Could that be because of some systemic problem with the sorts of companies seen in the FTSE 250? Or might it point to an undervaluation problem?

Quality street or dead-end alley?

Starting with the first possible explanation, there may be something to be said for the idea that the FTSE 250 contains more than a few fairly uninspiring companies.

We often talk about the index of medium-sized companies as if they are all growing and might yet enter the larger peer. But the opposite is also true. Once a company’s market capitalisation declines to the point where it no longer merits a place in the FTSE 100, it gets relegated to the ‘second division’. In this case, that is the FTSE 250.

So the FTSE 250 contains struggling former FTSE 100 members like Ocado (down 31% in the past year) and Burberry (down a whopping 64% in the past year).

Sure, there are companies with strong growth prospects in there. But it is a mixed bag.

Is there a valuation gap – and will it ever close?

That does not necessarily bother me though, as I tend to buy individual shares rather than tracker funds.

I see arguments for both approaches, but buying an individual share can sometimes mean I do well even when the index of which that share is a member fares poorly.

A number of FTSE 250 shares look undervalued relative to what I see as their long-term potential.  But that does not mean those shares will necessarily move up closer to what I see as fair value. One reason is that some investors may think the shares deserve a discount given the typically smaller size of the firms in the 250 compared to their Footsie peers.

Looking for long-term value

But I see others as very promising. Take ME Group (LSE: MEGP) as an example. The operator of Photo-Me booths and similar vending machines worldwide, the company yields over 4%. Its price-to-earnings ratio of 14 looks reasonable to me given what I see as strong business growth prospects.

Last year revenues grew 5% while post-tax profit grew 11%. Operating machines that conveniently provide what people need just when they need it can be a lucrative line of business. Last year, ME Group’s net profit margin was an impressive 15%.

As we saw during the pandemic, any unexpected drop in town centre and shopping centre visitor numbers poses a significant risk to the company’s revenues and profits. But with a proven business model and limited competition, I see ME Group as a share investors should consider buying.

In the past five years, the share has more than doubled.

The post Is the FTSE 250 seriously undervalued? appeared first on The Motley Fool UK.

It’s all about ME

The first stock is ME Group International (LSE:MEGP). The FTSE 250 firm’s known for its automated photo-booths, printing kiosks and other vending solutions. At the moment the stock trades at 180p and has a dividend yield of 4.33%.

It’s not just the income side that’s appealing to me. Over the past year, the share price has jumped by 8%.

Part of the increase in the dividend and the share price relates to the strong performance from 2023. The report hailed “a year of record financial performance”. This was driven by various factors. For example, it expanded abroad in Australia. Further, it launched new partnerships with Central Co-op and Morrisons.

The future looks good, with a modernisation push already under way on existing products. Even with this, the profitability shouldn’t be hindered, so dividends aren’t under threat. In terms of risks, I’d say that it needs to keep focusing on diversifying away from photo-booths and similar machines, as demand for these more traditional services could fade.

Low share price, high income

Another idea is Lloyds Banking Group (LSE:LLOY). It might take some a while to process, but the Lloyds share price is less than £1. In fact, at 58p, it has the lowest share price in the entire FTSE 100.

But there’s a big difference between having a low share price and being undervalued. A stock could trade at £1,000 and be undervalued. When it comes to the bank, the 31% rally over the past year means that, in my eyes, it’s fairly valued. However, I’m looking at this from the income side right now.

A dividend yield of 4.72% is very healthy, and it has been above 5% for most of the past year. The dividend per share payments have been increasing, from 2p in 2021 to 2.4p in 2022 and 2.76p over the last year. This is due to boosted earnings coming out of the pandemic, with higher interest rates also helping the company.

Looking forward, it’s true that interest rate cuts wont be helpful. This is a risk. However, I do think this could be offset by the positive sentiment from consumers. Lower interest rates should make them spend more, able to afford mortgages, and raise confidence to take out loans. All of this should make the bank money.

I like both stocks, and when I get some more free cash will look to allocate it to these ideas.

The post 2 dividend shares with a price below £2 and a yield above 4.3% appeared first on The Motley Fool UK.

While you may never have heard of the company, there is a fair chance you have seen (or even used) one of its thousands of photo machines in supermarkets, shopping centres, and elsewhere, or one of its RevolutIon laundry machines.

Attractive business model

This is a lucrative business. The company operates in areas that have high demand. Even during the depths of the pandemic, when ME Group was trading as a penny share, revenues fell but did not collapse.

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When it comes to profitability, earnings have moved around.

Even before the pandemic earnings per share had declined – and they took a pummelling over the next several years, helping explain why ME was trading as a penny share.

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But as the chart above shows, they are now stronger than they have ever been. I think that speaks to the appeal of ME’s business model: its automated machine network means that its labour costs can be kept low, while the services it offers tend to have robust demand. If people need to do their laundry, they need to do their laundry.

Valuation could offer long-term value

But a good business does not necessarily make a good investment. Valuation matters too.

I think ME Group stacks up fairly well on that front. Looking at the current price-to-earnings ratio of 13, I think it offers the potential for long-term appreciation if earnings per share continue to increase in future.

On top of that, the dividend yield of 4.3% looks attractive to me.

I think the company’s unique estate of machines and long experience of vending machines helps set it apart from competitors. But there are risks. As we saw during the pandemic, any drop in the number of people visiting shopping centres can lead to a sharp drop in demand.

Buy or wait?

Having been a penny share within the last four years, though, could ME Group head back there any time soon?

