2 FTSE 250 stocks to buy and 1 to avoid

This Fool explains why these two FTSE 250 stocks have bright growth prospects, but their peer could run into trouble as we advance.

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Investing is as much about knowing which investments to avoid as knowing which ones to buy. Indeed, right now, it looks as if there are plenty of bargains in the FTSE 250. But some of these businesses I would not touch with a barge pole. 

With that in mind, here are two FTSE 250 stocks I would buy for my portfolio today and one company I do not own and would sell if I did. 

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Luxury market 

My first ‘buy’ company is the luxury watch retailer, Watches of Switzerland (LSE: WOSG). Demand for luxury watches has surged over the past two years. This company is rising to the challenge of growing demand by expanding worldwide.

With its windfall profits, the group is plotting a global expansion. It is looking to grow its market share in Europe and the US over the next few years through a combination of organic growth and acquisitions.

While this strategy is exciting, I am wary that many retailers have struggled in the past due to overexpansion. This is the most considerable risk the group faces. 

Despite this headwind, with more growth on the horizon, I am happy to add this FTSE 250 stock to my portfolio right now.  

Defensive income 

With uncertainty building in the global economy, I have also been looking for defensive equities to add to my portfolio. So I have settled on the water company Pennon (LSE: PNN).

Water is a highly defensive market. Corporations can increase their bills to consumers at a rate equal to, or above, the inflation rate every year, and customers usually have to pay as water is an essential service. 

That said, the most significant risk to the company’s growth is regulation in the long run. The water regulator, Ofwat, dictates how much Pennon is allowed to charge consumers. It could clamp down on the business if it thinks it is charging too much. 

Still, these qualities suggest that the business can continue to grow in an inflationary environment, making it the perfect stock to own right now. 

The shares also offer an attractive dividend yield of 3.4%, at the time of writing. This is not the highest dividend yield on the market, but the qualities outlined above suggest the dividend is more attractive than most. These are the reasons I would buy the stock right now. 

FTSE 250 stock in trouble 

While I would buy the companies outlined above, I would also sell Carnival (LSE: CCL) if I owned it and would certainly not buy it today. The cruise line operator nearly collapsed during the pandemic, and while customers are returning, it could be years before the business returns to full health. 

The debt it had to take on to push through the pandemic has severely weakened its balance sheet. It is not clear when the business will be able to start reducing these liabilities. Consumers are in no rush to return, and in the meantime, the enterprise continues to lose money. 

Nevertheless, the company’s outlook is not entirely negative. Some consumers are returning, and they seem willing to spend more. If this trend continues, its outlook may improve. 

However, I am not buying this recovery story, considering the risks outlined above. I think the two FTSE 250 stocks outlined in the first half of this article have much brighter prospects. 

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