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I like to look for value not only in the flagship FTSE 100 leading stock index, but also in its sister FTSE 250 Index of small and medium-sized companies.
A FTSE 250 share I already own offers a dividend yield of 8.1%. That means if I spend £100 buying its shares today, I'd expect to earn just over £8 each year in dividends.
But despite that income appeal, the stock has been getting cheaper. It has already fallen 9% this year and we are not even three months in! In five years, the share price has fallen 41%.
Is that a sign that you should consider doing it while you can? Or is this the kind of buying opportunity that is an investor's dream?
Solid position in a durable market
You may be familiar with the company in question, even if you haven't identified it in the description above.
Is Topps Tiles (LSE: TPT), a tile wholesaler and retailer that has been in business for decades. In recent years it has had the strategic objective of selling one in every five tiles purchased in Great Britain. The firm has achieved that milestone.
Why do I like this business?
Demand for tiles can rise or fall depending on how many people move house and whether disposable income is high enough to justify spending money on a new look for a bathroom, kitchen or utility room.
However, in the long term I expect lasting demand for tiles. Topps also sells other surface coverings such as vinyl, so the FTSE 250 company could do well even as tastes change. Its strong position and deep knowledge of the tile market should help Topps stay on top of what customers want.
In addition to an extensive network of stores that allow DIYers and builders to get what they need without waiting, in recent years the company has also been steadily expanding its online presence for commercial and retail customers.
Valuation concerns
But other investors can see what I see (or more) and have still driven down the FTSE 250 share price.
Because?
One reason is concern about the risks of declining sales. This could be due to a weakening housing market or tighter household budgets leading to the postponement of non-essential expenses. In its most recent quarter, the company's comparable sales fell 7% year over year.
The fixed costs of a company like Topps are high, from leasing stores to keeping millions of tiles in stock waiting for buyers. Therefore, even a fairly modest apparent slowdown in sales can seriously hurt profits. This, in turn, could lead to a reduction in the dividend.
I would buy
I recognize those risks. I think they help explain why Topps is now in penny share territory.
However, as a long-term investor, I believe this FTSE 250 company has a proven business model based on a strong position in a market that I expect to see demand for in the coming decades.
So if I had extra money to invest today, I would happily buy more shares.
