These FTSE 250 shares could make a comeback.
It is a well-known contrarian stance to buy a selection of shares that are out of favour and wait for the majority of them to bounce back.
Of course, you need to minimise the downside risk of them going bust, and it's nice to earn a big, fat dividend while you wait. For these reasons, most 'dog' strategies tend to focus on large caps, such as the FTSE 100.
For example, you could choose the ten highest-yielding stocks in the FTSE 100 and invest in them equally. These companies are then held for the following 12 months. At that point, you dump the lot and repeat the process.
For the ultra contrarian, I've selected three picks from the FTSE 250 that are currently way below their year highs, only two of which are paying decent dividends. This selection isn't without risk and therefore I'd welcome comments from Fools on them.
Nevertheless, these three big dogs should make full-year profits and are eager to find a good home in any portfolio that isn't too risk averse.
HMV
HMV Group (LSE: HMV) sells DVDs and music through its HMV stores and books through Waterstones. Primarily based in the UK, it also owns stores in Canada, Hong Kong, Singapore and Ireland, with a total of 722 outlets worldwide.
Consensus forecasts estimate that this FTSE 250 constituent will deliver full-year pre-tax profits of £76m for the full year ending 30 April 2010 (2009: £61m). Revenues could hit £2.06bn (2009: £1.96bn). HMV is also on expected to deliver an inflation-busting dividend yield of 8%, with forecast dividend cover of 1.7 times.
Its share price, at around 92p, is almost at a year low, reflecting the gloom engendered by a first-half loss and the recession that has claimed the scalp of competitors such as Zavvi, Borders and Woolworths.
However, under chief executive Simon Fox, the company is making strides to broaden its revenue streams away from traditional retail into areas such as cinema, digital music and gig tickets.
Drax
The recent cold weather has been very good news for Drax (LSE: DRX), which owns and operates the Drax Power Station, the UK's largest coal-fired power station based in North Yorkshire. With unprecedented demand for heating and electricity, coal has become the UK's number one energy source, overtaking gas.
Drax's share price has been in the doldrums and, although at 430p it has begun to pick up, it is still way short of its year high of 580p. Its prospective dividend yield for 2010 has risen to a heart-warming 7.3%.
Pre-tax profits for 2009, while well down on the previous year, are expected to come in at around £250m. It is currently trading at 430p, putting it on a prospective P/E ratio of 8, falling to 6.8 for the current year.
Coal-powered energy is still badly needed in the UK energy mix and Drax is also working on producing 'green' electricity by building power stations that run on biomass (e.g. forestry and agricultural waste).
There is more on Drax in this recent article from Tony Luckett.
Ladbrokes
Anyone who'd bet on Britain's biggest bookmaker Ladbrokes (LSE: LAD) making them money a couple of years ago would have backed a loser, as the shares have slid down from highs of almost 400p to 145p.
This week, it announced the departure of Chief Executive Chris Bell. This caps a run of bad news, which included:
- a surprise £275m cash call in October 2009 designed to help cut the company's almost £1bn debt; and
- the suspension of its final dividend following a poor third quarter -- although it promised to reinstate the payment by the time of its half-year results next year.
This is a fairly risky play, but if it gets the right CEO on board and starts to develop its online gaming channel, I suspect the shares could rise significantly. Admittedly, there are a lot of 'ifs', but it is still profitable and the 2010 World Cup should give it a boost.
Consensus forecasts are that it will make a pre-tax profit of £167m for 2009, falling to £157m in 2010. It is currently trading on a prospective P/E ratio of 8.9 for 2010. This is about the same rating as its rival William Hill (LSE: WMH) -- which is generally more favoured by analysts.
More from Chris Menon:
Chris holds shares in Ladbrokes.
