1 cheap FTSE 250 stock to buy now

This FTSE 250 (INDEXFTSE:MCX) stock is hated by the market but Paul Summers is keeping the faith and maintains the shares are a bargain.

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FTSE 250 constituent Moneysupermarket.com (LSE: MONY) is having a bad 2021. In the year to date, its share price has tumbled a depressing 20%. To put this fall in perspective, the company hasn’t traded this low since 2014. 

FTSE 250 laggard

Before explaining why this strikes me as an opportunity, it’s worth reflecting on why MONY is performing so poorly.

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First, we have the ubiquitous headwind that is Covid-19. It saw reduced business in 2020 as banks and financial services tightened their lending criteria in the wake of the pandemic. Naturally, a lack of people travelling abroad also meant a fall in demand for travel-related services such as insurance. 

If this wasn’t bad enough, the current energy crisis in the UK has pushed more investors to head for the exits. The rationale behind this is that fewer people will be looking to change suppliers. Even if they did contemplate doing so, fewer options would make finding a better deal tougher. Again, that could mean less traffic (and reduced earnings) for Moneysupermarket. 

Quality…on the cheap

As I type, Moneysupermarket shares trade at 17 times FY21 earnings. That may not appear ‘cheap’ in the traditional sense. In fact, dedicated value investors might scold me for using the word. Only stocks trading on single-digit earnings multiples really qualify, they might say.

But this number must always be put in context and take into account a company’s track record. On many financial ratios, MONY scores very well. Returns on capital employed — something that star investors like the UK’s own Terry Smith scrutinises — have been consistently high over the years. It also looks financially sound with a strong balance sheet.

The brand is another attraction. In an admittedly crowded field, Moneysupermarket remains one of the best-known comparison websites around. As a regular switcher, I go back to the site at least a few times every year to ensure I’m getting the most bang for my buck on utilities and insurance.

Nor am I about to turn down the dividends on offer. The consensus among analysts is that the FTSE 250 member will return 12p per share in the current financial year. That’s a yield of 5.7% at last Friday’s closing price. Adequate compensation while I await a recovery? I think so. 

All this makes me think MONY looks cheap, perhaps ludicrously so.

Patience required

Obviously, the sticky patch could continue. A resurgence of Covid-19 in the UK could drag the share price of this FTSE 250 laggard even lower. Confirmation of more energy companies going bust could do the same. Harking back to the dividend, it’s vital to note that those payouts are barely covered by profits. This may mean that MONY ends up slashing its cash returns before long if conditions don’t improve. 

The ‘endowment effect’ — the idea that I value things I own more than they are actually worth — is a possibility here too. In reality, it doesn’t matter what I think MONY’s valuation should be. It’s only worth what someone else is prepared to pay for my shares. 

Nevertheless, I refuse to let go of my contrarian mindset. I don’t see anything to make me think that MONY is just 80% of the company it was back in January. The outlook for this business is still positive once the short-term storm clouds dissipate.

At this level, I’m still a buyer.

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Paul Summers owns shares in Moneysupermarket.com. The Motley Fool UK has recommended Moneysupermarket.com. 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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