I think this FTSE 250 stock is a great buy after its 15% drop

The stock in question is Homeserve (LSE: HSV). The multinational home repairs provider is down almost 7% today, after it released its final results for the year ending 31 March 2021. 

This is a continuation of a larger trend. In the last month the FTSE 250 stock’s price has fallen 15% and about the same over the past year as well. It has seen much volatility since, even reaching multi-year highs last August, but it is essentially trending downwards. 

Why is the Homeserve share price falling?

I reckon the Homeserve share price is falling for two reasons.

One, there is a broad and prolonged rotation out of defensive shares. As the outlook for coronavirus-impacted sectors improved last year, defensive shares started looking expensive by comparison. 

Two, it does not help that the Homeserve share price is still comparatively elevated. Its price to earnings (P/E) ratio at 35 times is still quite high especially considering that its share price has fallen 28% from its highs last August. 

Strong performance

That does not take away from the stock’s credentials in my view, though. It is a financially strong company that reported 15% revenue growth for the year ending 31 March 2021 earlier today. And it has managed robust growth despite lockdowns, which made access to homes difficult. 

It has seen a plunge in statutory operating profit by a whole 55% because of a big one-off charge on eServe, its UK customer relationship management solution, which ultimately did not work out well. The charge is glaringly large at £84.8m, and has wiped out a large part of its operating profits. However, considering its financial performance over the years, I am inclined to overlook it. At least for now.

Homeserve expects to deliver an acceleration in performance next year. Considering that the global economy is expected to pick up speed through the rest of 2021, I believe in Homeserve’s forecast. Also, while there could be some come-off in demand as people return to offices, this may be more than made up for by the relaxation in lockdowns.  

More positives for the FTSE 250 stock

Homeserve also pays a dividend and currently yields 2.3%. While this is not a dividend yield that qualifies it for an income stock, it is an additional gain. After all, there are instances of growth stocks that offer little more than rock-bottom dividend yields.

And in my view, Homeserve is a growth stock. Before the unexpected happened last year, its share price had been steadily rising. In fact, if I had bought the stock five years ago, I would have more than doubled my money by now. 

My takeaway

I think these developments bode well for Homeserve. Additionally, I am fairly convinced that the stock market rally can continue, even with hiccups. This means that the likelihood of share price increase is higher than it would be in an indifferent market.

I think now is an opportunity for me to buy.