The FTSE 250 index can be a source of lucrative investment opportunities. This index – which contains the largest 250 stocks on the London Stock Exchange outside the FTSE 100 – is home to many great companies that are growing rapidly.
Here, I’m going to highlight two FTSE 250 shares I’d buy today. Both have momentum at present and I think there’s a good chance they’ll generate strong returns for investors over the long term.
A FTSE 250 stock for the digital revolution
One of my top picks in the FTSE 250 right now is Kainos (LSE: KNOS). It’s an under-the-radar UK technology company that helps governments and businesses with digital transformation (cloud computing, data management, automation, etc). Currently, it serves customers in over 20 countries.
Kainos’ most recent full-year results, for the 12 months ended 31 March, were very strong. Revenue was up 31% to £235m while adjusted pre-tax profit jumped 124% to £57.1m. Diluted earnings per share came in at 36.8p, up 122% year-on-year. These results represented the 11th consecutive year of growth.
This strong growth isn’t the only thing I like about this company. Another is its level of profitability. Over the last five years, return on capital employed has averaged 43%, which is very impressive. Additionally, the company has a strong balance sheet.
One risk to be aware of here is that the stock’s valuation is quite high. Currently, Kainos sports a forward-looking price-to-earnings (P/E) ratio of about 38. This valuation doesn’t leave much room for error. If growth stalls, the stock’s likely to fall.
Overall however, I see a lot of appeal in this FTSE 250 stock. With the shares currently experiencing a bit of a pullback, I think it’s a good time to be building a position.
Another top tech stock
Another FTSE 250 stock I’d buy right now is Computacenter (LSE: CCC), which operates in a similar field to Kainos. It also provides technology solutions to businesses and government organisations. Its customers include the likes of Linklaters, UBS, Hays, and Costa Coffee.
Computacenter has also posted strong results. Its full-year 2020 results, posted in March, showed a 8% increase in revenue, a 47% increase in profit before tax, and a 50% increase in diluted earnings per share. Meanwhile, in a Q1 trading update posted in late April, the company said it was seeing strong demand for its services and that it expects 2021 to be another good year for profits.
Like Kainos, CCC is a high-quality company. It’s highly profitable (five-year average return on capital employed of 21%) and it has a strong balance sheet. The company is also a reliable dividend payer.
A risk to note here is that demand for IT solutions could potentially stall in the short term, due to the fact that many businesses brought spending forward last year during the pandemic. However, I think the overall risk/reward proposition here is attractive. At its current valuation (the P/E is under 20), I see this FTSE 250 stock as a buy.
Edward Sheldon owns shares in London Stock Exchange. The Motley Fool UK has recommended Kainos. 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.