The FTSE 250 fire sale continues! 2 bargain stocks to buy today

The FTSE 250 continues to offer exciting bargains as the index recovers from last year’s correction. Are these the best buying opportunities right now?

| More on:

The content of this article was relevant at the time of publishing. Circumstances change continuously and caution should therefore be exercised when relying upon any content contained within this article.

Mature black couple enjoying shopping together in UK high street

Image source: Getty Images

You’re reading a free article with opinions that may differ from The Motley Fool’s Premium Investing Services. Become a Motley Fool member today to get instant access to our top analyst recommendations, in-depth research, investing resources, and more. Learn More.

Despite heading in the right direction these past 12 months, the FTSE 250 continues to offer bargains. The economic environment is improving, but investors are still punishing capital-intensive companies in the face of rising interest rates.

Caught in the crossfire of this pessimism are two renewable energy empires, Greencoat UK Wind (LSE:UKW) and Foresight Solar Fund (LSE:FSFL). And there is some justification for concern. After all, building wind and solar farms isn’t cheap, and it’s resulted in a lot of debt being racked up over the years.

However, even with the added pressure from high debt-servicing costs, neither firm appears to be in serious trouble from what I can tell. And with both stocks down by double digits despite raising dividends, this, to me, looks like an attractive entry point.

Investing in renewable energy infrastructure

Foresight and Greencoat have very similar business models. They both use shareholder and lender capital to acquire green energy assets to generate and sell electricity to suppliers such as SSE, Centrica, and EDF Energy. And Foresight has also begun taking things a step forward by investing in industrial-grade energy storage solutions on top of its solar assets.

While the initial cost is high, both solar and wind power technologies don’t require much maintenance compared to other energy systems. As such, both groups boast high double-digit profitability. And, in turn, this has led to impressive levels of cash generation.

In fact, it’s precisely how both companies have successfully raised dividends for eight consecutive years. And this trend doesn’t look like it’s changing even with higher interest rates, considering both have hiked their interim dividends once again.

Shifting landscapes spell trouble

Despite the seemingly solid performance, investors appear to remain unimpressed. And there might be a good reason for it.

Higher interest rates may not pose a threat to the firms’ existing loan book, but to continue expanding operations and raising dividends, more debt is going to be needed. And, over time, as old cheap loans mature and new expensive ones make up the bulk of the debt portfolio, profit margins will likely get squeezed.

This threat is particularly problematic since neither Greencoat nor Foresight have any pricing power to offset this impact. Don’t forget energy prices are driven by the market, not the individual companies.

The bottom line

As global warming becomes an evermore present threat, demand for clean energy sources is on the rise. And the UK in particular appears to be at the vanguard with 36% of total electricity generation coming from renewables in the last 12 months. For reference, that’s up from 4.8% 10 years ago.

With that in mind, I think the opportunities for Greencoat and Foresight are only going to increase moving forward. The higher cost of funds will demand more capital allocation skill from the management teams. However, with a near-decade-long track record of creating value for shareholders, I remain optimistic, especially at today’s cheap valuations.

Should you invest, the value of your investment may rise or fall and your capital is at risk. Before investing, your individual circumstances should be assessed. Consider taking independent financial advice.

Zaven Boyrazian has positions in Greencoat Uk Wind Plc. The Motley Fool UK has recommended Foresight Solar Fund and Greencoat Uk Wind Plc. 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.

More on Investing Articles

Mature Caucasian woman sat at a table with coffee and laptop while making notes on paper
Investing Articles

Down 11%, a brilliant FTSE 250 growth stock I’d buy on the dip!

I think Games Workshop shares are a brilliant dip buy following last week's slump. Here's why it's one of my…

Read more »

Middle-aged black male working at home desk
Investing Articles

Are these top-traded FTSE 100 shares the best to buy for 2024?

The market has disagreed with me pretty much all year on the best buys among FTSE 100 shares. But, are…

Read more »

Young black colleagues high-fiving each other at work
Investing Articles

My five favourite forms of passive income

I've been looking for ways to pump up my passive income, so I can retire richer. But which of these…

Read more »

Silhouette of a bull standing on top of a landscape with the sun setting behind it
Investing Articles

What’s the FTSE 100’s best 10% dividend yield?

Depressed prices have thrown up some golden opportunities on the FTSE 100. Which of these 10%-yielding Footsie stocks should I…

Read more »

Two white male workmen working on site at an oil rig
Investing Articles

BP shares look dirt cheap

Are BP shares a brilliant bargain? The financials look excellent and it’s hard not to call them anything other than…

Read more »

Mindful young woman breathing out with closed eyes, calming down in stressful situation, working on computer in modern kitchen.
Investing Articles

My 12 fears for the stock market in 2024

After a terrific year for global stock markets in 2023, what can I look forward to in 2024? As a…

Read more »

Young woman working at modern office. Technical price graph and indicator, red and green candlestick chart and stock trading computer screen background.
Investing Articles

2 income shares for bumper dividends in 2024

I own these two income shares for their outstanding ability to deliver billions of pounds of cash dividends each year…

Read more »

Investing Articles

Could the IAG share price hit £2.11 in 2024?

According to analysts, the IAG share price could be headed for £2.11. But Stephen Wright wonders whether the stock is…

Read more »