The mid-cap FTSE 250 index has fallen by 10% over the last year. That’s left it lagging behind the big cap FTSE 100 index, which is up by 5% over the same 12-month period.
The FTSE 250’s weak performance is quite unusual. The mid-cap index has outperformed the FTSE 100 by 250% since 2002. Although past performance is not an indicator of future returns, I think there’s plenty of value in the FTSE 250 today. Here are five FTSE 250 shares that are on my buy list for May.
A contrarian buy?
My first pick is chemicals group Synthomer (LSE: SYNT). This business has been through a lot of change over the last couple of years.
In 2020 and 2021, demand for latex globes surged due to the pandemic. Latex sales are now returning to normal, but the group has recently completed a major acquisition in the US. This has created a new adhesives division within the group.
It’s a complicated picture and Synthomer’s share price has suffered as a result of the uncertain outlook .
With so many changes – and a new chief executive – I can certainly see some risk of further setbacks. However, I think I’m now starting to see some clarity.
Synthomer’s latest trading update reported an “encouraging start to the year”. Meanwhile, broker forecasts suggest that the group’s 2022 earnings and dividend will stabilise well above 2019 levels.
These City estimates price the stock on just seven times forecast earnings, with a dividend yield of 5.8%. That seems cheap to me for a business that’s been quite profitable in the past. Synthomer is on my list as a potential buy for my portfolio in May.
A whopping 9% yield
My next pick is well-known UK insurer Direct Line Insurance (LSE: DLG). This FTSE 250 business is best known for its home and motor policies, which are sold under brands including Direct Line, Churchill and Privilege.
Direct Line shares currently offer a forecast dividend yield of 9.5%. This very high yield is more than double the FTSE 100 average of around 4%. High yields can indicate some extra risk.
In this case, I think the problem is that Direct Line’s profits have been falling in recent years. The group’s 2021 results showed pre-tax profit of £446m. That compares to a figure of £581m in 2018.
My analysis suggests Direct Line’s dividend will be affordable. But this view does depend on the company’s profits starting to recover, following significant investment in new IT.
The company says these changes are already starting to deliver improved profitability. CEO Penny James also says that Direct Line is starting to see stronger market conditions in motor insurance this year, allowing the group to increase its pricing.
I already hold Direct Line shares and have no plans to sell. I think the evidence so far supports a recovery. In my view, these shares are probably too cheap.
A FTSE 250 bargain?
Shares in my next company have fallen by nearly 30% since hitting a record high in November. The company concerned is Pagegroup (LSE: PAGE), which is one of the FTSE 250’s largest recruitment groups.
My guess is that the market is pricing in the risk of a recession. This could lead to a slowdown in new hiring, hitting Pagegroup’s profits.
However, there’s not much evidence of this yet in the company’s performance. Pagegroup saw gross profits rise by 43% to £258m during the first quarter of this year. The company reported a “record performance in March”, which was the first month ever to generate a £100m gross profit.
I was also reassured to see growth spread quite evenly across the regions where the group operates. Gross profit rose by 41% in EMEA, 36% in Asia Pacific, 43% in the UK, and 57% in the Americas.
Pagegroup’s share slump has left the stock trading on 10 times forecast earnings, with a 4% dividend yield. On balance, I think this is probably too cheap. Pagegroup is on my list as a potential buy.
A founder-led business
One thing I often look for are companies where senior management have a significant ownership stake. I feel this makes it more likely that they will run the business with shareholders in mind.
One possible bargain share that fits this description is financial trading group CMC Markets (LSE: CMCX). CMC is led by CEO Lord Cruddas. He founded the business in 1989 and still owns 57%.
CMC’s profits boomed during lockdown, but have cooled (as expected) since then. The market has punished the stock quite severely in my view, and CMC’s share price has fallen by over 40% since April 2021.
One risk here is that profits can be unpredictable, as many traders rely on volatile markets to find trading opportunities. Quieter markets generally mean lower profits.
However, CMC is also taking steps to diversify by expanding its stockbroking business. This should provide more stable earnings and create some new growth opportunities.
As I write, CMC shares are trading on 12 times forecast earnings, with a dividend yield of 4.3%. I think this FTSE 250 share could be a bargain and would be happy to add it to my portfolio.
A quality retailer
I want to wrap up with a look at FTSE 250 homewares retailer Dunelm (LSE: DNLM). This is another family-controlled business with a track record of strong profitability.
Dunelm’s sales boomed during the pandemic, as we all spent more time at home. However, over the last year, the group’s share price has fallen by 30%, even though sales have continued to rise.
This FTSE 250 retailer’s latest trading update showed sales up by 25% during the nine months to 26 March. During the first three months of 2022, sales were 69% higher than at the same time last year.
City analysts expect the company’s earnings to rise by 27% to 80p per share this year. That prices Dunelm stock on 12 times earnings, with a possible 5.8% dividend yield.
There’s a risk that the rising cost of living and the return of summer holidays could hit Dunelm’s sales later this year. But this is one of the most profitable big retailers in the UK. I think the sell-off has gone far enough. I’ve been buying Dunelm shares for my portfolio.
