FTSE 250 shares: 3 cheap stocks that could take off this year

This Fool is considering three low-cost FTSE 250 stocks with potential for growth. Could one of these companies be the next big thing?

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The FTSE 250 is a goldmine of hidden gems with low share prices and strong growth potential. 

This month, I’ve spotted three shares I think could do well in 2024. These aren’t in my portfolio yet but they’re strong contenders for the next buying round.

They are Greggs (LSE:GRG), Greencoat UK Wind (LSE:UKW) and Direct Line (LSE:DLG).

Getting a piece of the pie

Popular high-street chain Greggs is often considered the UK’s favourite bakery. The past year has been good for the high street chain, seeing the opening of 220 new stores. This means Greggs is on track to meet its 2026 target of doubling sales and opening its 3,000th store in the UK.

In its 2023 full-year (FY) results, Greggs revealed profit before tax of £188.3m, a 27% year-on-year increase. Although profit margins fell by 1%, revenue and net income increased by 20% and 19%, respectively. The positive results prompted the chain to reward its faithful investors with a special dividend of 40p per share.

With earnings-per-share (EPS) at £1.41 and the shares costing £28.30, Greggs’ price-to-earnings (P/E) ratio is 20.1. That’s higher than the industry average of 17.4, so the shares look expensive on paper. But at this price, I still think Greggs is cheap given its growth potential.

Growth in the wind?

Shares in the UK’s largest windfarm operator may be down 12.7% this year but the future looks bright for the green energy firm. The £3.17bn company has only been around for 12 years, expanding aggressively in that time. In 2023, it invested £821m into new infrastructure, increasing generating capacity by 397MW. It now provides 1.5% of all the country’s energy. 

However, while the 7.25% dividend yield is attractive, it has an unusually high payout ratio of 183%. This means dividend payments could be difficult for the company to cover and risk being cut, reducing overall returns. Still, Greencoat’s balance sheet looks fairly solid, with a 47% debt-to-equity (D/E) ratio and 53.8% profit margins.

In 2023, there was a 50% growth in renewable energy capacity added to global energy systems. That growth is expected to increase in 2024. I think Greencoat UK Wind is perfectly positioned to be the next big thing for green energy in the UK.

A sure thing?

With a £2.7bn market cap, Direct Line is a relatively small but well-known UK insurance firm. Recently, it’s been in the news due to an aggressive, but failed, takeover bid by Belgian insurer Ageas. Direct Line reportedly declined two ‘highly conditional’ cash-and-stock proposals, the highest of which was worth £3.2bn.

The shares surged 25% on the news to 224p before settling back to current levels around 210p.

The interest is unsurprising. Despite growing 38.3% last year, forecasters still estimate Direct Line to be trading at 45% below fair value. Furthermore, earnings are forecast to grow by 22.6% per year going forward.

However, before 2023, things weren’t as good.

Over the past eight years, Direct Line shares have lost 50% of their value, dropping from a high of 407p in December 2015. A recovery finally appears to be on the cards but it could be a while before long-term investors see profit.

But for me, Direct Line looks like a cheap FTSE 250 share that’s on the way up!

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.

Mark Hartley has no position in any of the shares mentioned. The Motley Fool UK has recommended Greencoat Uk Wind Plc and Greggs 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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