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During the past year, the FTSE 250 The index has lost 13% of its value. The long term hasn’t been rewarding either: in five years, the index has fallen 5%.
I think there are some potential bargains for my portfolio in the seemingly old-fashioned index that features companies smaller than the giants of the FTSE 100. Here are two that I think could outperform the broader stock market in the next few years. If I had extra money to invest today, I would add both to my portfolio.
Howden Carpentry
What will happen to the housing market in the coming years?
Nobody knows. Fears about the risk of a housing market crash may help explain why shares in the FTSE 250 are members Howden Carpentry (LSE: HWDN) have fallen 13% over the past year.
But whatever the real estate market does, builders will need the lumber part of their business for renovation and construction. Howden has developed deep relationships with commercial clients and has a distinctive client proposition. Their network of local warehouses with products immediately available from stock is a great asset.
Revenue last year was up 11%, pre-tax earnings were up 4%, and annual ordinary dividend per share was up 6%. The company has been buying back its own shares of late. It is trading at what I see as an attractive price-earnings (P/E) ratio of just 10.
risks and rewards
The valuation could reflect investor concerns that housing market uncertainty could lead to lower demand for lumber, building materials and its core range of kitchens, hurting Howden’s earnings. Inflation is also a threat to profitability.
But I expect strong long-term demand in the construction sector, and Howden has a well-established business. I see their business relationships as a competitive advantage and I think the stock could do well in the next five to 10 years. Despite the recent slump, the stock is up 44% in the past five years.
computer center
Now I can buy shares in computer center (LSE: CCC) for just under three-quarters of the price it would have paid just a year ago.
But with a P/E ratio of 14, this tested product looks cheap to me given its long-term prospects. Last week the company released its 2022 results and I found them to be strong. Revenue grew 29%, profit before tax increased slightly to £249m and the dividend increased 2%.
That’s not a legend, but it’s a solid performance in a market where many companies have been cutting IT spending.
With its broad reach, deep-rooted client relationships and extensive service offering, I think the FTSE 250 firm looks poised to continue to do well. In the long term, the demand for IT services should be high.
Tight budgets are a risk to short-term revenue and profit. Another risk is the impact of competition on prices and profit margins. Computacenter operates in an attractive business area, and a variety of multinational firms would like to increase their market share, possibly at its expense.
But I remain optimistic about the company’s prospects and was encouraged by last week’s results. I think the current valuation is pretty cheap for a mid-size professional services firm with the proven capability of Computacenter.
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