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Provident Financial plc isn’t the only FTSE 250 stock I’m avoiding right now

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It’s amazing how quickly sentiment can change in the investing world. A stock can literally go from market darling to dud in the blink of an eye. Today, I’m looking at two stocks that have done exactly that, and explaining why I’ll be avoiding both for now.

Provident Financial

This time last year, shares in Neil Woodford favourite Provident Financial (LSE: PFG) were changing hands for around 3,000p. The doorstep lender had enjoyed a solid three years of revenue and profit growth, and its share price had surged as a result. With an attractive dividend yield on offer as well, it was a stock that many investors, myself included, viewed in a positive light.

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The picture then changed dramatically. Provident released a profit warning in June, on the back of a change in its operating model, followed by another profit warning and a dividend cut in August. Understandably, the market did not like this at all and by late August the shares were trading under 600p. So is there turnaround potential here?

The group released full-year results in February and it appears that it is slowly working through its issues. It recently completed a £300m rights issue and also agreed a settlement with the FCA in relation to an investigation into its Vanquis Bank arm. The shares have moved higher as a result, and now trade at 930p. Is it time to get on on board?

Neil Woodford recently stated that the business “is now on a stable recovery path” and that “the company’s intrinsic value is substantially higher than the current share price would suggest.”

However, I’m not convinced the stock is a ‘buy’ just yet. The full-year numbers made for some pretty awful reading, with adjusted profit before tax falling 67% and adjusted earnings per share declining 65%. No dividend was paid for the year. As a result, I’ll be staying away from Provident for now.

Cineworld

Cineworld (LSE: CINE) is another stock that has lost its shine recently, albeit for completely different reasons. Unlike Provident, business at the cinema operator is actually chugging along quite nicely at present. Full-year results for FY2017 released this morning revealed an 8% rise in group revenue, a 23% surge in profit before tax, and a 12.3% increase in adjusted diluted EPS for the year. So why did the shares fall 30% between late November and late January?

Investors clearly have doubts about the company’s transformational $5.8bn ‘reverse takeover’ of US cinema giant Regal Entertainment Group. While the acquisition has the potential to transform Cineworld into a key global player, the amount of debt taken on for the deal ($4.1bn) is astronomical.

The huge pile of debt means that the combined group’s net debt is expected to be around four times EBITDA. As my colleague Roland Head recently pointed out, that’s well above the 2.5 times level that is considered to be sensible. Debt of that magnitude adds considerable risk to the investment thesis unfortunately, so for now, I’ll be avoiding the shares.

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Edward Sheldon has no position in any 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.

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