Should you buy these two FTSE 250 champions?
Investing in high quality mid-cap stocks can be a great way to boost your portfolio returns and the FTSE 250 is home to many fast growing mid-cap-sized companies. Here's a look at two FTSE 250 stocks that have generated excellent returns for shareholders in recent years.
Packaging specialist DS Smith (LSE: SMDS) has been a standout performer over the last five years, with shareholders enjoying total annualised returns of over 29% per year. A string of acquisitions has seen revenue grow from £1759m in FY2011 to £4066m in FY2016 and adjusted earnings per share from continuing operations have grown from 9p to 23p in that time.
Can the company continue to perform for shareholders? I believe it can.
The increase in online shopping is boosting demand for packaging and DS Smith is well placed to take advantage of this demand, being a leading provider of corrugated packaging in Europe. City analysts forecast revenue and earnings growth of 11% and 25% respectively for FY2017, and a trading update last week revealed that the company had made "goodprogress" since the start of the year and remained "positive" about the outlook going forward.
With analysts pencilling-in earnings of 31p per share next year, the stock trades on an undemanding P/E ratio of 13.5 times next year's earnings which is good value in my opinion, especially given the fact that the company pays a healthy dividend of around 3.1%.
The share price has spent the last 12 months consolidating around the 400p mark, but if revenues and earnings continue to grow it shouldn't be too long before the share price continues on its upwards trajectory.
IG Group Holdings
Derivatives specialist IG Group Holdings (LSE: IGG) is a stock that I've had on my watch list for a few years now yet never purchased, and regrettably I've missed out on some excellent return. as the stock has gained almost 21% a year over the last half decade on an annualised basis.
What appeals to me about IG Group is that unlike other financial services companies, IG can actually benefit from market volatility as its clients' trading activity tends to increase during periods of turbulence.
Revenue has grown from £355m in FY2011 to £492m for FY2016 and shows no sign of slowing down with city analysts pencillin-in revenue of £510m and £554m for the next two years. Furthermore, the company has increased its dividend from 20p five years ago to 31p for FY2016 and the dividend is forecast to grow strongly in the next two years, which is great news for dividend investors.
IG looks like a high quality business, with sizeable free cash flow, very little debt and a solid dividend for shareholders that has grown at an inflation beating rate of 7% over the last five years.
However, with the share price rising around 20% since mid July, I won't be buying the stock just yet. The price spike has lifted the P/E ratio to 19.1 times next year's earnings and pushed the dividend yield from above 4% down to around 3.1%. For this reason, I believe it might be worth waiting for a more attractive entry point before buying.
A Motley Fool stock priced to buy?
The stocks above have potential to provide shareholders with a nice mix of capital growth and dividend growth.
If you're looking for another stock with similar potential that is trading very cheaply, I'd urge you to read this free report from The Motley Fool: A Top Income Stock.
This UK company currently yields almost 4% and grew its dividend by 45% last year, yet due to recent share price weakness the stock miraculously trades on a low P/E of under 10.
Edward Sheldon has no position in any shares mentioned. The Motley Fool UK has recommended DS Smith. We Fools don't all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors.