Beware! These FTSE 250 shares could be heading for a fall…

Bilaal Mohamed explains why these two FTSE 250 (INDEXFTSE:MCX) shares could be heading for a fall very soon.

| 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.

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.

It’s been a truly disastrous few years for British outsourcing firm Serco Group (LSE: SRP), with numerous contract problems and high-profile scandals that have ultimately strained the company’s relations with the British government, from which it derives half its revenues. Consequently, the FTSE 250 company has been forced to issue numerous profit warnings in recent years, resulting in a share price slump from all-time highs of 553p in 2013, to just 77p earlier this year.

On the road to recovery?

In its interim statement the Hook-based firm said it was on the road to recovery after a strong set of results for the first half of its financial year thanks to cost savings and the fall in the value of sterling. Serco’s share price has been recovering too, gaining 44% since April this year and partly reversing a slide that began three years ago. So is Serco turning a corner and reversing its fortunes, or is this just a dead cat bounce? Unfortunately, I believe it’s the latter.

Firstly, the strong share price rally this year has come from a very low base, and the shares are still worth less than a third of their value of just three years ago. Secondly, broker consensus estimates suggest a rather gloomy outlook. The City is expecting underlying profits to fall by 16% in the current year to the end of December, with profits shrinking by a further 38% next year, by which time the shares will be trading at an astronomical 47 times forecast earnings. I expect gravity and common sense will kick in, and the shares will fall back to earth some time very soon.

Growth, but at a price

In stark contrast to Serco, British-based industrial engineering firm Spirax-Sarco (LSE: SPX) has enjoyed copious amounts of prosperity over the years. The mid-cap firm that specialises in steam management systems and peristaltic pumps has enjoyed rapid expansion and now operates 77 units in 43 countries around the world. Consistent revenue and earnings growth has attracted the attention of investors and has led to a relentless share price climb from under £3 at the start of the millennium to current levels around £46. That’s a 15-bagger!

The Cheltenham-based mid-cap firm recently reported good growth in pre-tax profits for the first half of 2016, and with it announced the acquisition of the assets of Brazilian valve maker Hiter Indústria e Comércio de Controles Termo-Hidráulicos from US-listed Pentair. Spirax expects to benefit from strong cost synergies between Hiter that makes steam and process fluid applications, and its own existing Brazilian unit.

Analysts’ projections suggest Spirax’s revenues will rise to £741m this year, together with a 15% rise in underlying earnings. But after a 57% share price rise over the last 12 months Spirax looks pricey at 28 times forecast earnings. I fear a strong market correction could be on the cards by the end of the year.

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.

Bilaal Mohamed has no position in any shares mentioned. The Motley Fool UK has no position in any of the shares mentioned. We Fools don't all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors.

More on Investing Articles

Passive income text with pin graph chart on business table
Investing Articles

Yields of up to 7%! I’d consider boosting my income with these FTSE dividend stocks

The London market has some decent-looking dividend stocks right now, and I’m tempted by these two for growing income streams.

Read more »

Young mixed-race couple sat on the beach looking out over the sea
Investing Articles

I’d put £20K in an ISA now to target a £1,900 monthly second income in future!

Christopher Ruane shares why he thinks a long-term approach to investing and careful selection of shares could help him build…

Read more »

Mature couple at the beach
Investing Articles

6 stocks that Fools have been buying!

Our Foolish freelancers are putting their money where their mouths are and buying these stocks in recent weeks.

Read more »

Black woman using loudspeaker to be heard
Investing Articles

I was right about the Barclays share price! Here’s what I think happens next

Jon Smith explains why he still feels the Barclays share price is undervalued and flags up why updates on its…

Read more »

Investing Articles

Where I’d start investing £8,000 in April 2024

Writer Ben McPoland highlights two areas of the stock market that he would target if he were to start investing…

Read more »

View of Tower Bridge in Autumn
Investing Articles

Ahead of the ISA deadline, here are 3 FTSE 100 stocks I’d consider

Jon Smith notes down some FTSE 100 stocks in sectors ranging from property to retail that he thinks could offer…

Read more »

Young female business analyst looking at a graph chart while working from home
Investing Articles

Why I think Rolls-Royce shares will pay a dividend in 2024

Stephen Wright thinks Rolls-Royce shares are about to pay a dividend again. But he isn’t convinced this is something investors…

Read more »

Investing Articles

1 of the best UK shares to consider buying in April

Higher gold prices and a falling share price have put this FTSE 250 stock on Stephen Wright's list of UK…

Read more »