While the FTSE 100 hit a record high this month, the more UK-focused FTSE 250 is still roughly 20% below its previous peak. So, what better time to go hunting for second-tier recovery plays before the (hopefully inevitable) big recovery?
Here are two I particularly like.
Green shoots
As a holder of shares in FTSE 250-listed price comparison company Moneysupermarket.com (LSE: MONY) already, I can’t pretend the last couple of years have been pleasant.
However, recent form has been much more encouraging. In fact, the stock has climbed a little over 17% in the short 2023 so far.
Yes, some of this might be due to the Bank of England’s optimism that a UK recession will be shorter and less severe than first thought (if one happens at all). A rising tide lifts all boats, as it were.
But I think this would be rather harsh on the website operator. It’s clear that the cost-of-living crisis has pushed more people to look for better deals for services like broadband and insurance. Indeed, revenue at Moneysupermarket’s travel insurance segment was almost 50% higher last year than in pre-pandemic 2019.
I reckon this momentum will continue, especially once the energy market becomes more competitive and people are finally able to switch providers.
Chunky dividends
Clearly, the economic clouds may still take a while to disperse.
Nevertheless, a price tag of 15 times forecast earnings still feels reasonable to me, especially when the income stream is taken into account.
Moneysupermarket maintained, rather than increased, its total payout for 2022. While this might have disappointed some investors, I think it’s actually quite prudent given current uncertainty.
Even if no hike came in 2023, the stock would still yield a chunky 5.1% at today’s share price. For comparison, the FTSE 250 index yields ‘just’ 3.1%.
Is the extra risk worth it? I think so. Indeed, I may well add to my current position if funds become available.
Buy before the boom?
Another second-tier stock I think is a potentially great buy right now is Newcastle-based housebuilder Bellway (LSE: BWY).
That might sound strange considering how the sector fared towards the end of 2022 as mortgage rates galloped higher and demand from would-be buyers fell.
However, I reckon a lot of bad news is already priced in. Bellway shares change hands on a price-to-earnings (P/E) ratio of just six. A forecast 5.6% dividend yield, easily covered by expected profit, is another attraction.
Patience required
Now, I have no idea how the property market is going to fare in 2023. Clearly, a rise in unemployment is unlikely to be help it. On the flip side, this could be a catalyst for interest rates to be pushed lower.
We’ll get an idea of just how bad (or not so bad) trading at Bellway is when the company reveals its half-year numbers at the end of March. Naturally, management commentary on the outlook will be heavily scrutinised.
As a Foolish investor, however, I know that it’s pointless worrying about things I can’t control. It’s far better to concentrate on buying stocks with great long-term potential. I think that’s the case here given the ongoing need for housing in the UK.
Again, I’d feel comfortable buying now with any spare cash.
