Gloomy forecasts suggesting the UK stock market would crash after the referendum have so far been proved wrong.
Market performance has been so strong that some investors are questioning whether there’s any value left out there. I think that while there are a handful of FTSE 100 stocks that remain attractive, the big cap index is probably quite fully valued.
I’m increasingly attracted to the FTSE 250. After performing strongly in recent years, the mid-cap index has climbed just 3% so far in 2016. I believe the FTSE 250 contains a number of stocks which could offer decent value for investors.
In this article, I’ll highlight two companies I believe may be worth a closer look.
Eastern demand is fuelling growth
Like most other UK-listed airline stocks, shares in Wizz Air Holdings (LSE: WIZZ) fell sharply when the UK’s Brexit vote was announced. At the time of writing, Wizz Air shares are worth 22% less than they were five months ago.
However, Wizz Air may not deserve this down-rating. Whereas most other UK-listed airlines have issued profit warnings or cut forward guidance since June, Wizz Air has not. Broker forecasts were cut following the referendum but have climbed again since.
Instead of reducing its planned growth, Wizz Air has been able to shift planned capacity away from the UK and into non-UK routes elsewhere in Europe. In Wizz Air’s July update, the airline said that net profit guidance for the current year would remain unchanged at €245m–€255m. Planned capacity growth would also remain broadly in-line with previous guidance, at 16–17%.
It may be prudent to delay any investing decisions about Wizz Air until 9 November, when interim results are due. But with earnings per share expected to grow by 15% this year and a forecast P/E of 9, Wizz Air looks good value to me.
Customers hate this firm
How can a company be so unpopular and yet remain profitable? That’s a question that Southern Rail travellers would probably like to ask management at Govia Thameslink franchise operator Go-Ahead Group (LSE: GOG).
The transport group’s profits came in as expected last year, despite strikes and cancelled services on key London rail routes. Shareholders benefited from Go-Ahead’s strong free cash flow and enjoyed a 6.5% dividend hike which took the payout to 95.85p per share. That’s equivalent to a yield of 4.7% at the current share price.
Go-Ahead’s operating margin rose from 3.0% to 3.5% last year. The group’s pre-tax profit of £99.8m was 26.8% higher than in 2014/15, while earnings per share rose by 33.5% to 152p.
A similar improvement in performance is expected this year. Broker consensus forecasts suggest that earnings per share will rise by 19% to 191.9p, putting the stock on a forecast P/E of 11. The dividend is expected to rise by 6% to 101.5p, giving a prospective yield of 4.9%.
Go-Ahead’s net debt of £323m represents a net debt to EBITDA ratio of 1.36x, which looks safe enough to me. The group’s pension deficit was almost zero at the end of last year, removing another potential risk.
In my view, Go-Ahead has the potential to deliver attractive income and capital gains for shareholders.