Anything is possible in the markets, of course, but for now at least I think the firm’s robust business performance is likely to keep the share price buoyant. Its lack of competition in many areas gives it pricing power, which I think could mean we see even higher earnings in future.

So, even though it no longer offers the screaming value it did as a penny share, if I had spare cash to invest today I would be happy to add ME Group to my portfolio.

The post This former penny share has quadrupled. Could it go higher? appeared first on The Motley Fool UK.

In the FTSE 250 index, ME Group International (LSE: MEGP) ticks a lot of boxes.

For a start, with the share price near 168p (on 15 May), the forward-looking dividend yield is around 5% for the trading year to October 2025. But earnings, cash flows and dividends have been growing as the business expands.

Meanwhile, the aggregated yield of the FTSE 250 is running near 4.2%, so ME Group is beating its index.

Strong cash flow

The company operates, sells and services instant-service vending equipment in 18 countries, mainly aimed at the consumer market.

We’re talking about things like:

• photobooths and integrated identification solutions;
• unattended laundry services and launderettes;
• digital printing kiosks;
• food service vending;
• and other vending equipment such as children’s rides, amusement machines, and business service equipment.

The multi-year record for cash flow looks stable and has been growing. That backs up the dividend payments, which have been cranking up well since 2020. However, they did stop altogether that year when the pandemic struck.

City analysts expect further advances for earnings and the dividend this year and next. Meanwhile, the share price has been responding well to the growth in the underlying business:

Growth has been both organic and via acquisitions. Diversification into new markets and technical innovation have driven a phase of expansion in the business and it looks set to continue.

A positive outlook

In February with the full-year results report, chief executive and deputy chairman Serge Crasnianski was upbeat about the outlook.

The business had delivered a year of “record” financial performance and progressed its long-term growth strategy.

Crasnianski said the laundry operations are a “key growth driver”. But there was strong revenue and earnings growth across all the firm’s business areas and geographies.

The directors expect to build on the success of 2023’s trading and achieve further progress during the current trading year.

However, the current operational momentum hasn’t arrived overnight. For many years, the company has been building long-term relationships with major site owners.

Equipment is usually placed in areas of high footfall such as supermarkets, shopping malls, transport hubs, and administration buildings. The strategy has led to the steady cash flow enjoyed by the enterprise today and for the past few years.

However, there are risks from competition and general economic shocks. For example, in 2018 the share price plunged when the company downgraded its 2019 profit guidance because of over-supply in its Japanese photo identification business.

It’s always possible for the firm to hit turbulence again given the way it’s expanding in its markets.

Nevertheless, ME Group appears to be executing the growth of its operations well for the time being. So I see it as worth deeper research with a view to considering the stock for inclusion in a diversified passive income portfolio.

The post My best FTSE 250 stock to consider buying now for passive income while it’s near 168p appeared first on The Motley Fool UK.

Today, I’m highlighting two examples of why it can be a good idea, not to mention highly profitable, to look beyond the ‘usual suspects’.

Big gains

At first glance, ME Group International (LSE: MEGP) is just about the most mundane business imaginable.

The company specialises in “instant-service equipment“. That’s vending machines in everyday language. ME has almost 44,000 of them across 19 countries, including laundry services, digital printing kiosks and photobooths.

By contrast, the share price performance in the last year has been nothing short of brilliant (+52%) thanks to trading hitting something of a purple patch.

The mid-cap recently announced close to 25% jumps in revenue (to £143.8m) and in post-tax profit (to £20.4m) for the six months to the end of April.

Clearly, its diverse growth strategy has struck a chord with both customers and investors.

More to come?

Have I missed the boat here? Possibly not.

Despite the positive momentum seen in the shares, I can still buy a slice of the company for 12 times earnings. On top of this, there’s a secure-looking 4.2% dividend yield.

As such, I certainly don’t think more share price gains are out of the question.

Then again, an improvement in overall market sentiment could see ME International stock spurned for racier alternatives. I also wonder about the long-term demand for things like photo booths.

Still, I’d at least consider an investment here if I didn’t already hold a sufficient number of cheap income stocks in my portfolio.

Index-beater

Another under-the-radar UK share that’s been going great guns has been promotions firm 4imprint Group (LSE: FOUR). Its value has climbed 47% in the last year as clients look to grow their brands post-pandemic and hit their marketing goals.

For perspective, the FTSE 250 index of which it is a member is down about 2% in the same time period.

Chalk up another victory for the nimble stock-picker!

All in the price?

One potential drawback to this share now, however, is the valuation.

In contrast to ME International, 4imprint shares now change hands on a price-to-earnings (P/E) ratio of 21.

Theoretically, this could mean that the market reaction to a slowdown in trading could be harsh. Rather ominously, it’s worth mentioning that management already warned in May of a potential slowdown in its primary US market. That sent the share price tumbling on the day (although it recovered).

Interim results on 9 August will certainly be worth paying attention to.

Quality UK share

Having said this, I do think this price tag can be justified based on how well the company scores on established ‘quality’ metrics.

Although operating margins are pretty average, the returns 4imprint makes on the money it puts to work in the business — otherwise known as return on capital employed — are usually far higher than most other companies

While we need to be careful not to oversimplify things, this can really help to turbocharge the rate at which investors’ wealth is compounded.

So, 4imprint really catches my eye.

I’d be willing to invest here, as and when cash becomes available.

The post These under-the-radar UK shares have been flying. Are they still worth buying? appeared first on The Motley Fool UK.