I have been looking for cheap FTSE 250 shares to buy following the recent spate of market volatility.
My targets are companies to add to my portfolio that exhibit the qualities of robust businesses. This means I am looking for corporations with strong balance sheets and competitive advantages, which should help them navigate any economic challenges in the foreseeable future.
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There are a handful of these corporations in the index. Two companies really stand out to me as being undervalued compared to their potential right now. I would buy both for my portfolio and hold them for the next decade as they double down on their competitive advantages and growth.
FTSE 250 growth
The first company on my list is the online gambling operator 888 Holdings (LSE: 888).
This company is the sort of business that splits opinions. Investing in gambling establishments is not going to be everyone’s cup of tea, but these businesses can be incredibly profitable. The industry is also experiencing a bit of a growth spurt as online activity increases.
Despite the attractive qualities of the sector, there are plenty of challenges these companies may have to encounter going forward.
For example, the sector is incredibly competitive, and it is only becoming more so. On top of this, the industry is highly regulated. Regulators are always bringing in new rules and regulations to try and stop companies taking advantage of consumers.
This is not going to change any time soon. Companies will need to learn to live with these rules even if they mean higher costs and lower profits.
One of the best shares to buy
Still, ethical considerations aside, the FTSE 250 company does have some incredibly desirable qualities. Its return on capital employed, a key measure of profitability for every £1 invested in the business, has averaged 30% over the past six years. That puts the business in the top 15% of the most profitable enterprises on the London market.
Management has used the company’s profits sensibly to expand organically and through acquisitions over the past couple of years. According to City analysts, the group will report nearly $100m of profits for the 2021 financial year.
Further growth is projected for 2022. According to current projections, the corporation will earn a net profit of $140m in the 2022 financial year. By comparison, for 2015, the company earned a net profit of just $30m.
These numbers illustrate how rapidly the FTSE 250 company has expanded over the past couple of years. It has been able to achieve this growth even with the challenges outlined above.
Of course, projections for growth over the next two years are just that, projections. There is no guarantee the firm will hit these targets. A lot could change over the next couple of years, and a new regulatory requirement could mean high costs for the business.
Nevertheless, I think the numbers illustrate the company’s potential. Its substantial return on investment also suggests to me that the enterprise will have the financial resources to take on any threats it may encounter.
Undervalued FTSE 250 stock
Despite the company’s attractive qualities, at the time of writing, the FTSE 250 stock is trading at a forward price-to-earnings (P/E) multiple of just 9. I think that undervalues its potential and does not take into account the organisation’s efficient operations. On top of this, the stock offers a dividend yield of 5.8%.
With the potential for income and capital growth over the next couple of years, I would be happy to add 888 to my portfolio today.
Massive market potential
Wealth management is one of the biggest industries in the UK.
As the country’s population grows and becomes wealthier, it seems likely the demand for these services will only expand. However, many publicly listed wealth management companies are currently trading at relatively cheap valuations compared to their growth potential over the next couple of years.
The FTSE 250 wealth manager Quilter (LSE: QLT) is a great example.
The company recently published its full-year results for 2021, which show the scale of the opportunity on offer. Last year, the group achieved net investment inflows of £4bn.
Assets under management and administration increased by 13% to £112bn. With assets under administration expanding, the company’s management fees also expanded. Adjusted profit before tax increased by 28%.
Over the past year, management has been streamlining the enterprise.
FTSE 250 reorganisation
It has been divesting non-core businesses and doubling down on the areas where it has a competitive edge. The company has been investing more in its asset management platform and recently divested Quilter International for £481m.
The organisation is planning to return the bulk of these proceeds to investors with a special dividend of 20p per share. The rest of the money will be reinvested back into the corporation to drive growth.
Unfortunately, the FTSE 250 company cannot take its position in the market for granted. The wealth management industry is incredibly competitive, and Quilter needs to keep spending and investing in its product to maintain and build consumers’ trust.
The biggest challenge the group may face as we advance is competition, but it could also face pressure from regulators. Every financial services company has to deal with regulators’ demands, which can significantly increase costs. These additional costs could hit profit margins and hurt growth.
Even after taking these risks and challenges into account, I think the FTSE 250 stock has tremendous growth potential over the next few years. I am also encouraged by management’s cash return plans. It looks as if they are focused on rewarding shareholders as well as growing the business.
The recently announced special dividend will provide a yield of around 17% on the current share price. I think further cash returns are also likely in the future as the company continues to invest in its offering. With assets under management expanding, it is clearly offering something consumers want to be part of.