I love buying quality FTSE 250 growth shares when they’re going cheap. I can make huge returns as their profits rise and share prices move skywards. Those price gains can be even greater when they’re starting from a low base.
So which bargain stocks have grabbed my attention today? Grainger (LSE:GRI) and Ibstock (LSE:IBST) have both caught my eye, as each carries one or more of a low:
- Price-to-earnings (P/E) ratio
- Price-to-earnings growth (PEG) ratio
- Price-to-book (P/B) ratio
As a keen income investor, I’ve also considered the dividend yields of each company. And one of these top stocks carries a yield miles above the FTSE 250 average of 3.3%. Let’s take a look.
Too cheap to miss?
Grainger’s share price has fallen off a cliff since the Middle East conflict began. Why? With soaring oil prices fuelling inflation, it’s possible that interest rates will be hiked, hitting the property stock’s asset values and earnings.
But have these fears been overstated? I think so, given how cheap Grainger’s shares are today. Its forward price-to-earnings (P/E) ratio has tumbled to 5.8 and its P/E-to-growth (PEG) to 0.7.
As well, the real estate investment trust (REIT) has seen its P/B ratio drop to 0.6. As with the PEG, any reading below 1 indicates a share trading below value.
Finally, Grainger’s dividend yield has jumped to 5.9%. Under REIT rules, at least 90% of annual rental profits must be paid out in dividends.
On balance, I think Grainger’s a top stock to consider in uncertain times. And especially with that rock-bottom valuation. Its focus on the stable residential property market should help it weather any storms. We all need a roof above our head, after all.
Looking longer term, Grainger has exceptional earnings potential as it steadily builds its portfolio. The company has more than 11,000 homes today, and a large development pipeline to raise that number by almost half. I think it could soar in value over time.
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Another FTSE 250 bargain
Brick manufacturer Ibstock is possibly even more affected by the Iran war than Grainger. How so?
Rising interest rates threaten to derail the housing market’s fragile economy. On top of this, brickmaking is a highly energy-intensive process, leaving this FTSE 250 share vulnerable to rocketing energy prices.
Could these threats now be baked into Ibstock’s share price, though? I think so. In fact, I’m considering adding more of its shares to my existing holdings, so cheap are its shares right now.
Ibstock’s forward PEG ratio is just a fraction above 0, suggesting outstanding value. Its P/B is also under the value yardstick of 1, at 0.9.
As an investor, I’m happy to endure some short-term pain in exchange for significant long-term gain. And the potential returns I expect to make here are hugely attractive. Brick demand could accelerate sharply as Britain’s rising population fuels a housebuilding boom. Government studies suggest as many as 300,000 new homes are needed every year following years of undersupply.
Ibstock is especially well placed to capitalise on this opportunity. It’s the UK’s largest brickmaker, accounting for roughly 40% of market supply.
