Up more than 30% in two months. Should I buy this FTSE 250 stock as it recovers?

This FTSE 250 company has a strong cash balance, decent cash flow and signs of improvements in revenue. The shares are well up, so should I join the party?

| More on:

The content of this article was relevant at the time of publishing. Circumstances change continuously and caution should therefore be exercised when relying upon any content contained within this article.

When investing, your capital is at risk. The value of your investments can go down as well as up and you may get back less than you put in.

Read More

The content of this article is provided for information purposes only and is not intended to be, nor does it constitute, any form of personal advice. Investments in a currency other than sterling are exposed to currency exchange risk. Currency exchange rates are constantly changing, which may affect the value of the investment in sterling terms. You could lose money in sterling even if the stock price rises in the currency of origin. Stocks listed on overseas exchanges may be subject to additional dealing and exchange rate charges, and may have other tax implications, and may not provide the same, or any, regulatory protection as in the UK.

You’re reading a free article with opinions that may differ from The Motley Fool’s Premium Investing Services. Become a Motley Fool member today to get instant access to our top analyst recommendations, in-depth research, investing resources, and more. Learn More.

FTSE 250 recruitment company Hays (LSE: HAS) looks like a decent business to me. One of the positives is the firm’s net cash position on the balance sheet.

In today’s second-quarter trading update, the company said it had £380m of net cash on 31 December 2020, up from just over £13m a year earlier. And the directors reckon cash collection from clients has “remained strong”, despite the ravages of the pandemic.

However, the company raised a gross £200m in a placing last spring to make sure it could survive the Covid-19 crisis. And there’s no doubt its international operations have been hit hard by the pandemic.

Revenues well down and shares up

Today’s numbers revealed the ongoing carnage. Overall fees dropped by 19% in the second quarter of the firm’s trading year following a 29% plunge in the first quarter. But the directors reckon revenue trends improved through the quarter”. But that optimistic note comes with a warning. It’s “too early” to know how the new UK and European lockdowns will affect trading in the second half of the trading year.

But chief executive Alistair Cox is optimistic about the outlook. He’s “confident” Hays will increase its market share “as clients and candidates look for our expert recruitment guidance, both during and after Covid”.

And he’s not the only one with optimistic expectations. At 146p, the share price has risen by around 37% since the beginning of November. As ever, investors in the stock market seem to be buying shares like Hays in anticipation of better trading before it’s happened. And I can see the logic because there could well be a scramble to recruit people in all kinds of industries once the world is free of the curse of Covid.

Earnings set to rebound

Meanwhile, City analysts following the company expect earnings to come in near 5.8p for the trading year to June 2022. And that’s a vast improvement on the 2.1p or so they expect in the current trading year. But it’s still a long way from the earnings of just above 12p the company posted for 2019, before the crisis. So, the potential for a big recovery in earnings exists when things finally get back to ‘normal’.

On balance, I find the stock to be less attractive than the underlying business right now. At the current share price, the forward-looking earnings multiple runs near 25. And even if those earnings do fully recover and double further down the road, the multiple will still be as high as 12. Although the valuation drops a little if I adjust for the cash pile, it still looks full to me.

And if I can’t find a way to categorise Hays as a cheap share, the upside potential is probably less attractive than it was just over two months ago when the shares were lower. Meanwhile, the business faces near-term uncertainties. So, I’m inclined to avoid the stock for the time being in favour of other stocks in the FTSE 250.

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.

Kevin Godbold has no position in any share 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.

More on Investing Articles

Bus waiting in front of the London Stock Exchange on a sunny day.
Investing Articles

Could the 9.8% M&G dividend yield get even bigger?

Christopher Ruane reckons that, although the M&G dividend yield is already close to a double-digit percentage, it could get better…

Read more »

Investing Articles

How much passive income could I earn by putting £380 a month into a Stocks and Shares ISA?

Christopher Ruane explains how he'd aim to turn a Stocks and Shares ISA into four-figure passive income streams each year.

Read more »

Investor looking at stock graph on a tablet with their finger hovering over the Buy button
Investing Articles

2 passive income stocks I’m buying before an interest rate cut

With the market expecting interest rates to fall in August, time might be running out for investors looking to buy…

Read more »

Investing Articles

If I’d bought Rolls-Royce shares a year ago, here’s what I’d have now

Rolls-Royce shares have been the big FTSE 100 success story of the past 12 months and more. And there's still…

Read more »

Young female analyst working at her desk in the office
Investing Articles

If the Dow’s heading for 60,000 by 2030, can the FTSE 100 index hit 12,000?

Strategist Ed Yardeni predicts a 50% rise for America’s Dow Jones Industrial Average over six years. Can the FTSE 100…

Read more »

Investing Articles

Is the National Grid share price a once-in-a-decade opportunity?

The National Grid share price looks like a bargain. But there’s much more for investors to think about than a…

Read more »

Investing Articles

Here’s why the Rolls-Royce share price should keep gaining!

The Rolls-Royce share price is up 185% over the past 12 months, but there are a host of tailwinds that…

Read more »

Mature Caucasian woman sat at a table with coffee and laptop while making notes on paper
Investing Articles

Buying 1,852 shares in this ultra-high yield FTSE 100 income stock would give me £1k a year

Harvey Jones is keen to load up on this blue-chip income stock that pays the highest yield on the FTSE…

Read more »