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The FTSE 250 endured a tough March, but is showing some signs in early April that the worst of the move lower could be over. As the dust starts to settle, some companies look attractive, but others are flashing warning signs for me.
Differentiating between the two is very important! Here’s one stock I think looks undervalued, but another I’m very cautious about.
Building on the future
Let’s start with the company I believe is undervalued: Travis Perkins (LSE:TPK). It’s down 18% in the past month, but up 11% over a broader one-year period.
The hit in the past month came mostly from the release of the company’s full-year results. It showed trading conditions remain subdued, with weak housing activity dragging on demand for building materials. Revenue dipped by 0.9% and adjusted operating profit fell 12.5%, and the group swung to a £97m loss after impairment charges and restructuring costs piled up.
Even though housing activity remains a risk going forward, I think this could just be a dip in the share price. For one, the balance sheet has improved dramatically. The firm has moved into a net cash position for the first time in decades, giving it resilience and flexibility. Free cash flow has also come in stronger than expected, which matters far more than accounting losses over the long run.
Further, we shouldn’t forget this is still a highly cyclical business. If the conflict in the Middle East ends and UK interest rates fall later this year, consumers should feel more confident, helping to boost the construction and housing markets. This should then translate to a meaningful rebound in volumes and investor sentiment.
Therefore, I see the stock as undervalued given where it could be trading by the end of the year, and feel investors could consider buying it.
No recovery signs yet
On the other hand, I’m continuing to stay away from recruitment firm Hays (LSE:HAS). A month ago, I wrote about the company, which was trading at the lowest level in decades. Yet I decided it wasn’t the right time to buy, which was a good call, as the stock’s down 17% over the last month. It’s down 59% in the last year.
Right now, the job market’s weak for Hayes. Economic uncertainty across Europe, particularly in key regions such as Germany and the UK, is dampening hiring activity. And when hiring slows, recruiters like Hays feel it almost immediately.
Yet it’s not just about waiting for a recovery in the labour market. Hays is struggling on other fronts, with news at the end of February that the CEO would be stepping down, alongside poor financial results. The company has even slashed its dividend by 84%, never a signal that things are going smoothly.
It’s true that Hays hasn’t lost its relevance. It remains one of the largest recruitment firms in Europe. It has a strong global footprint and deep relationships across industries. When hiring eventually recovers, I expect the stock to bounce back. However, from where I’m currently standing, I still believe there’s further room for the stock to fall before I want to buy.
This story originally appeared on Motley Fool
