Any good investor should own the best FTSE 250 companies, in my view. Those firms with really strong fundamentals are top of my buy list.
They provide rapid growth at a time when such things are hard to come by. But choosing the right sector to invest in is key.
For fast growth
The Avon Rubber (LSE:AVON) share price has bounced (pun intended) strongly from the stock market crash in March. Now around 2,950p, the shares have not only retaken February’s peak, but surpassed the price to hit all-time highs.
Why? Well, half-year results from Avon Rubber this week confirmed what we already knew. This is the free cash flow king of all FTSE 250 companies.
Its order book inthe half to to 31 March 2020 was up 95% over 2019. Revenue was 24% higher at £94.7m. Pre-tax profits of £14.7m were 67% bigger. And earnings per share were up 64%.
In a pretty flawless balance sheet, there was one worrying figure. Net debt for the financial year is £66.9m, compared to net cash of £34.6m in the previous year. Is something rotten here? Not quite. This number is actually due to Avon’s £75m takeover of 3M’s ballistic protection business. This has proved a brilliant move by CEO Paul McDonald, adding huge sales from long-term, stable government contracts, including one worth $600m with the US Department of Defense.
As McDonald explained, both Avon Protection and its second business Milkrite “remain robust, [have] good liquidity and excellent medium-term revenue visibility“.
For economic moat
Games Workshop (LSE:GAW) has long been an outperforming portfolio star among the FTSE 250 companies I own. Despite the recent market crash, the shares are still up more than 1,000% in the last five years.
The fantasy toymaker confirmed at the start of May it had restarted online and trade sales of its vastly popular figurines. Shops have already reopened — with appropriate social distancing guidelines — in Norway, China and the Netherlands. So revenue is starting to come back into the company.
The worldwide economic shutdown has hurt Games Workshop, of that there is no doubt. CEO Kevin Rountree confirmed in a 28 April trading update that full-year profits would be down around £70m, compared to last year’s record £83m.
But to me, this means I get a cheaper entry point into a massively profitable high-margin business with zero competitors.
Take a trend advantage
Computacenter (LSE:CCC) has a lower profile than the two FTSE 250 companies above. But it has profited hugely from the Covid lockdowns, selling far more laptops and devices as more people work from home.
Looking ahead, it’s clear companies are realising that some office-based workers won’t have to return at all, so I can see this upshift in revenue continuing. In a May trading update, CEO Mike Norris said the first half of 2020 would surge “well ahead” of 2019.
“Business has accelerated, he said, “and we have managed to secure some substantial technology sourcing contracts due to our ability to scale our operations.”
Profits are strong here too. 2019 full-year results showed pre-tax profits of £140m on £5bn revenues, growing well from previous efforts. Not every investor has picked up on this trend yet, with a P/E ratio about the market average at 17.5 times earnings. I’d jump in.