The powerful stock market rally we’ve seen since March has created some big winners among tech stocks, and other businesses not affected by lockdown.
Today, I want to look at three FTSE 250 shares which are almost certain to be promoted to the FTSE 100 in this week’s quarterly reshuffle. All three have outperformed this year, but I think further gains are likely as FTSE 100 funds buy into these stocks.
One share I’d like to buy
FTSE 250 firm Homeserve (LSE: HSV) provides home repair and emergency services, usually through annual subscriptions. It’s a profitable business model that’s been very resilient so far this year. The Homeserve share price has bounded back in the market rally and is now unchanged since the start of 2020 — an impressive feat.
The company’s latest results show us why investors have been buying this stock. Pre-tax profit rose by 12% to £181m during the year to 31 March. The dividend was increased by 10% to 23.6p, giving a yield of nearly 2%. No dividend cuts here.
Management says that despite the challenges presented by Covid-19, the group expects to deliver “a solid performance” in 2020/21. Analysts expect profits to rise by around 9% this year. This stock isn’t cheap, on around 29 times forecast earnings. But it’s proven to be a profitable and reliable performer. I see the shares as a long-term buy.
A top performer in the market rally
My second pick is gaming firm GVC Holdings (LSE: GVC). This group includes online businesses such as bwin, Sportingbet, partypoker, and Foxy Bingo, plus the former Ladbrokes Coral chain of high street bookmakers. GVC is also expanding into the newly-deregulated US sports betting market, through a partnership with MGM Resorts.
The last couple of years have been a period of transition for this business, but things now seem to be coming together nicely. GVC’s 2019 financial results in March were in line with expectations, with revenue of £3.6bn and underlying pre-tax profit of £535.8m. GVC shares have been among the top performers in the market rally, rising by more than 150% from their March low of 293p.
The cancellation of sporting events will hit GVC’s profits this year. But online revenue rose by 19% during the first quarter and City analysts still expect full-year profits to rise. Current forecasts put the stock on 15 times forecast earnings for 2020, falling to a P/E of 9.5 in 2021. I think this could be a decent entry point for long-term buyers.
Don’t overlook this tech stock
My final choice is anti-virus software group Avast (LSE: AVST). This business floated on the London market in May 2018, since when the shares have doubled.
Investors who spotted the growth potential in security software have been well rewarded, but I think Avast still offers decent value and growth potential. Performance has been strong so far this year, with adjusted revenue up by 6.5% to $213m during the first quarter. Management expect a similar rate of revenue growth for the full year and says customer signup rates have improved.
Avast generated an operating margin of more than 40% in 2019. If this level of profitability can be maintained in 2020, then I think shareholders should see strong growth.
The shares have performed well in the market rally, climbing nearly 95% from March’s market low. Despite this, the shares don’t look expensive to me, on 18 times forecast earnings. I rate Avast as a buy.
