Today I’ll be discussing the outlook for two mid-cap firms that could prove to be irresistible buys for contrarians looking to pick up out-of-favour growth stocks on the cheap. Is it time to seize the opportunity and buy these FTSE 250 shares, or should investors wait for a better opportunity?
Security Breach
It’s certainly been an eventful year for telecoms group TalkTalk (LSE: TALK), but not in a good way. The cyber-attack on the company’s website last October left the firm with both a bruised reputation and battered share price. Pre-tax profits halved to just £14m for fiscal 2016 after being hit by £42m of exceptional costs as a result of the security breach. Perhaps unsurprisingly, news of the cyber-attack prompted a massive sell-off with the shares falling to multi-year lows below £2 by the start of this year.
After sensing a buying opportunity it was time for bargain hunters to pounce, sending the share price soaring by 35% within months, before another sell-off ensued in May. Again we find TalkTalk shares changing hands at heavily discounted levels around £2, and perhaps offering both value investors and brave contrarians another bite of the cherry.
The City is certainly expecting a rebound this year, with analysts talking about a 69% rise in underlying earnings for the full year to the end of March, and a further 25% improvement forecast for next year. This year’s sell-off leaves the shares priced a third lower than a year ago, and supporting a chunky dividend yield well on the way to 8%. Furthermore, with the price-to-earnings ratio falling to 11 next year, I believe brave investors could be getting a lot of bang for their buck.
Switch to London
Europe’s leading corrugated packaging company Smurfit Kappa Group (LSE: SKG) has enjoyed tremendous growth in recent times with pre-tax profits rising from €299m to €599m in just half a decade and revenues hitting a staggering €8.1bn by the end of last year. Shareholder rewards have been hiked accordingly with dividend payouts rising from 15¢ per share in 2011 to the 68¢ per share full-year payout for 2015. Despite the continued strong performance last year, the Irish group has suffered a share price slump with Smurfit losing a quarter of its market value over the past 12 months, as growth projections come crashing down to mid-single-digits over the medium term.
The Dublin-based firm, which recently joined the mid-cap FTSE 250 index after moving its primary listing to London, posted a strong set of interim results earlier this year reporting a 28% rise in pre-tax profits for the six months to the end of June, with improved margins and good organic volume growth. Although a slowdown in growth is anticipated over the next couple of years, I still believe Smurfit offers exceptional value for investors seeking capital growth, with the shares trading at just nine times forward earnings for 2017, and a growing dividend that currently yields a respectable 3.8%.