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One FTSE 250 stock and one small-cap I’d consider buying with £2,000

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Outsourcing has been a tough line of business lately, given the troubles afflicting the likes of Carillion, Interserve and Kier Group.

Serco, so good

International service company Serco Group (LSE: SRP) has done far better with its share price, up 37% in the last 12 months. It’s up another 4% today after its trading update for the first half of 2019 showed 20% growth in underlying trading profit and 6% for revenues.

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Serco also reported a £3bn order intake, including the award of its largest-ever contract, with AASC. 2019 will be the third year in a row in which order intake exceeds revenues.

Top end

The share price also benefited as it reported FY19 revenue is expected to be around the top end of the previously-stated range of £2.9-3bn, while underlying trading profit guidance was maintained at around £105m.

Group CEO Rupert Soames said the £1.73bn FTSE 250 company enjoys the “strategic advantage of having a strong international footprint” with 4% organic growth driven by the Americas and Asia Pacific divisions. Its UK division posted an improved trading performance, boosted by the Carillion health facilities management acquisition completed in 2018.

Fighting back

There’s one “but” though. When Rupert Hargreaves looked at Serco stock in February, he concluded it was too expensive, trading at a vastly optimistic forward P/E of 19.9, and feared that even a slight disappointment in earnings could punish the share price. Now it trades at a whopping 24.8 times earnings, making it even more expensive.

Soames has done a great job of turning Serco around since his appointment five years ago, when the group was struggling. He’s returned the company to growth and driven through plenty of M&A activity, and deserves plaudits. The downside is that it looks a bit pricey, plus there’s no dividend.

Liontrust roars

Fund manager Liontrust Asset Management (LSE: LIO) has also had a good spell, its stock up 26% in the past six months. But it’s flat today despite impressive final results showing a 10% rise in adjusted profit before tax to £30.1m and record inflows of nearly £1.8bn.

Revenues also rose 10% to £85m while profit before tax rose a bumper 55% to £19m, helped by a £4m drop in costs to £11.1m. Record net inflows for the year to 31 March totalled £1.78m, up from just over £1bn last year, particularly impressive given recent market bumpiness. CEO John Ions said a 21% increase in assets under management emphasise another successful year for Liontrust.”

He pinned this success on building an impressive group of investment teams, along with a great distribution franchise and a strong and distinctive brand.” Lionstust has always been respected by the brokers I talk to (mind you, so was Neil Woodford). 

Watch it

The share price is a bit less toppy than Serco’s at 13.5 times earnings and investors get a 3% yield and a progressive management attitude as well, with the total dividend per share lifted 27%.

Edward Sheldon also rates this small-cap champion, whose market-cap is just £367m. He even suggests it could be a takeover target. Fund managers are highly exposed to stock market fortunes. Maybe one to stick on your watch list for the next dip?

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Harvey Jones 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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