To find the best buying opportunities in the stock market, it’s sometimes worth looking at companies which are temporarily out of favour. These can deliver big dividends and capital gains when conditions improve.
Today, I want to look at two FTSE 250 stocks that have fallen by 35% or more over the last year. Should we be buying these stocks now while they’re cheap?
Cold weather could boost sales
Fashion group Superdry (LSE: SDRY) blamed warm weather for a dip in sales during the first half of the year. Much of the group’s profit comes from hoodies and jackets. These didn’t sell well during the mild autumn and sales fell by 1.5% to £269.3m during the 13 weeks to 26 January.
The company’s clothing range certainly seems to be one part of the problem. Chief executive Euan Sutherland is aiming to solve this by broadening the group’s clothing range, including adding childrenswear.
Is there a second problem?
Shareholders will hope that the recent return to normal winter weather in the UK and overseas will help sales during the final quarter of the year. But the company’s figures suggest to me that there might be a second problem.
The reason revenue is falling is because store sales are falling. During the third quarter, store sales fell by 8.5% despite new stores opening. In contrast, internet sales were almost unchanged and wholesale revenue rose by 12.7%.
It was a similar story during the first half of the year. Store sales fell by 2.3% compared to the same period a year earlier, despite the number of stores rising from 605 to 695. In my opinion, Superdry needs to slow the rate of store openings and focus on online growth.
Despite this concern, I think this business remains in decent overall health. With the shares trading on 9 times 2019 forecast earnings and offering a 5% dividend yield, I think Superdry could be a contrarian buy at current levels.
This could be a safe bet
Retailers aren’t the only market sector that are out of favour with investors. Bookmakers and online gaming stocks are also enduring tough times. Shares of 888 Holdings (LSE: 888) have fallen by 35% over the last year, despite the group’s profits remaining stable.
One reason for the slump is that UK revenue fell by 18% to $87m during the first half of the year, compared to the same period a year earlier. This spooked investors, as the UK accounts for about one-third of revenue.
The company says it’s restructuring the UK business to focus on the most profitable activities. In the meantime, growth is continuing at a good rate in most other markets.
Like a number of rivals, 888 is also hoping to profit from a move into US online gambling. This was thought to have been legalised, but a recent statement from the US justice department has cast doubt on this and the situation remains unclear.
That means the outlook for 888 also isn’t entirely clear. But the company remains highly profitable, with an operating margin of 22% during the first half of the year. Adjusted earnings are expected to rise by about 10% this year, putting the stock on a forecast P/E of 11.5 with a 6.6% dividend yield.
This valuation reflects market uncertainty. But if the company can return to growth, I could see a decent upside from here.
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Roland Head has no position in any of the shares mentioned. The Motley Fool UK has recommended Superdry. 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.