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Best FTSE 250 shares to watch in November 2022


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Darktrace, easyJet, and Safestore Holdings could be three of the best FTSE 250 shares to watch in November despite significant volatility.

easyjetSource: Bloomberg
 
 Charles Archer | Financial Writer, London | Publication date: Wednesday 12 October 2022 

Selecting some of the best FTSE 250 shares to watch next month is not an easy task. The index itself is down 29% year-to-date to just 17,000 points. And while this could represent a buying opportunity, further falls appear imminent.

The UK’s second-tier index is, unlike older brother the FTSE 100, primarily domestically focused. And the UK’s economy is undoubtedly in a delicate state.

The government’s fiscal policy continues to drift further apart from the Bank of England’s monetary policy. IMF Director of Research Pierre-Olivier Gourinchas has already warned ‘it’s not going to work out well.’

Some analysts are speculating that Andrew Bailey could usher in a whopping 125 basis points rate rise next month. The central bank has again warned of ‘material risk’ to the UK’s financial stability. Further, it’s alerted investors that emergency bond buying will definitively end on Friday.

Meanwhile, Chancellor Kwasi Kwarteng’s unfunded tax cuts will require taking a £60 billion axe to public spending by 2026 according to the Institute for Fiscal Studies.

Increased GDP/USD volatility, a potential pensions crisis, collapsing discretionary income, and soaring government debt interest are all contributing to an atmosphere of financial fear.

And today alone, £900 million in index-linked gilts were sold by the Debt Management Office at a yield of 1.55%, the highest level since October 2008.

Against this backdrop, even the best FTSE 250 shares could see further capital falls soon.

As ever, the caveat remains that nobody can reliably predict the bottom. And some quality companies could now be trading at handsome discounts relative to their potential.

Best FTSE 250 stocks

Darktrace (LON: DARK)

Darktrace shares have collapsed by 63% over the past year to 306p today. The AI cyber-defence company is a divisive stock pick; despite its correction it comes with an astronomical price-to-earnings ratio of 90, and major shareholder Mike Lynch faces US extradition over fraud charges.

In addition, it has been shorted successfully over the past year, and a possible buyout from Thoma Bravo in August came to nothing. Further, it has serious competition from the likes of CrowdStrike and Palo Alto Networks.

However, it operates in a uniquely positioned industry for this recession. It’s highly defensive as companies will not restrict depending on cyber-defence. But Darktrace is also operating in a growth area, with GlobalData expecting global cybersecurity revenue to rise from $220 billion to $334 billion by 2026.

In full-year results, Darktrace saw its customer base grow by 32.1% year-over-year to 7,437, revenue rise by 45.7% to £415 million, and an operating profit of £7.6 million against a £34.8 million loss in fiscal 2021.

Key risk: Further share price falls as investors recalibrate portfolios away from higher risk growth stocks.

darktraceSource: Bloomberg

easyJet (LON: EZJ)

easyJet shares have halved in price since the start of 2022, to just 300p apiece. Ejected from the FTSE 100 in the early days of the pandemic, a hoped-for summer recovery has instead been peppered with travel disruption amid sky-high inflation.

While it’s worth noting that easyJet traded above 1,200p less than three years ago, it was also worth just 287p eight days ago. A steep correction does not make further falls unlikely.

With a year-end trading update to be released on 13 October, analysts expect the airline to make a comparatively small loss of £127 million for the full year, a significant improvement on the prior year’s £1.14 billion loss.

Further, Q3 saw the airline fly 22 million people, a sevenfold increase on the same quarter last year, and 87% of pre-pandemic capacity levels. It also generated £1.76 billion in revenue, up from just £213 million in the year-ago period.

Of course, it was forced to raise £5.5 billion through share sales and loans to survive the pandemic. And the Ukraine war and staff struggles haven’t helped, with Q3 costs growing to £1.87 billion. Further, ABTA CEO Mark Tanzer has warned that ‘the current turbulence in the financial markets... is a real cause of concern for our members.’

However, where there’s risk, there’s reward.

With Thomas Cook and Monarch long gone, CEO Johan Lundgren notes ‘I would have thought there were going to be more failures than mergers and takeovers this year,’ and further that easyJet remains one of the 'least indebted airlines' and 'one of the few that has an investment-grade credit rating.’

Market share could be ready for the taking.

Key risk: A deeper-than-expected recession weighing on the airline stock’s share price over the medium term.

Safestore Holdings (LON: SAFE)

Safestore Holdings shares have fallen by 43% year-to-date to 813p, afflicted by the wider market slowdown and fears of a property crash sparked by rising interest rates.

The prophesied housing market correction would clearly be bad news for the FTSE 250 company, as it derives significant revenue from home movers. Falling prices are usually an indicator of tightened credit, making home moves more difficult.

However, the £1.7 billion giant is the largest self-storage provider in the UK, and second largest in Europe. This gives it a strong level of geographical diversification.

Moreover, Mordor Intelligence posits that the European self-storage market will see 4.09% CAGR growth between 2021 and 2026. FTSE 100 giant Legal and General even created its own storage space fund to exploit the growing market back in 2019.

Interestingly, business storage is responsible for 30% of the market, and this trend could be set to rise as companies seek storage space after downsizing offices in response to hybrid working.

In the company’s Q3 trading update, revenue increased by 14.9% year-over-year to £54.7 million, while its maximum lettable area increased by 9.9%.

With a property pipeline representing 14% of the current portfolio, CEO Frederic Vecchioli notes that the FTSE 250 company has ‘delivered a strong occupancy performance over recent years, yet we still have 1.2m square feet of fully invested currently unlet space...our most significant upside opportunity is from filling this space and that remains our priority.’

Key risk: Too deep a recession, and Safestore’s rapid expansion could backfire, especially given its already unlet space.

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