As we enter the second half of the year, I’ve been looking for FTSE 250 value stocks to add to my portfolio, which could increase profitability as the world moves on from the coronavirus pandemic.
I’d buy both these cheap FTSE 250 shares based on their current valuation and growth prospects.
Cheap FTSE 250 shares
The first stock on my list is public transport operator FirstGroup (LSE: FGP). Over the past year, as consumers have been repeatedly told to stay at home and avoid travelling, public transport use has plunged. This has had a severe impact on the company’s sales and profits.
According to its half-year results for the six months to the end of September 2020, the company reported an adjusted operating profit of just £10m. However, the figures were skewed by a £33.2m benefit relating to the termination of its Avanti Rail contract. In the prior-year period, it earned £89m.
Management has pulled out all of the stops over the past 14 months to reinforce the group’s balance sheet and prevent further losses. These actions include the decision to sell its US bus divisions for £3.3bn. The company has also been trying to sell its Greyhound US intercity bus service.
I think these moves should stabilise the group’s balance sheet and put the company on a stable footing to return to growth. Indeed, I believe that despite the pandemic, demand for public transport will only increase as the government tries to get people out of cars and onto more efficient forms of public transportation.
As such, while the FTSE 250 group has struggled over the past 14 months, I’d buy the stock for the long term.
That said, public transport can be a challenging industry in which to operate. Profit margins are slim, and the sector is heavily regulated. These challenges may hold back growth. There’s also a chance the company’s growth may come under pressure if it fails to win contracts.
Growth and income
The other FTSE 250 stock I’d buy in July is CMC Markets (LSE: CMCX). This financial services company reported a record increase in profits last year. The combination of increased market volatility and stuck-at-home traders with little else to do helped the firm’s top and bottom lines.
Profits hit £178m last year. Unfortunately, this boom is unlikely to last. Net income will decline to £104m this year, according to City projections. Still, even at this level, the stock is trading at a forward price-to-earnings (P/E) multiple of just 12.5. I think that looks cheap.
What’s more, it offers a dividend yield of 4%. Based on these qualities, I’d buy the FTSE 250 stock today.
Like most financial operations, regulatory risk is a key challenge the group has to deal with. If it falls foul of regulators, it could lose access to key markets, which would significantly impact revenue and profit generation. This is probably the most considerable risk hanging over the stock today.
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Rupert Hargreaves has no position in any of the shares 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.