With the FTSE 250 now trading close to a record high, it is perhaps unsurprising that some of its incumbents appear to be overvalued. Investor sentiment has been buoyant in recent years and while the performances of a number of FTSE 250 stocks may be strong, their valuations may leave a narrow margin of safety on offer.
With that in mind, here is one mid-cap stock which could be worth selling on valuation grounds. A smaller company operating in the same sector appears to have a stronger growth outlook and lower valuation. Therefore, it seems to offer a brighter investment future on a relative basis.
Time to sell?
The FTSE 250 stock which could be worth selling right now is engineering, design and information management software solutions provider Aveva (LSE: AVV). The company has delivered mixed performance in the last five years when it comes to profit growth, with its bottom line falling in two years to generate an annualised growth rate of just 1% during the period.
The company recently merged with Schneider Electric’s industrial software division, and this could lead to improving performance over the medium term. However, its forecast earnings growth rate over the next two years is not especially impressive. It is due to post a rise in net profit of 3% in the current year, followed by further growth of 9% next year. This is below the index average and suggests that the stock may lack a clear catalyst to push its share price higher.
In addition, Aveva has a high valuation at the present time. It trades on a price-to-earnings (P/E) ratio of around 50, which suggests that it lacks a margin of safety. As such, and with a dividend yield of 1.6% which may not rise rapidly due to its modest earnings outlook, the company appears to lack investment potential.
Time to buy?
In contrast, the outlook for sector peer SDL (LSE: SDL) appears to be significantly more positive. On Thursday it reported that trading in its first quarter had been in line with management expectations, and that it has now signed the vast majority of the licence deals that had slipped from the 2017 financial year. This was expected and may help to boost investor sentiment in the near term.
With SDL forecast to post a rise in its bottom line of 16% in the current year and 13% next year, it has an upbeat growth outlook. It trades on a price-to-earnings growth (PEG) ratio of 1.3, which suggests that it has significant upside potential.
In terms of SDL’s track record of growth, it has been somewhat mixed. In the last five years it has recorded losses in two years, which suggests that it is a relatively volatile entity that could be risky when compared to its sector peers. However, with it seeming to trade well below its intrinsic value, it could offer high return potential. As such, for less risk-averse investors it could be worth buying right now.
Peter Stephens has no position in any of the 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.