It could be worth buying the dip for this FTSE 250 stock, down 7% today

Jon Smith spots a sharp drop in a FTSE 250 stock but explains why this could just be a blip — and could actually be an opportunity.

| More on:
Couple working from home while daughter watches video on smartphone with headphones on

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.

The biggest faller in the FTSE 250 so far today (29 May) is IWG (LSE:IWG). The stock is down 7%, relating to some short-term negative news. However, the stock is still up 37% over the past year. When I look closer at the business, I think this could just be a dip. Here’s why.

Details of the move

The news that’s causing the stock to dip sharply relates to the CEO, Mark Dixon. He sold 35m shares in the business, generating tens of millions of pounds in the process. The funds are to be used towards paying off pledge and lending contacts with one of his banking providers.

Naturally, when the CEO sells such a large chunk of stock in one go, the share price is going to fall. This isn’t just related to the transaction, but rather by other investors seeing this and choosing to sell too. The thinking here could be that if the CEO is selling, does he know something that we don’t?

The actions of Dixon are also watched closely because he’s the largest shareholder by some way. Before the sale today, he owned 25% of the outstanding shares, almost 255m. That’s quite unusual to have a CEO with such a large stake in a business this big. However, investors need to remember that he is also the founder.

Why I’m not concerned

I believe this is just a dip based on a few reasons. Dixon had 255m shares. He’s sold 35m, which sounds like a lot, but based on his overall holding it’s not a huge amount. It’s not like he has sold all of his stake in the business.

Dixon has a tangible reason for selling, based on a separate need for cash. There’s nowhere where it says he sold the stock because he thought the share price was overvalued. Put another way, this was a trade not for speculative purposes, but for a transactional need.

Finally, when I consider the trajectory the firm is on, I struggle to see this fall today manifesting a much larger drop in coming months. The full-year results from 2023 started off by noting the firm had “delivered the highest-ever revenue in IWG’s 35-year history”.

The 10% jump from 2022 help to fuel strong cash flow and ultimately a 34% increase in EBITDA from the previous year.

Watch out for the losses

There’s always a reason to be cautious. In this case, I am concerned that the business is still posting a loss after tax. This has been the way since the pandemic hit in 2020. It’s true that the hybrid workspace setup has changed a lot since then. I’d argue that IWG is well-placed to deal with this pivot in the long run. Yet it could still take several years before the business gets back to making a profit.

The risk is that this doesn’t happen. Investors can quickly get scared on realising this.

Despite this, I think the reaction today has been overblown. On that basis, I’m thinking about buying the stock shortly, looking for a move back higher in coming months.

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.

Jon Smith has no position in any of the shares mentioned. The Motley Fool UK has no position in any of the shares mentioned. 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

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

This 10.6% yielder beats every dividend share on the FTSE 100. Can it last?

Harvey Jones couldn't resist the double-digit yield on offer from this FTSE 100 stock. Now he'd like to get some…

Read more »

A pastel colored growing graph with rising rocket.
Investing Articles

With the FTSE 100 flying, I love the look of this company

The FTSE 100 index has been in rally mode over the last few months, but I think one of it's…

Read more »

Investing Articles

17% of my Stocks and Shares ISA is invested in these 2 UK shares

Stephen Wright looks to focus on investments in companies that have strong competitive advantages. And two UK shares stand out…

Read more »

Investing Articles

Here’s how much income I’d get if I invested my entire £20k ISA into Lloyds shares

Harvey Jones bought Lloyds shares last year and is kicking himself for failing to buy even more of them. The…

Read more »

Smiling white woman holding iPhone with Airpods in ear
Investing Articles

Apple is still my favourite company in the S&P 500, here’s why

Apple recently unveiled a lot of new software at a developer conference. Here's why the tech giant is still my…

Read more »

Investing Articles

5 great value UK companies I’d buy in a Stocks and Shares ISA and aim to hold for decades 

Harvey Jones is getting to work on his Stocks and Shares ISA. He thinks these five firms have solid income…

Read more »

Value Shares

Are GSK shares a bargain after falling 11%?

GSK shares have taken a hit in recent weeks due to Zantac uncertainty. Here, Edward Sheldon looks at whether they’re…

Read more »

Investing Articles

Nearing £5, could the Rolls-Royce share price hit £6?

The Rolls-Royce share price has soared in the past year. Our writer thinks there could be a strong runway ahead…

Read more »