Two cheap stocks in the FTSE 250 that have caught my eye are Capita Group (LSE:CPI) and Biffa (LSE:BIFF). But both are cheap for a reason and therefore come with considerable risk.
Cheap stocks weigh risk vs reward
Capita Group is a consulting, digital services and software business. Since Carillion collapsed in 2018, the outsourcing sector has been suffering. Capita comes under this banner and has not escaped the backlash. Prior to the pandemic hitting, it endured a string of profit warnings. Under new leadership, it’s now aiming to win higher quality and more lucrative tech contracts, as well as streamlining assets.
Its AXELOS division is a joint venture with the UK government’s cabinet office. Capita has confirmed it’s in talks to review and potentially sell AXELOS. This is to help streamline the business and keep it afloat as its share price has been hammered by the pandemic. It already completed the sale of its education services business (ESS) earlier this month, and the proceeds are being used to pay down the balance sheet.
The Capita share price has fallen 94% in five years. It’s down 73% in the past year, and its share price has experienced considerable volatility during this time.
The FTSE 250 company recently signed a contract to provide training services to the Royal Navy and the Royal Marines. And in December it secured a two-year contract extension with the Ministry of Defence (MoD) to recruit for the British Army.
Capita’s price-to-earnings ratio (P/E) is just 2. Warren Buffett considers anything under 10 to be in the value category so this certainly shows a cheap share. But cheap is only a bargain if it can go the distance and recover. Earnings per share are 18p, and the company doesn’t offer a dividend.
Capita has close ties to the UK government and British establishment. For instance, it collects the BBC TV licence fees. However, it has a 94% debt ratio, which is clearly unattractive. Nevertheless, it’s trying to pay this down by trimming assets, so it looks as if there’s room for a strengthening balance sheet and share price growth in the future. Despite all its problems, I think it will overcome them and I’d be happy to invest in Capita.
Sustainable investing
The Biffa share price is down 21% in a year. It’s a waste management company that’s suffered from losses due to so many public spaces being closed. However, as the country reopens, I imagine revenues will rise again. It spent £40m on acquisitions between June and November. It also intends to spend the same again on green infrastructure. Biffa has a P/E of 12 with EPS of 18p.
Its Q3 trading update released in January showed resilience with better than expected results. The company opened a state-of-the-art plastic recycling plant in Seaham a year ago. Biffa aims to quadruple its plastic recycling capabilities by 2030 and recently partnered with Nestlé Waters UK to provide it with bottles made from recycled British plastic.
Sustainability and a green agenda is on every government’s radar at the moment, so I think this is a good sector to be investing in.
These are both high-risk cheap stocks, but I’d consider adding them to my Stocks and Shares ISA as long-term investments. I think they both have a good chance of survival and growth ahead.