Down 20%, could this FTSE 250 stock be one of the best bargains out there?

This Fool recently increased his position in this FTSE 250 stock. And he’s keen to continue. Here, he explains why he sees it as a bargain.

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I think FTSE 250 stocks are great investments. The index is home to plenty of exciting companies that offer investors the potential for handsome gains. And with it less renowned than the FTSE 100, I think there are a few hidden gems within it.

With that, I’m turning my attention to Safestore (LSE: SAFE). The business does what it says on the tin. It’s the UK’s largest self-storage unit provider, with over 130 stores nationwide. And with it down 20% year to date, I sense a bargain.

Share price history

Before we delve into why, let’s first explore how Safestore has performed in recent times. Seeing as I’m a Fool (capital F!), I tend to think in decades, not weeks and months, so let’s start there. 10 years ago, a share would have cost me just 157p. Going off the 16 November closing price of 765p, that’s nearly a 400% rise!

Despite that, the outlook has been a bit gloomier recently. The last 12 months have seen it fall by over 17%. And after a strong start to 2023, it’s been on a steady decline since late February.

Why the fall?

So, what’s the reason behind this fall?

No surprise one of the main factors has been hiked interest rates. Higher rates mean purchasing and constructing facilities are more expensive. And for a business like Safestore, this isn’t good news.

On top of that, net debt as of 30 April stood at £776.6m. With predictions that the base rate won’t fall to 3% by late 2025, servicing this could become costly. It has managed to pass on costs to consumers for now. However, this may not last.

A bargain?

Even with the above considered, is there a case to be made that Safestore is a bargain?

It looks cheap. A price-to-earnings ratio just below six certainly backs up this argument. This sits well below the FTSE 250 average of between 10-12.

I’m always on the hunt for passive income opportunities, and a dividend yield of around 4% is another string in Safestore’s bow. Dividends increased from £31.9m in H1 2022 to £37.7m in H1 2023. And in the last decade, its dividend has experienced major growth.

The business also has expansion at the front of its plans. After cementing itself as a domestic leader, it’s turning its focus to Europe. Last year, it added development sites in Paris and the Netherlands to its portfolio. In 2023, we’ve seen this expansion in action through a joint venture with Carlyle in Germany.

On top of that, a £400m revolving credit facility announced in late 2022 not only bolsters its balance sheet but will also provide opportunities for future expansion. Despite the headwinds faced by a tough economic environment, the business seems to be pressing on with its ambitious strategy.

What I’m doing

I think at its current price, Safestore could be a bargain. It’ll face challenges. But these are short-term concerns. It has strong momentum through international expansion, a cheap valuation, and passive income to bolster my returns. I topped up my position a few weeks back. Cash permitting, I plan to do the same in the upcoming weeks.

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.

Charlie Keough has positions in Safestore Plc. The Motley Fool UK has recommended Safestore 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.

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