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Why I’d ignore this FTSE 250 ‘super stock’ and what I’d buy instead

I can remember when the share price of FTSE 250 firm Aggreko (LSE: AGK) was powering upwards and the provider of modular, mobile power generators looked like a high-quality outfit with robust and growing operations.

Indeed, from early 2009, the share price shot up by more than 500% over the following three-and-a-half years with business boosted by events such as the 2012 London Olympics. But the share price began a long decline from its peak at the end of summer that year and is now around 65% lower. By early 2016, the outlook statements had dropped their bullish tone and the company seemed braced for softer trading ahead.

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Slipping earnings

The financial record over the past five years shows earnings generally falling annually and the dividend has been essentially flat. But the operational and share-price slide could have run its course. City analysts following the firm have pencilled in earnings rises for the current year and for 2020. The share-price chart shows something of a consolidation, suggesting the lows might be in. And one popular share research website has labelled Aggreko as a Super Stock because of its strong showing against value, quality and momentum indicators.

Meanwhile, the valuation isn’t as racy as it was in the days of vibrant trading I described earlier. With the share price close to 829p, the forward-looking price-to-earnings ratio for the current year is around 16 and the anticipated dividend yield about 3.3%.

However, I’m concerned by the way Aggreko struggled to maintain its earnings over the last few years. The company has revealed its vulnerability to market cycles, and if we see a general macroeconomic slump, I reckon earnings could fall off a cliff, taking the dividend and the share price down too.

What makes this company special?

To me, it’s not worth investing in any individual company share unless I believe the stock has the potential to outperform the general stock market. I’m uncertain about Aggreko’s ability to do that so I’m avoiding the shares. In this case, I’d rather look at other shares or invest in a low-cost, passive index tracker fund that follows the fortunes of the market.

There are many choices with trackers. Perhaps I’d go for the HSBC FTSE 250 Index Class S – Accumulation, tracking the FTSE 250 index of which Aggreko is a constituent. Or I could look at the Legal & General UK Index Class C – Accumulation, which follows the FTSE 350 index and comprises the shares in the FTSE 250 index and those in the FTSE 100 index of larger companies. Or maybe I’d track the UK’s largest public limited companies with the Legal & General UK 100 Index Trust Class C – Accumulation.

You’ll notice that all three of the tracker funds I’ve mentioned are the accumulation version rather than the income version. Accumulation trackers automatically reinvest the dividends back into your investment, which sets you on the path to compounding your money.

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Kevin Godbold has no position in any share 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.