Investing in FTSE 250 shares can offer an investor exposure to medium-sized companies that still have growth prospects.
But such businesses can have quite a few bumps along the way, I have found. Indeed, over the past five years, the FTSE 250 has gained 16% — but that is less than a third of the 50% gain the FTSE 100 has delivered over that period.
One FTSE 250 share I bought when I thought it was a bargain has been dogged by poor performance. But a trading statement issued today (23 April) has seen its share price move up 9%.
Could this potentially be a sign of better days to come?
Strong brand, exposed to shifting consumer trends
The share in question is Domino’s Pizza (LSE: DOM), the local master franchisee of the US pizza giant.
When I bought in, I thought the investment case was simple. Domino’s had been winding down overseas operations in some European markets and focusing on growth potential in its UK market. It looked set to benefit from economies of scale and a clearer strategic focus. It has a strong brand, lean operating model and loyal customer base.
However, things did not go well. A surge in demand for pizza deliveries over the pandemic years started to fizzle out. Chicken threatened to displace pizza in the hearts of some delivery customers.
Even after today’s boost, the FTSE 250 share is still 46% cheaper than it was five years ago.
A positive start to the year
That price fall has helped boost the Domino’s dividend yield to 5.7%.
The tasty passive income streams are attractive to me as an investor and help explain why I have hung on to the share, alongside the fact that I still believe in the basic investment case I outlined above.
I was cheered by the positive news in today’s update when it comes to that investment case. The company’s launch of a chicken dipping product helps to combat the threat that chicken demand could displace pizza orders for some customers.
In the first quarter, total orders were up around 2% year on year. Some of that came from expansion and some from sales growth at existing outlets. Total sales revenues were up 6%, suggesting that as well as higher sales volume, the company was able to raise its prices.
Frankly that sort of growth is not exceptional. Greggs has delivered better numbers and still been punished by the City.
But the difference is around expectations.
Domino’s has lately been dogged by investor concerns about whether its market size can grow at all, or even stay the same. So delivering growth is better than many people expected, helping push up the share price.
This still looks cheap to me
I am still in the red on my Domino’s position, although am happily collecting dividends along the way.
But I continue to hold the share and plan to keep doing so, as I think it looks cheap given its strong brand, proven business model and ongoing growth opportunities.
Although the current price-to-earnings ratio of 13 may not look like a screaming bargain, last year’s operating profit had shown a sharp decline. If the company can translate growth into earnings recovery, the current valuation looks low to me.
