Up 23% in a week, this FTSE 250 stock looks cheap to me

After two pieces of good news, this FTSE 250 has soared by almost a quarter since 28 February. Yet I still view this stock as very undervalued!

| More on:
Young mixed-race woman jumping for joy in a park with confetti falling around her

Image source: Getty Images

When investing, your capital is at risk. The value of your investments can go down as well as up and you may get back less than you put in.

Read More

The content of this article is provided for information purposes only and is not intended to be, nor does it constitute, any form of personal advice. Investments in a currency other than sterling are exposed to currency exchange risk. Currency exchange rates are constantly changing, which may affect the value of the investment in sterling terms. You could lose money in sterling even if the stock price rises in the currency of origin. Stocks listed on overseas exchanges may be subject to additional dealing and exchange rate charges, and may have other tax implications, and may not provide the same, or any, regulatory protection as in the UK.

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.

Since late 2021, I have repeatedly argued that UK shares look far too cheap, especially when compared to their foreign counterparts. As a result, my wife and I have built a new family portfolio packed with undervalued FTSE 100 and FTSE 250 stocks.

FTSE flops

Despite its relative cheapness, the Footsie has been a flop over the past year. In fact, it’s actually down 3% in the last 12 months. It’s a similar story for the FTSE 250, which has dipped 1.8% in a year.

Meanwhile, the US S&P 500 index has soared by 28.1% over the same period, while the Japanese TOPIX index has leapt by 32.5%. For me, this leaves many major stock markets looking overvalued, while UK shares languish in the bargain bin.

Investing theory suggests that buying low-priced assets usually produces superior future returns to buying high-priced alternatives. So that’s why we keep buying and holding quality UK shares for the long run.

A FTSE hidden gem

For example, one stock I’ve kept a close eye on recently is ITV (LSE: ITV). Founded in 1955, ITV is the UK’s leading commercial terrestrial broadcaster. However, it also produces content for other media outlets across the globe and operates ITVX, a fast-growing streaming service.

ITV’s biggest problem is that advertisers are cutting back spending on linear TV. This decline has been driven by the weaker UK economy, falling consumer spending, and higher spending on online ads.

As a result, the broadcaster’s share price has taken a beating. At its 52-week high, it peaked at 89.88p on 9 March 2023, almost exactly a year ago. It then plunged to a 52-week low of 54.94p on 28 February, just one week ago.

At this point, I saw this stock as crazily undervalued, but didn’t have enough cash at hand to back my hunch. How I wish I had seized this chance.

As I write, the ITV share price has rebounded to 67.32p, valuing this business at £2.7bn. That’s a surge of almost a quarter (+22.5%) in the space of a week. Wow.

More gains to come?

Despite this sudden surge in its share price, ITV still looks undervalued to me. Its shares trade on a modest multiple of 9.9 times earnings, delivering an earnings yield of 10.1%.

What really draws me to this cheap stock is its market-thrashing dividend yield of 7.4% a year. That’s heading for double the FTSE 100’s yearly cash yield of around 4%. That said, this payout is covered by under 1.4 times earnings — a relatively slim safety margin.

Then again, ITV is cash-rich and has a rock-solid balance sheet, having just sold its share of the BritBox joint venture to co-partner the BBC for net proceeds of £235m in cash. Therefore, I foresee no cuts to our shareholder dividends in 2024/25.

In summary, while ITV stock was dirt-cheap a week ago, it still seems a bargain now, despite sharp hikes in the share price. Hence, we will hold on tightly to this FTSE 250 holding, collecting 7.4% a year in cash while hoping for more share-price recovery!

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.

Cliff D’Arcy has an economic interest in ITV shares. The Motley Fool UK has recommended ITV. 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

happy senior couple using a laptop in their living room to look at their financial budgets
Investing Articles

Investing freedom — but inside a pension

Strapped consumers might be cutting back on investing, but they’re still keeping up their pension contributions. The only problem? A…

Read more »

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

Forget gold! I’d rather buy these 3 FTSE high-yielders in a Stocks and Shares ISA

Gold looks like a risky investment to me as the price hits an all-time high. I'm ignoring the fuss to…

Read more »

Young female business analyst looking at a graph chart while working from home
Growth Shares

This 55p UK stock could rise more than 300%, according to a City broker

This UK stock has fallen from above 800p to below 60p. But analysts at Citi believe it’s capable of a…

Read more »

Businesswoman analyses profitability of working company with digital virtual screen
Investing Articles

I think this FTSE 250 trust has all the right ingredients to lock in long-term profits

Today I'm examining the prospects of a private equity investment trust on the FTSE 250 that caught my attention recently…

Read more »

Young black man looking at phone while on the London Overground
Investing Articles

2 under-the-radar UK shares investors should consider snapping up

Two UK shares have caught the eye of our writer. She explains why investors should be taking a closer look…

Read more »

Investing Articles

Are these 2 ultra-high-yielding income stocks a good buy for me?

These two income stocks often split the debate amongst investors. So what does our writer think of them as potential…

Read more »

Senior woman potting plant in garden at home
Investing Articles

5% yield! This dividend stock could be great for my retirement

Our writer explains why this dividend stock appeals to her as she’s investing to build wealth to enjoy in the…

Read more »

A young Asian woman holding up her index finger
Investing Articles

I’d aim for a second income of £1,000 a month with this super-reliable dividend stock

I think a great way to build a second income stream is by investing in dividend stocks via a Stocks…

Read more »