easyJet, Tritax Big Box REIT, and Greencoat UK Wind could constitute three of the best FSTE 250 companies to consider next month.
As the FTSE 100 takes the international spotlight for hitting its 8,000-point symbolic record, it may be worth considering some of the best FTSE 250 shares while investors are distracted. Of course, the junior index fell by 19.7% in 2022 compared to the FTSE 100’s modest 1% gain. But both indices are up by circa 5.5% so far in 2023, and this could leave FTSE 250 stocks undervalued.
There are essentially two differences between the two indices. The FTSE 100 is weighted towards established banking, oil, and mining dividend companies, while FTSE 250 businesses usually have a growth story to tell. And FTSE Russell data shows that 82% of FTSE 100 companies’ income is derived from overseas — the FTSE 250 is far more domestically focused, which means the effect of the UK’s economy on the index is correspondingly magnified.
FTSE 250: UK economic factors
As spring creeps up, there are some reasons to be cautiously optimistic about the UK’s economic situation. The Sunak-Hunt government seems to have brought a moderation of stability, despite the dent to the UK’s reputation as a financial centre caused by their predecessors last year.
European gas prices have fallen dramatically, and energy bills may start falling as soon as Q3. For context, £7,000 annual domestic bill predictions are not ancient history. CPI inflation has dipped from the 11.1% high of October to just 10.1% in January — and in the absence of another economic shock, the Bank of England predicts the measure will come close to the official 2% target by this time next year.
Accordingly, the Bank thinks the recession will now likely last only one year, and the National Institute of Social and Economic Research thinks the country may avoid a recession altogether — although warns it will not feel like it for millions of households.
Of course, the UK’s central bank does not have a stellar forecasting track record. Inflation was supposedly ‘transitory’ in the months leading up to the first rate increase in December 2021, and it was only a few weeks ago that it was predicting that the recession would last for two years.
This does serve to show that even the very best economists do not have a set of crystal balls. Indeed, the Monetary Policy Committee appears divided over where interest rates will go next. Governor Andrew Bailey remains ‘very uncertain’ about the trajectory of UK inflation, while MPC members Catherine Mann and Silvana Tenreyo have issued diametrically opposed public statements in various forums on the debate.
For perspective, XpertHR analysis shows that employer salary increases are currently at a median of 6%, their highest in three decades. Meanwhile, OECD data shows that investment in the UK remains below its mid-2016 level, while the IMF has warned that the UK will fare worse economically than any other developed country in 2023.
And in the background, there’s seemingly endless strikes for higher pay as workers struggle with the cost-of-living, that if successful would simply feed the inflation monster. Difficult political, fiscal, and monetary choices abound, and the spring budget could also see a few surprises as the Conservative party attempts to rebound from polling lows.
All in all, this unsteady environment is not conducive to healthy growth stocks. However, where there’s uncertainty, there may also be buying opportunities.
Best FTSE 250 shares
1. Tritax Big Box REIT (LON: BBOX)
Tritax shares have fallen by 34% over the past year, both because of wider recessionary fears and specific concerns over falling real estate prices. However, at 154p today it has managed to climb out of the 126p dip of late September last year.
While analysts expect that BBOX will post smaller profits throughout the recession, the company has arguably overcorrected. The real estate investment trust suffered from a pop in the warehouse bubble, beginning earlier this year when major client Amazon warned it had overexpanded its warehousing needs and was looking to dispose of some space.
But Tritax’s share price is now trading at a large discount to its net asset value, and it also holds ESG points as one of the greenest REITs in the UK. Further, the FTSE 250 stock has paid out reliable dividends for years by virtue of its REIT status, and this dividend income could rise over the longer term as e-commerce continues to grow in importance.
In 2022 full-year results, CEO Colin Godfrey noted that the company ‘delivered excellent operational performance in FY 2022 underpinned by record development lettings and further development starts as we continued to capitalise on a strong occupational market.’
Tritax saw 38 million square feet of UK lettings in 2022, the third highest year on record and 33% above the 10-year average. And it saw annual contracted rent grow by 14.5% — or £28.4 million — to £224 million, collecting 100% of rent due over the past two years.
2. easyJet (LON: EZJ)
easyJet shares have soared by 53% year-to-date as the airline benefits from a strong quarterly update bolstered by record reported airport activity since the start of the pandemic.
Q1 saw revenue increase by 83% to £1.47 billion, while the company’s headline loss before tax was just £133 million, an improvement over the £213 million loss in the same quarter last year. Meanwhile, net det debt fell to £1.1 billion, and the FTSE 250 company expects both that this year’s first half loss will be significantly lower than in its last financial year, and that the full year will see a swing to profit.
CEO Johan Lundgren notes that EZJ has seen ‘strong and sustained demand for travel over the first quarter, carrying almost 50% more customers compared with last year. This strong booking performance, aided by the airline's step changed revenue capability, has driven an £80m year on year boost in the first quarter with continued momentum as customers prioritise spending on holidays for the year ahead.’
It's also worth noting that both Thomas Cook and Monarch were unable to survive the pandemic, so easyJet is fighting with remaining rivals for an even larger slice of the market share.
Of course, there are headwinds. Interest rates are rising, fuel costs have doubled, and despite the pent-up demand the cost-of-living crisis could slow the recovery pace. The company was also forced to raise £5.5 billion in share sales and loans through the pandemic.
3. Greencoat UK Wind (LON: UKW)
Greencoat UK Wind is a green energy-focused investment company which owns 45 wind farms across the UK with an aggregate net capacity of 1,289.8 megawatts representing 5% of the UK’s windfarm market share. This is sufficient to power 1.5 million, or 6% of all domestic homes in the country. And it recently invested in a 12.5% stake in Hornsea 1, at present the world’s largest offshore windfarm.
UKW aims to provide investors with a dividend income that increases with inflation while preserving the capital value of its portfolio. However, for context, this dividend is only at 4.7%, far below inflation, but just above the FTSE 100 average dividend yield.
One key investor concern is that the company’s profits will be affected by the windfall tax, which comes in at wind energy sold above £75 per mega-watt hour. However, UKW is now trading at a NAV discount of 5%, and the ban on onshore windfarms looks set to be scrapped soon, providing a strong chance for the company to make further investments.
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