Would I invest £1,000 in this FTSE 250 recovery stock in 2022?

The FTSE 250 stock was one of the biggest index gainers yesterday after it released a strong set of results. But is that enough justification to buy the stock?

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Business development to success and FTSE 100 250 350 growth concept.

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The FTSE 250 index has largely maintained its trading momentum in December. It has closed at 23,000+ levels in at least three sessions this week as I write on Friday afternoon. As always, some stocks have made bigger gains in these past days than others. One of them is the greeting card, flowers, and gifts e-tailer Moonpig (LSE: MOON). 

Moonpig’s numbers ahead of pre-pandemic levels

On Thursday, the stock’s price increased by 4.5% after it released its results for the six months to 31 October, making it among the biggest FTSE 250 gainers. The numbers show that its performance has corrected from the lockdown spurt. Revenues are down by 8.5% and pre-tax profits have declined by 43% from the same time last year. So why is the stock still up? I reckon that is because it has still shown a significant jump from the pre-pandemic numbers of 2019. Revenues are up by 115% and reported profit before tax has doubled. Moonpig has also become more optimistic in its outlook. Revenue for the current year is expected to be “at the upper end of the previous guidance range”. 

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What’s ahead for the FTSE 250 stock

I think these numbers are pretty impressive. The fact that it has been able to maintain an edge even after the easing of lockdown restrictions and the reopening of bricks-and-mortar retailers indicates some likely brand value to the company. The big question for me, as I plan my investments for 2022, is whether I should buy the Moonpig stock now.

There is no question that its fundamentals look good right now. And if recovery continues, it is not hard to envision more growth for the company. Times when economic growth picks up are normally quite good for consumer discretionary stocks. These stocks represent companies whose products are ‘nice to haves’ as opposed to say, grocery stocks, which represent companies that stock our ‘must have’ products. 

During years of growth pickup, discretionary companies see an outsized expansion in demand and vice versa. This could explain why Moonpig’s sales have stayed relatively strong even post-lockdown. If we add the fact that lockdowns have probably created a lasting structural shift towards online spending, Moonpig could potentially do quite well in the future.

The downside

But Moonpig is also a pricey stock. The company’s price-to-earnings (P/E) ratio is a huge 63 times. Frankly, I find that hard to justify. I can think of many examples of established FTSE 100 companies with lower P/Es that have seen consistent growth over the years. Why would I not rather buy those stocks instead? And I reckon other investors might think the same way. This may be why Moonpig’s share price has fallen some 25% from the highs of June this year. It is also down by 10% from its listing price earlier this year. 

My assessment 

Keeping everything in mind, Moonpig remains on my watchlist. I think there is a case for far more price correction here. I am happy to buy the £1,000 worth of the stock when its P/E reaches more reasonable levels, probably in 2022.  

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Manika Premsingh has no position in any of the shares 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.

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