While the FTSE 250 includes a number of stocks that appear to offer wide margins of safety, some of its incumbents seem to be overpriced. That’s not entirely surprising, given the 42% rise in the index over the last five years. However, it does mean that investors may need to become increasingly selective about the shares they buy for their portfolios.
With that in mind, here are two shares which appear to lack investment appeal despite their profitable outlooks. As such, they could be worth avoiding in favour of other FTSE 250 stocks at the present time.
Wednesday saw global medical products and technologies company ConvaTec (LSE: CTEV) release a trading update for the first quarter of 2018. The business has performed in line with expectations during the period, with revenue rising by 3.7% on an organic basis to reach $458.2m.
This is a relatively impressive result, given that the company’s Advanced Wound Care and Ostomy Care performance was hurt by the ongoing impact of supply constraints that arose last year. In fact, the diversity of the stock’s operations helped it to offset this disappointment, with it enjoying strong demand elsewhere that has enabled it to remain on track to meet guidance for the full year.
With ConvaTec expected to report a rise in its bottom line of 9% this year and 7% next year, the company appears to be performing well. It offers a consistent growth outlook for the long term within a defensive sector. However, with it having a price-to-earnings growth (PEG) ratio of 2.5, it appears as though investors have factored-in its growth outlook. As such, there may be better options available elsewhere in the FTSE 250.
Also seemingly overvalued is beverages company Britvic (LSE: BVIC). Clearly, the last couple of years have been a challenging period for soft drinks companies. Tax changes and a lack of pricing improvements at times have contributed to a general slowdown across the industry. This has meant that after three years of double-digit earnings growth, the company has recorded a rise in net profit of only 6%-7% per annum in the last two years.
Looking ahead, the company’s rate of earnings growth is expected to fall further. In the current year it is forecast to fall to 1%, before picking up to 5% in the next financial year. This drop in its growth rate could cause investor sentiment to come under a degree of pressure. And with the company trading on a PEG ratio of 2.7, investors do not appear to have factored-in further difficulties over the medium term.
Of course, Britvic has a strong stable of brands and could deliver a sound recovery over the long run. For now though, its relative appeal within the FTSE 250 appears to be diminishing. As such, investors may wish to look elsewhere for growth at a reasonable price.
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Peter Stephens has no position in any of the shares mentioned. The Motley Fool UK owns shares of and has recommended Britvic. 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.