Given that the FTSE 250 has risen by 7% in the last three months, it may sound unlikely that any of its constituents could rise by over 50% within two years. After all, share prices are generally high at the moment and many investors may therefore feel that there is somewhat limited capital growth potential on offer. However, reporting on Wednesday was a FTSE 250 stock which could rise by over 50% due to its low valuation and upbeat outlook.
The company is question is recruitment specialist Pagegroup (LSE: PAGE). It was able to increase revenue by 3.6% in 2016 when compared to its 2015 performance. That’s despite challenges within the UK economy, where client and candidate confidence levels were impacted by the EU referendum result. Furthermore, market conditions were also challenging within other larger markets such as Brazil and Financial Services.
Despite this, Pagegroup’s gross profit increased by 3% on a constant currency basis. However, when the positive impact of weak sterling is factored-in, its revenue and gross profit grew by 12.3% and 11.7% respectively. This highlights that it could benefit from a further currency boost if, as expected, sterling remains weak during the course of the next two years. And since the company reported record years for gross profit in 20 of the countries in which it operates, including France, Germany and Italy, its overall performance as a business remains strong.
While 2017 is expected to be an uncertain year for Pagegroup, its bottom line is due to be around 9% higher in 2018 than it is today. Although this may indicate a lack of capital growth potential, the company’s shares appear to offer excellent value for money when compared to their historic average price-to-earnings (P/E) ratio.
Over the last four years, they have traded on an average P/E ratio of 26.6, which is ahead of their current 18.7. If they were to revert to their average P/E ratio over the next two years as the business continues to perform relatively well, the share price could move over 50% higher during that time.
An attractive sector
Of course, other recruitment companies also offer significant upside potential. For example, SThree (LSE: STHR) is forecast to record a rise in its earnings of 2% in the current year and 14% next year. Since it trades on a P/E ratio of 15, it seems to offer superior value for money when compared to Pagegroup. And since its average P/E ratio in the last five years is 21.1, it also offers capital growth potential of over 50%. In fact, if SThree meets its forecast over the next two years and its P/E ratio reverts to the long-term average, its shares could trade over 60% higher by 2019.
Both companies have well-diversified business models and strong positions within their chosen specialisms. They are highly dependent on the wider economic outlook as their business models are highly cyclical. However, with wide margins of safety, they both appear to be sound buys, with SThree seeming to having the most potential upside.
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Peter Stephens 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.