So far, 2017 has been a good year for the FTSE 250. It has risen by almost 4%, despite the pullback of the last couple of sessions. Clearly there is a long way to go until it can be labelled a ‘successful’ year for the index. However, these two shares could contribute to that description being accurate. They have both made strong starts to the year and could continue to deliver rapid share price growth as the year continues.
Wednesday’s update from housebuilder Redrow (LSE: RDW) showed that talk of challenges in the housing market have thus far been overhyped. The industry continues to deliver robust performance even as uncertainty surrounding Brexit builds. While this does not mean that house price falls will be avoided, the scale of challenges facing housebuilders may have been exaggerated.
Certainly, Redrow’s update indicates that this is the case. It is on target to record financial performance for the full year which is in line with previous guidance. It is due to deliver an increase in earnings of 14% this year, followed by further growth of 5% next year. Despite this encouraging growth outlook, the company’s shares trade on a price-to-earnings (P/E) ratio of 7.8. That’s after a share price rise of 15% since the start of the year, which highlights just how cheap the company’s shares were.
With inflation moving higher and Brexit talks set to start shortly, some investors may consider there are short-term risks for housebuilders such as Redrow. Thus far, they have yet to make an appearance. Rather, with such a low valuation, the risk/reward opportunity on offer appears to be highly enticing.
Since the start of the year, business-to-business media company Ascential (LSE: ASCL) has delivered a share price gain of around 16%. While this may indicate to some investors that a pullback may be ahead, the company’s valuation suggests otherwise. It is forecast to record a rise in earnings of 16% this year, followed by further growth of 13% next year. This puts it on a price-to-earnings growth (PEG) ratio of only 1.2. As such, there seems to be a sufficiently wide margin of safety on offer to merit purchase.
As well as capital growth potential, Ascential also has income appeal in the long run. Dividends per share are forecast to rise by 55% between 2016 and 2018, which puts the company’s shares on a forward dividend yield of 2.3%. And since dividends are due to be covered 2.9 times by profit in 2018, there seems to be scope for them to rise at a faster rate than earnings over the medium term.
While the outlook for the global economy is somewhat uncertain. Ascential’s low valuation indicates that investors may have already priced-in a challenging outlook. As a cyclical company, its financial performance may be hurt to a greater extent than most stocks if global GDP growth is downgraded. While this cannot be ruled out in the short run, for long-term investors the company appears to offer an attractive risk/reward ratio.
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Peter Stephens owns shares of Redrow. The Motley Fool UK has recommended Redrow. We Fools don't all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors.