The FTSE 250 has lost over a quarter of its value this year. The index, known for firms with high growth potential, now contains many promising companies trading at cheap prices.
Many investors have become rich buying up cheap shares of successful growth companies. This is a strategy that I think could work for the rest of us too.
FTSE 250 firms can grow faster
It’s at times like these, when a recession is imminent, that the agility of smaller-cap firms is key. FTSE 250 constituents that are smaller than their FTSE 100 peers are likely to see faster growth.
Consequently, some fund managers think that there’s good reason for active funds to increase their holdings of non-FTSE 100 companies.
ESG criteria gain popularity
One such growth opportunity for funds is the appetite for firms meeting more stringent environmental, social, and governance (ESG) criteria. ESG criteria are a set of standards that socially conscious investors use to screen potential investments. More and more investors are putting their money where their values are.
Although it’s true that there are many FTSE 100 companies that incorporate these criteria, the large-cap index is where the miners, oil majors, and pharmaceutical companies reside. And ESG investing is not usually associated with these industries. The FTSE 250 offers more choice for those seeking growth with environmentally and socially conscious investments.
Contour Global, a FTSE 250 powerhouse
One such investment is FTSE 250 constituent Contour Global (LSE: GLO). Contour is a UK-based wholesale power generation business. Its Europe-wide operations are focused on thermal and renewable energy. Altogether, the firm owns 103 power plants in 21 countries.
Contour’s business is relatively unaffected by the coronavirus-induced demand shock to the global economy. Moreover, it isn’t expecting any significant disruption for the rest of 2020. Its solid end-of-year results reinforced this view.
In addition, turnover and operating profit have grown for the last five years. Income from operations swelled 11.5% to £241m in its latest year, thanks to its renewables division. Contour is also aiming to increase its ordinary dividend per share by 10% each year going forward.
However, some fund managers are bullish about Contour Global for another reason. The firm has cancelled a coal power plant project in Kosovo due to political opposition. Consequently, the company is not pursuing any other projects with the fossil fuel, making it highly attractive to ESG-themed funds containing FTSE 250 firms.
High gearing makes for a risky investment
The downside of this cancellation is $12m in impairment and $22m in recoverable costs. These costs were in addition to a 2019 Spanish solar power acquisition, swelling the firm’s gross gearing ratio by over 48%. I calculated a debt-to-equity ratio of around 0.9, mostly comprised of long-term debt. This indicates Contour Global could be a highly risky investment.
Contour’s shares are currently trading around 160p, with some analysts giving the firm a fair value of 205p. While it has a P/E of 49, that fair value price indicates that there may be earnings growth to be had. Much is expected.
The firm will be hoping its acquisitions will add to its future profitability. Early indications are that they may well do so and risk-tolerant investors might find the prospect attractive.
However, due to the weak balance sheet, I’ll be seeking to make my fortune elsewhere for the moment. I will be watching Contour’s developments closely though.