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When it comes to good stock-picking, I naturally always favour my own views and those of my friends. However, these days, it’s always good to cross-check views or get ideas from ChatGPT, that can then be reviewed myself.
So with the summer now coming to a close and my holidays over, I’m on the hunt for new FTSE 250 ideas. Here’s what ChatGPT suggested!
An interesting selection
My AI companion said it believes Serco (LSE:SRP) is the best pick in the index right now. When I pressed it for reasoning, it said the view was based on the combination of structural growth, improving margins, strong cash generation and an attractive valuation.
I therefore decided to do some more research on the company, noting initially that the stock’s up 17% over the past year, but remains well below the 52-week high. Before I get to the valuation angle, the big standout to me is actually one of the sectors it targets.
The firm provides outsourced services primarily to governments, operating across areas including defence, immigration, justice and healthcare. The nature of these contracts means many are large and run for several years, giving the company appealing revenue visibility.
Yet it’s the defence exposure that really catches my attention. Governments across the UK, Europe and North America are committing significantly more money to defence and national security. After all, conflicts from this year show that the world’s becoming an increasingly dangerous place.
Therefore, Serco should be well-positioned to capture some of this spending, while still being diversified enough across other areas to protect it in case defence spending slows.
Talking valuation
The valuation was cited by ChatGPT as another major attraction. Yet I’m not completely sure this is a valid point. The price-to-earnings ratio is 14.96. By comparison, the index average ratio is 10.3, so technically, Serco is more expensive than the average stock.
Don’t get me wrong, I don’t think the stock’s expensive, and there’s easily scope for it to go higher before flagging as overbought. But the notion it’s a bargain isn’t that accurate.
Interestingly, the shares remain around 20% below their 52-week high. So from this angle, it could be seen as attractive, as it could move back to this level if performance remains strong.
One of the main risks I see is that Serco operates on relatively thin margins. This means problems with a major contract could quickly eat into profits. Government outsourcing can also be politically sensitive, while changes in government spending priorities could reduce future contract opportunities.
When I boil everything down, I think Serco’s a stock I’m going to consider adding to my portfolio, but I don’t think it’s the best option to buy right now in the entire index. I’d rather keep hunting for companies that catch my eye, for example, via a high dividend yield or from true undervalued gems.
Should you invest £5,000 in Serco Group Plc right now?
When investing expert Mark Rogers and his team have a stock tip, it can pay to listen. After all, the flagship Twelfth Magpie Share Advisor newsletter he has run for nearly a decade has provided thousands of paying members with top stock recommendations from the UK and US markets.
And right now, Mark thinks there are 6 standout stocks that investors should consider buying. Want to see if Serco Group Plc made the list?
Jon Smith does not hold any positions in the companies mentioned.
This story originally appeared on Motley Fool
