Is it time to rescue these battered FTSE 250 shares?

The Motley Fool
Card Factory
Card Factory

It hasn't exactly been a year to celebrate for shareholders of Card Factory(LSE: CARD). Investors in the UK's leading specialist retailer of greetings cards and related gifts have watched the value of their shares plummet from last year's highs just below £4 per share, to today's levels around £2.50. So is this the right time to step in and grab a beaten-down bargain, or should investors stay cautious about the FTSE 250 firm's prospects?


Challenging environment

Last week the Wakefield-based retailer issued a trading update admitting that the general retail environment remains challenging with adverse footfall trends impacting customer traffic in its stores. Despite the tough trading conditions, Card Factory managed to achieve 4.4% sales growth in the nine months through to the end of October, while opening 46 new stores over the period, bringing the total number to 860.

Like many of its peers, Card Factory's financial year ends after the festive season on 31 January, and by then the company hopes to have opened a total of 50 news stores for the year, in line with its historical opening rate. I like the fact that management is confident enough to have already started to build the pipeline of new store opportunities for fiscal 2018. So why has Card Factory been battered by the market this year?

15-month rally

First, I think there has been a significant amount of profit-taking. The shares enjoyed a 15-month rally following its IPO in May 2014, when after a disappointing start the shares had doubled in value by September last year. Who can blame investors for wanting to bank some profits after such hefty gains?

Secondly, it hasn't escaped my attention that the sharpest share price fall has come since the run-up to and aftermath of the EU referendum, with the shares losing a third of their value since May. Understandably both investors and retailers themselves are cautious about the outlook following the Brexit vote, and I think this will continue for some time to come.

Broker consensus estimates are expecting the firm to post a 4% dip in earnings for the current year to the end of January, with only a modest 3% recovery forecast for fiscal 2018. Despite this year's share price weakness, Card Factory isn't a bargain for me at 14 times forward earnings, and I still can't see a compelling reason to invest at the moment.

UK profits fall

Meanwhile, another mid-cap stock that's been out of favour with investors this year is PageGroup(LSE: PAGE). The Weybridge-based recruiter formerly known as Michael Page International is a worldwide leader in specialist recruitment. In its last update, the company reported a rise in total third-quarter profit, but a drop in the UK, as it expressed caution following the result of the EU referendum.

The company revealed that total gross profit for the three months to the end of September was up 14.1% from the same period a year ago to £158.6m, but profits in the UK fell by 4.7% to £37.8m as continued uncertainty following the Brexit vote had impacted its multi-national clients.

The group's shares have managed to recover from a post-referendum sell-off, but are still down almost 30% on the year. In my view the company is still a little overvalued at 17 times forward earnings, given analysts' expectations of nil growth this year, with a 5% drop to follow in 2017.

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Bilaal Mohamed has no position in any shares mentioned. The Motley Fool UK has no position in any of the shares mentioned. We Fools don't all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors.