Over the past year, the FTSE 250 index has lost 13% of its value. The longer term has been unrewarding too — in five years, the index has dropped 5%.
I think there are some potential bargains for my portfolio in the seemingly unfashionable index that features smaller businesses than the giants of the FTSE 100. Here are two that I reckon could outperform the broader stock market in coming years. If I had spare money to invest today, I would add both to my portfolio.
Howden Joinery
What will happen to the housing market in coming years?
Nobody knows. Fears about the risk of a property market crash may help explain why shares in FTSE 250 member Howden Joinery (LSE: HWDN) have fallen 13% over the past year.
But, whatever the property market does, builders will need the timber part of its business for renovation and building. Howden has developed deep relationships with trade customers and has a distinctive customer proposition. Its network of local depots with goods immediately available from stock is a strong asset.
Revenues last year rose 11%, pre-tax profits were up 4% and the annual ordinary dividend per share increased 6%. The company has been buying back its own shares lately. It trades on what I see as an attractive price-to-earnings (P/E) ratio of just 10.
Risks and rewards
The valuation could reflect investor concerns that property market uncertainty may lead to lower demand for wood, building materials, and its core kitchens offer, hurting revenues at Howden. Inflation is also a threat to profitability.
But I expect strong long-term demand in the building sector and Howden has a well-established business. I see its trade relationships as a competitive advantage and think the shares could do well in the coming five to 10 years. Despite the recent fall, the shares have moved up 44% in the past five years.
Computacenter
I can now buy shares in Computacenter (LSE: CCC) for slightly less than three-quarters of the price I would have paid just a year ago.
But with a P/E ratio of 14, this proven performer looks cheap to me given its long-term prospects. Last week the firm unveiled its 2022 results and they looked strong to me. Revenues grew 29%, pre-tax profit edged up slightly to £249m and the dividend was raised 2%.
That is not the stuff of legend, but it is a solid performance in a market where many firms have been cutting back on IT expenditure.
With its broad reach, deeply embedded client relationships and wide service offering, I think the FTSE 250 firm looks set to continue doing well. In the long term, demand for IT services ought to be high.
Tightened budgets are a risk to short-term revenues and profits. Another risk is the impact of competition on pricing and profit margins. Computacenter operates in an attractive business area and a range of multinational firms would like to grow their market share, possibly at its expense.
But I remain upbeat about the company’s prospects and was cheered by last week’s results. I think the current valuation is fairly cheap for a mid-sized professional services firm with Computacenter’s proven ability.
