Are these 2 recovery stocks the best buys on the FTSE 250?

These two FTSE 250 (INDEXFTSE: MCX) stocks look tempting but beware their toppy valuations, warns Harvey Jones.

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This has been a tough day for stock markets amid a global sell-off, but these two FTSE 250 companies have had it particularly bad, both falling after publishing their latest results. Is now a good time to be greedy while others are fearful?

All things Electro

My first faller is Electrocomponents (LSE: ECM) which is down more than 7%, despite reporting first-half revenue growth of 9.8% and market share gains in all three of its regions. However, investors are a forward-looking bunch, and were worried by warnings of slowing growth as it moved into the second half, even though this was largely expected.

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Electrocomponents also reported a 1% rise in gross margins to 44.4%, while revenue growth and cost control increased the adjusted operating profit conversion ratio from 22.7% to to 25.7%, and the adjusted operating profit margin climbed from 9.9% to 11.4%. Adjusted earnings per share (EPS) rose 30.5% to 15.9p on a like-for-like basis. All good stuff.

Brexit bother

The £2.52bn company distributes electronic components through the RS Components and Allied Electronics & Automation brands. It is the largest of its kind in Europe and the Asia Pacific region and reported “encouraging” new contract wins so I was initially surprised to see it punished so hard for what appears to be a reasonable set of results.

Investors are no doubt concerned about the “uncertain” external environment in some of its key markets and expensive contingency plans for Brexit, including a £30m inventory build through the second half, and expanding EU warehouse capacity, where possible, in case of no deal. Or maybe they are concerned about its slightly pricey forecast valuation, which is currently 17.6 times earnings. The forecast yield of 2.5% is good but not thrilling. However, my colleague Roland Head puts forward a compelling buy case here.

Viva Aveva

Today’s other faller is FTSE 250-listed engineering and industrial software specialist Aveva Group (LSE: AVV), down almost 4% after its interim results for the six months ended 30 September, despite another set of apparently positive figures.

The results follow its acquisition of Schneider Electric Software with revenue for the combined group growing 10.9% to £343m, and adjusted profit before tax up 54.3% to £60.5m. Recurring revenue rose 18.7% and it served up an interim dividend of 14p per share, whereas this time last year it paid nil.

Software, hard profits

Management said integration remains on track with new organisational structures in place across the group, integrated product solutions developed and showcased to customers, and cost synergy programmes under way. The full-year outlook remains positive.

CEO Craig Hayman said the £4.16bn group “delivered a good performance” with strong sales execution and integration on track, making progress towards its medium-term targets of increasing recurring revenue and improving the adjusted EBIT margin to 30%.

Ooh, pricey

The valuation here is even higher at 32.3 times earnings, which presumably explains the limp market response to these results as Aveva needs to be going gangbusters to justify that heady valuation. With a yield of just 1.7%, and cover of 1.8, I agree with Peter Stephens that it lacks investor appeal right now.

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harveyj has no position in any of the shares mentioned. The Motley Fool UK has no position in any of the shares mentioned. Views expressed on the companies mentioned in this article are those of the writer and therefore may differ from the official recommendations we make in our subscription services such as Share Advisor, Hidden Winners and Pro. Here at The Motley Fool we believe that considering a diverse range of insights makes us better investors.

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