The FTSE 250 index, which contains the largest 250 stocks outside the FTSE 100, is home to a number of fast-growing companies. Today, I’m profiling two such companies that I believe offer excellent investment potential right now.
When Warren Buffett looks for investment opportunities, he seeks out companies that have strong ‘economic moats’. This is a certain set of conditions that allows a company to generate consistent profits every year, with little concern that competitors will steal market share.
One FTSE 250 company that looks to me to have a strong economic moat is UK property website Rightmove (LSE: RMV). The £4bn market cap company is the dominant player in the UK property search space, last year listing 1m residential properties and enjoying 1.5bn visits across all platforms. Its market share of traffic across both desktop and mobile was 73%, with the mobile component even higher at 79%.
Rightmove’s revenues and profits have grown significantly in recent years, and full-year results for FY2017 showed that the company still has momentum, despite the lingering uncertainty over Brexit and the housing market. Last year, revenue climbed 11% to £243m, with underlying basic earnings per share rising 14% to 163.3p. Looking ahead, City analysts expect a further 9% increase in revenue for 2018, along with an 8% rise in earnings.
Rightmove shares aren’t particularly cheap, as with analysts pencilling in an earnings figure of 177.1p per share for FY2018, the forward-looking P/E ratio is 24.5. Yet I think that’s a reasonable price to pay for a slice of the business, given the company’s dominant market position and growth prospects.
If Rightmove’s P/E ratio is too high for you, check out OneSavings Bank (LSE: OSB). The challenger bank trades on a forward-looking P/E of just 7.2 – a valuation which doesn’t do the stock’s growth prospects any justice at all, in my view.
OSB is a specialist lender and retail savings group that offers residential, buy-to-let and commercial mortgages, secured loans, development finance and savings solutions. While the bank does face some headwinds in the near term, including increased regulatory costs and regulatory and tax changes in the buy-to-let market, a strong pipeline of new business in its core markets means that it is well placed to keep growing. As such, it should be able to continue generating attractive returns for shareholders.
For FY2017, OneSavings enjoyed loan book growth of 23%, generating a 21% rise in underlying profit before tax. Underlying basic earnings per share climbed 23% to 51.1p. While earnings growth may be a little subdued this year, City analysts still expect the group to hike its dividend by 17.5%, which would take the payout to 15p per share, a yield of 4% at the current share price.
The stock’s current valuation basically assumes the business is a basket-case, yet a dividend hike of 22% last year would suggest otherwise. This is one FTSE 250 stock I’m bullish on.
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Edward Sheldon has no position in any shares mentioned. The Motley Fool UK has recommended Rightmove. 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.