If you’re looking for mid-cap stocks that can help you make a million, then I highly recommend taking a look at insurance group Hastings (LSE: HSTG). There are only a handful of companies in the FTSE 250 I think have the potential to make investors rich over the long term, and Hastings is one of them.
I reason why I’m so optimistic about the outlook for this company is its business model. The UK car insurance industry is notorious for its low-profit margins and lack of profitability, but Hastings is breaking the mould. The group relies on technology and customer data to help it achieve the best results.
This data advantage has helped the firm achieve sector-leading profitability. For example in 2017, one of the best years on record for the insurance industry as a whole, Hastings recorded a combined ratio of 73% compared to the industry average of 96.8%. In 2016, the UK car insurance industry reported an average combined ratio of 109%, Hastings’ ratio was just 78%. I think these numbers demonstrate Hastings arguably has the best business model in the UK car insurance industry.
Also, management has adopted a highly attractive dividend policy, whereby the group pays out the bulk of its profits to investors every year. City analysts reckon this means investors are in line for a 6.7% dividend yield this year, rising to 7.2% in 2020. Net profit has grown at a compound annual rate of 26% for the past six years. I don’t I think this trend will come to an end anytime soon as Hastings should continue to attract customers with its innovative offering.
With earnings growing at 26% per annum and a 7% dividend yield on the cards, I see no reason why the stock cannot produce a high teens total return for investors going forward.
Another FTSE 250 stock I’m willing to back as a millionaire-maker is Restaurant Group (LSE: RTN). This company has struggled to find its way during the past few years and, I will admit, the business hasn’t particularly enamoured me in the past.
However, it looks as if management has finally been able to slow the decline at the group’s core Frankie & Benny’s business, and this turnaround, coupled with the recent acquisition of Wagamama, seems to have put the company firmly back on a growth trajectory.
Group like-for-like sales for the 19 weeks ended 12 May jumped 2.8% and total sales, including the Wagamama deal, were up 57%.
Based on this sales growth, City analysts expect the group to report a 22% increase in earnings per share for 2020. This projection puts the stock on a forward P/E of 9.9, which looks to me to be a steal, considering the company’s growth. On top of this, the stock supports a dividend yield of 4.2%.
This could only be the start of the company’s growth. Historically, the group has reported an operating profit margin of around 13%, but the margin fell to about 2% for 2018. If management can cut costs and improve efficiency, returning margins to historical levels, then I reckon profits could double or even triple from current levels.
This could produce potentially stratospheric gains for shareholders. That’s why I think this hospitality business has the potential to make you a million.
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Rupert Hargreaves owns no 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.