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while the FTSE 100 hit a record high this month, more focused on the UK FTSE 250 it is still about 20% below its previous peak. So what better time to look for second-tier recovery plays before the big (hopefully inevitable) rally?
Here are two that I particularly like.
green shots
As a shareholder of a FTSE 250 listed price comparison company moneysupermarket.com (LSE: MONY) Yeah, I can’t pretend the last two years have been nice.
However, recent form has been much more encouraging. In fact, the stock is up just over 17% in the short 2023 so far.
Yes, some of this could be down to Bank of England optimism that a UK recession will be shorter and less severe than previously thought (if it happens at all). A rising tide lifts all boats, so to speak.
But I think this would be quite hard on the website operator. It’s clear that the cost-of-living crisis has pushed more people to look for better deals on services like broadband and insurance. In fact, revenue in Moneysupermarket’s travel insurance segment was almost 50% higher last year than it was in 2019 before the pandemic.
I believe this momentum will continue, especially once the energy market turns more competitive and people can finally switch providers.
big dividends
Clearly, the economic clouds may still take some time to dissipate.
However, a price of 15 times expected earnings still seems reasonable to me, especially when you factor in the revenue stream.
Moneysupermarket kept, rather than increased, its full payout for 2022. While this might have disappointed some investors, I think it’s actually quite prudent given the current uncertainty.
Even if there were no rise in 2023, the stock would still yield a thick 5.1% at today’s share price. For comparison, the FTSE 250 index returns “only” 3.1%.
Is it worth the extra risk? I think so. In fact, I may well increase my current position if funds are available.
Buy before the boom?
Another second-tier stock that I think is a great potential buy right now is the Newcastle-based homebuilder. Bell tower (LSE: WHO).
That may sound strange considering how the sector fared in late 2022 as mortgage rates skyrocketed and demand from prospective buyers fell.
However, I think a lot of bad news is already discounted. Bellway shares change hands with a price-earnings (P/E) ratio of just six. An expected dividend yield of 5.6%, easily covered by expected profit, is another draw.
patience is required
Now, I have no idea how the housing market will fare in 2023. Clearly, a rise in unemployment is unlikely to help it. On the other hand, this could be a catalyst for lower interest rates.
We’ll get an idea of just how bad (or not so bad) trading is at Bellway when the company releases its semi-annual numbers at the end of March. Naturally, management’s comments on the outlook will be closely scrutinized.
However, as a dumb investor, I know there’s no point in worrying about things I can’t control. It is much better to focus on buying stocks with great long-term potential. I think that is the case here given the continuing need for housing in the UK.
Again, I would feel comfortable buying now with the extra money.
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