Greggs, JD Wetherspoon, and Centamin could constitute the three best FTSE 250 stocks to buy next month.
It’s no secret that the FTSE 100 is a far more popular index compared to little brother the FTSE 250. But according to FTSE Russell, approximately 82% of FTSE 100 companies' revenue is generated from international sources, resulting in relatively limited exposure to the domestic UK economy.
Consequently, events like the Ukraine War or the collapse of Silicon Valley Bank have a more pronounced impact on this index. In contrast, the FTSE 250 consists predominantly of businesses that heavily rely on the UK market.
And this year, there has been a varied mix of economic news. Consumer Price Index (CPI) inflation remains in double-digits for now, though a drop below 9% could be likely soon as the month-on-month jump this time last year was far higher than average.
Despite this, it is highly likely that the Bank of England will continue to raise the base interest rate from the current 4.25%, with market expectations indicating further rate hikes up to 5%. The Bank is predicting that inflation will drop to 5% by the end of the year, while the Office for Budget Responsibility's projection is that inflation will decrease to 2.9%. Both of these estimates may now be overly optimistic given the limited timeframe remaining.
Another significant factor to consider is that the UK is by some measures under the highest tax burden experienced since World War II. Amid numerous strikes and a severe cost-of-living crisis, larger companies have seen their corporation tax increase from 19% to 25%.
Additionally, dividend tax has risen, the dividend allowance has decreased, the Capital Gains allowance has been reduced, and the super-deduction has been replaced with a less favourable scheme. Income tax bands have been frozen as well.
Numerous experts suggest that UK growth will lag behind other G20 nations. While these predictions are not guarantees, it is evident that many UK companies are facing significant challenges.
Nevertheless, challenges also present opportunities.
Best FTSE 250 stocks
1. Greggs (LON: GRG)
Greggs has delivered yet another positive quarterly update. The much-loved FTSE 250 bakery’s lie-for-like sales rose by an excellent 17.1% to £609 million, while the chain also saw an increase in shops trading by 6%.
However, there are concerns that despite the company’s new attempts to tap into the late night market, sales volumes may potentially start to stagnate as food inflation approaches 20%. Additionally, the company saw Q1 growth decline down from Q4, raising questions about whether growth is finally tapering off.
However, Greggs is comparing Q1 sales to the sudden jump in demand during the same period last year when customers suddenly began returning to work and leisure as normal as pandemic restrictions abated. Demand for Greggs' products remains strong, as evidenced by the company's plans to open more shops and extend opening hours.
The group opened 88 shops in the quarter and is implementing cost-saving strategies while focusing on higher-traffic locations. It’s worth noting that in a high inflation world, value offerings like Greggs have the opportunity to steal market share — and especially from the ‘overpriced’ coffee chains.
Going forward, investors will be concentrating on margins rather than just sales. If Greggs can keep prices high while wholesale food and energy prices fall, margins could actually increase through H2. And Liberum analysts think that sales could double over the next five years, while Barclays views Greggs shares as quality compounder for long-term investors.
Together, this may start to look like a compelling investment case.
2. JD Wetherspoon (LON: JDW)
JD Wetherspoon, the FTSE 250 pub operator, has experienced a remarkable 67% increase in its share price year-to-date, reaching 757p. The company's like-for-like sales in the most recent half have risen by 5% compared to pre-pandemic H1 2019 and by 13% compared to H1 2022.
A notable achievement for JD Wetherspoon is its shift from a £26.1 million loss in 2022 to a profit before tax of £4.6 million — although this was significantly lower than the £50.3 million profit in 2019. Additionally, the company has successfully reduced its net debt by £176.5 million to £743.9 million. These positive financial indicators are boosting investor confidence and may contribute to further share price growth.
While challenges such as high inflation, a cost of living crisis, and rising labour and stock costs persist, CEO Tim Martin remains cautiously optimistic about the company's prospects in the near term. The summer season, including two Bank Holidays in a row, is traditionally busier for the hospitality sector, and could provide a boost to JD Wetherspoon's performance.
Furthermore, Martin's campaign for VAT tax parity with supermarkets could be looked at favourably by politicians considering how best to support the hospitality sector as it gradually transitions away from energy bill support.
3. Centamin (LON: CEY)
Centamin stands out for its solid fundamentals amid the favourable gold price environment.
The company's flagship Sukari gold mine in Egypt, where it has recently commissioned a new plant and a 36MW hybrid solar farm, positions Centamin well for efficient and sustainable operations. This solar farm is the largest of its kind in the world used to power a gold mine. Additionally, Centamin is exploring the Doropo project in the Ivory Coast, which could serve as a catalyst for future share price growth.
In recent full-year results, Centamin reported impressive revenues of $788 million, selling 436,638 ounces of gold at an average price of $1,794 per ounce. Gold is now trading far higher, and there is potential for further increases if the Federal Reserve chooses to pause its monetary tightening. Centamin's gold production reached 440,974 ounces in 2022, a 6% increase compared to the previous year.
The company achieved an adjusted EBITDA of $319 million with a robust operating margin of 40%, resulting in pre-tax profits of $171 million. Importantly, Centamin maintains a liquidity position of $157 million, providing ample capital for future operations.
For 2023, Centamin has provided production guidance of 450,000 to 480,000 ounces. With the current elevated gold price, June could present an attractive entry point, especially considering that CEY shares are currently down 6.7% year-to-date.
However, it's important to monitor potential risks as more significant tightening than expected could lead to a decline in the gold price and subsequently impact CEY shares in the second half of the year.