These FTSE 250 stocks are undeniably cheap

Roland Head profiles three bargain FTSE 250 (INDEXFTSE:MCX) stocks. Is now the time to buy?

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My search for bargain stocks has taken me deep into the FTSE 250 this week. In this article, I’ll look at three stocks with value credentials and attractive yields. What I need to know is whether they’re genuine bargains, or cheap for a good reason.

This builder sees sunny skies ahead

Housebuilder Bellway (LSE: BWY) hasn’t been the top performer in the housing sector over the last five years. But this £2.9bn firm seems to be putting on a late surge and has recovered well since the referendum.

This strong performance may have been helped by a decent set of results for the year ending 31 July. Bellway said that sales rose by 26.9% to £2,240.7m last year, while operating profit was 36.5% higher, at £492m.

Perhaps more importantly, Bellway said that reservations between the EU referendum and the 31 July were 13% higher than during the same period last year. Based on this initial snapshot, Bellway’s sales prospects don’t seem to have been dimmed by Brexit.

Analysts are certainly positive. Consensus earnings forecasts for 2016/17 have been upgraded since the referendum, and are now 13% higher than at the start of the year. Bellway shares trade on a forecast P/E of 7, with a well-covered yield of 4.5%. If you’re bullish on housing, Bellway may be worth a closer look.

What future for retailers?

Big high street retailers are battling online competition and facing an uncertain future. The new boss at Debenhams (LSE: DEB), ex-Amazon fashion executive Sergio Bucher, faces major challenges.

It seems fair to assume that Mr Bucher will have good ideas for improving Debenhams’ important online offering. But we don’t yet know what his plans will be for the group’s large store estate, which carries significant fixed costs.

Debenhams shares have fallen by 22% so far this year. They now trade on a forecast P/E of 8.4, with a prospective dividend yield of 5.9%. This payout was covered twice by last year’s free cash flow, which is impressive.

However, earnings are expected to fall by 14% in 2016/17 and by 7% in 2017/18. Mr Bucher will need to focus his attention on generating sales growth. This could harm profit margins, in the short term at least. So the dividend may not be as safe as it seems.

I’d like to know more about Mr Bucher’s plans before making a decision. For now, I’d hold.

Urban transport looks profitable

Bus and train operator Go-Ahead Group (LSE: GOG) is the biggest bus operator in London, with a 24% share of the market. The group also runs key commuter rail franchises in the south east of England. Go-Ahead’s London-focused rail operations have faced criticism this year, due to widespread delays and cancellations.

However, this disruption hasn’t yet harmed the group’s profits. Go-Ahead’s adjusted earnings rose by 21.3% to 220.5p per share during the year ending 2 July, while the group’s full-year dividend was 6.5% higher, at 95.85p.

These figures give Go-Ahead an attractive trailing P/E of 10 and a yield of 4.5%. Strong cash flow helped debt levels to fall last year and provided solid cover for the dividend. A similar performance is expected this year, and analysts have recently upgraded their earnings forecasts for 2016/17.

In my view, Go-Ahead could be worth a closer look.

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.

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

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