My top 5 FTSE 250 stocks to buy

This Fool explains why he thinks these FTSE 250 stocks are some of the best shares to buy now for growth and income.

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Many investors focus exclusively on the FTSE 100 when they are looking for stocks to buy. I think that is a mistake. I believe a whole range of high-quality companies lie outside the blue-chip index, particularly in the FTSE 250, and I would like to add some to my portfolio. 

As such, here are my top FTSE 250 shares. I would not hesitate to buy all of these stocks for my portfolio today. 

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Top FTSE 250 stocks 

One theme that is attracting a lot of attention right now is recycling. As the world tries to get to grips with climate change, governments around the world are focusing on improving recycling rates. 

This is a dirty, complex business, which means the sector is not easy to penetrate. That is why I would buy FTSE 250 stock Biffa (LSE: BIFF)

The waste and recycling company is one of the biggest in the UK, and it is expanding overseas too. The group’s sales for the first half of the year are expected to be around 3% higher than 2019. 

Thanks to this growth, the City reckons the stock is trading at a forward price-to-earnings (P/E) ratio of 20.2. I think that looks good value for such a defensive business. Last year, the firm’s sales slumped, but as recent figures show, that was just a blip in Biffa’s growth story. Management is also looking for acquisitions to supplement expansion. 

Risks the firm may face as we advance include rising costs, additional regulations, and competition. All of these challenges could weigh on growth. 

Bounce back 

Insurer Beazley (LSE: BEZ) reported significant losses last year thanks to the pandemic. The firm had to book some big losses on business interruption contracts it had underwritten. This also forced management to ask shareholders for more cash to meet losses. 

The good news is, the firm is now putting this issue behind it. Revenues and profits are set to rise this year, thanks in part, to a buoyant insurance market. Insurance rates are rising due to a string of natural disasters worldwide, which is helping Beazley bounce back from last year’s disaster. 

Gross premiums written increased by 29% in the nine months to 30 September to $3.2bn.

Unfortunately, the company is also having to set aside more cash to cover losses from natural catastrophes, but this is a risk of investing in the insurance sector. There will always be the potential for large losses. 

Still, I think the rising rates should more than offset these losses. That is why I would buy the stock today. 

Growth ahead

One of my favourite FTSE 250 growth stocks is Domino’s Pizza Group (LSE: DOM).

The group is a great operator. Its focus on the delivery market meant that it was primed and ready to glide through the pandemic. And now management is plotting further growth. 

In an update issued in the middle of October, Domino’s announced that it was planning to create 8,000 jobs as it expanded across its markets. The update also revealed that sales for the 13 weeks to 26 September rose 9.9% to £375.8m, or 8.8% on a like-for-like basis.

As the organisation gears up for the next stage of growth, I would buy the shares today. 

That said, I will be keeping an eye on the company’s competitors to see if they are gaining market share from the pizza delivery group. This could be a sign that it is focusing on growth too much, and not spending enough time meeting the demands of existing customers. 

FTSE 250 construction giant 

Balfour Beatty (LSE: BBY) is one of the best ways to play the upcoming construction boom across the UK in my opinion.

The UK government has outlined plans to spend over £100bn in the next few years on infrastructure across the country. As one of the largest construction contractors in the UK, I feel Balfour is primed to capture a large share of this spending. 

According to its latest trading update, issued in the middle of August, interim pre-tax profit was £35m for the six months to 2 July, compared with a loss of £26m a year ago.

Management is also so optimistic about the business’s growth potential that it lifted the company’s margin targets in its support services business to a range of 6% to 8%, from 3% to 5% previously. 

Based on Balfour’s own growth outlook, City analysts reckon the stock is trading at a forward P/E of just 12. I think that is far too cheap for this infrastructure growth play. As well as this attractive valuation, analysts say the stock will yield more than 3% next year. 

Having said all of the above, I will be keeping in mind the fact that the construction industry is highly volatile. It is usually the first to feel the pain in any economic downturn. As such, this stock might not be suitable for all investors. 

Nevertheless, considering its potential over the next few years, I would buy the shares for my portfolio now. 

Market challenger

The last of my stocks quintet is AJ Bell (LSE: AJB), which was originally launched to take on the big City stockbroking firms and their fat profit margins. In many ways, even though the business is now a £1.7bn company in its own right, it is still a challenger. 

The firm’s low-cost stockbroking service is proving to be very popular with investors, and it just keeps on growing. 

In an update for the year to 30 September, the company said total assets under administration rose 29% to £72.8bn. Customer numbers increased 30% to 382,754, while total net inflows rose 52% to £6.4bn.

Clearly, AJ Bell’s offering still resonates with investors. And considering this growth, even though the stock is a bit more expensive than the businesses I would usually buy, I would still add the shares to my portfolio. 

Some headwinds I will be keeping an eye out going forward include competition from even-lower-cost brokers such as Freetrade, as well as regulations. Additional regulatory costs could hit profit margins and may remove funds from the marketing budget, which would have a knock-on effect on growth. 

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Rupert Hargreaves has no position in any of the shares mentioned. The Motley Fool UK has recommended Dominos Pizza. 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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