It’s been a volatile start of the year for stock markets. When volatility does strike, I look to see if there are any bargain buys in the indexes, such as the FTSE 250. There are currently 211 stocks in this index that have fallen so far this year, so I may find a company that’s been oversold.
Here’s one that I’d buy today as a long-term investor.
A FTSE 250 stock that looks oversold
The company I’ve been looking at is Homeserve (LSE: HSV), a provider of home repair services across the US and Europe. It offers a subscription service to customers for emergency repairs. In addition, the company also owns platforms such as Checkatrade that connects tradespeoples to homeowners.
Overall performance at the company looks to be improving. For example, Homeserve is expected to achieve an adjusted net income margin of 11.5% in fiscal year 2022 (FY22, the 12 months to 31 March 2022). This would be an improvement on the 8.7% net income margin it achieved in FY21.
Revenue for FY22 is also forecast to increase by over 9%. This is great to see as a potential shareholder: growing revenue and improving profit margins. There’s a good chance that the share price will rise if this continues!
However, the share price has done exactly the opposite recently. Over one year, the stock has plunged 29%. The FTSE 250 has dipped by almost 0.4% across this time, so the Homeserve share price has significantly underperformed.
The reason is the valuation. Based on a forward price-to-earnings (P/E) ratio, Homeserve is valued on a multiple of 14 today. This time last year the stock was trading on a P/E of 19. And before the pandemic, the P/E multiple was an even higher 30.
So, although the overall financial performance of the business looks to be improving, investors have been willing to pay less for Homeserve shares recently. This could be a sign that the stock has been oversold as markets have fallen this year.
Why I’m buying as a long-term investor
Another reason why a company’s valuation can decline is due to uncertainty about its future. I think this has been another factor that has led to the underperformance of Homeserve shares. Indeed, the company is undergoing a “transformation plan to stabilise its UK business and return it to growth”. This is a key risk for the business as the UK is its most established market. In fact, operating profit across Homeserve’s UK business fell over 10% in FY21 compared to the prior year.
Things are starting to improve though. In the most recent half-year results to 30 September, operating profit across the UK grew by 3% over the same period in 2020. Homeserve also said: “There has been good early progress on initiatives to transform and broaden the UK business”.
The investment here isn’t without risk. However, I like the early signs of improvement with Homeserve’s UK business. The overall performance, particularly in the key North American market, has been excellent, too.
Taking everything into account, I do think Homeserve has been oversold recently. I also view the risks for its UK business as having been fully priced into the share price. Therefore, I’d buy the stock today as a long-term investor.