer 2015 as a series of scandals and falling profits have severely dented investor confidence. But with shares now trading at 7.8 times trailing earnings should investors take a punt on the struggling retailer?

There are certainly some major red flags that would stop me from doing so. Primary among these is the company’s new plan to become the ‘Selfridge’s of Sport’. Whenever I see a company turn away from its roots, such as Sports Direct attempting to shed its discounter past and go upscale, I get nervous. Branching out from what made the brand so famous is a risky manoeuvre that many companies have failed to pull off successfully in the past.

Second, the company is still embroiled in a series of corporate governance scandals that have laid bare the fact that the company is run like a personal fiefdom by founder and once-again CEO Mike Ashley. From not disclosing that his brother’s small company was given the contract for overseas order deliveries, to resisting minority shareholder calls for a board shake-up I see plenty of reason for small investors to be wary.

Third, the company isn’t as cheap as the TTM P/E ratio suggests. Looking forward, its shares trade at a much more expensive 18.7 times forecast earnings as analysts are pencilling-in a stunning 56% drop in earnings for the full year. This wouldn’t be unexpected as first half results saw EBITDA drop 33.5% year-on-year and statutory pre-tax profits a full 57%.

As the company is forced into raising staff wages to deal with that scandal and the weak pound pushes up the price of its imports, the company’s second half is unlikely to be any prettier. With earnings falling, corporate governance scandals a persistent problem and a questionable pivot in group strategy I’d stay well away from shares of Sports Direct.

Something to thank the hipsters for

A more appealing bargain basement option for some may be Workspace Group (LSE: WKP), a London-centric REIT whose shares trade at 5.45 times trailing earnings. This valuation isn’t out of order for REITS, which are notoriously cyclical, often highly leveraged and can grow rather slowly if constructing their own buildings.

However Workspace is more appealing than many of its counterparts because it focuses on the fast growing market for co-working spaces. This has become popular among start-ups and established companies alike as my generation avoids the traditional in favour of open-plan offices, the ability to work from anywhere and collaboration with workers from a range of industries.

Interim results released in January show this trend is continuing and has been relatively resistant to the Brexit-related property slowdown in London. During the final quarter of 2016 the company’s rent roll increased 3.5% on a like-for-like basis quarter-on-quarter and 9.3% year-on-year. This was driven by a quarter-on-quarter rise in occupancy rates to 90.6% and an increase in rent of 3.1% in the same period.

Now, there are some risks as we have no firm data on how co-working spaces will fare during an economic downturn. This uncertainty is enough to keep me away from Workspace’s shares but the company is an interesting one to follow nonetheless.

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