FTSE 250 bargains

The first company on my list is the buy-to-let specialist lender OSB Group (LSE: OSB). Thanks to the growing demand for financial products, the company reported in August that pre-tax profits for the first half of its financial year more than doubled. Based on this growth, City analysts believe the stock is trading at a forward price-to-earnings (P/E) multiple of just 6.4. 

As well as this attractive valuation, shares in OSB support a dividend yield of 4.2%. 

As the country continues to recover from the pandemic, I think challenger banks like OSB should see a strong recovery in earnings and sales. That is why I would snap up shares in the lender today while they are trading at a discount multiple. 

As we advance, the group may face risks, including higher costs and competition for custom from other lenders. 

Shares to buy for growth 

I would also acquire Premier Foods (LSE: PFD) for my portfolio of dirt-cheap FTSE 250 shares. This company is currently experiencing bumper demand for its food products.

Full-year adjusted pre-tax profit is expected to be at the top end of its expectations after sales grew 6.3% in the first quarter of its financial year. Its international business also appears to be growing at a rapid clip. Sales increased 17%, compared to 2019 levels in the first quarter. 

After making a substantial dent in its pension and debt obligations last year, the company now has more money to spend on marketing and product innovation. I think this clearly shows in the recent results. 

Based on growth expectations, the stock is trading at a forward P/E of 9.6, which I think looks cheap compared to the company’s potential. That is why I would buy the stock. 

Some challenges it could face going forward include inflationary pressures on wages and ingredients, as well as competition. 

Global champion 

The final company I would buy from my portfolio of FTSE 250 shares is the global ingredients group Tate & Lyle (LSE: TATE). 

Earlier this year, Tate completed the sale of a controlling stake in its primary products business for $1.3bn. The transaction essentially broke the group apart.

The remaining business is focused on food and beverage solutions designed to make food taste better and healthier. This is a faster-growing global market than the legacy division. 

The company is looking to return £500m to investors through a special dividend, and the rest of the proceeds will be used to reduce debt. 

Despite the transformative deal, the stock is selling at a P/E of 11.9. That looks too cheap to me, especially considering the organisation’s growth potential over the next few years. 

Risks the company may encounter going forward include cost and ingredients inflation as well as competition in the food additives business. All of these challenges could prove to be a drag on earnings growth. 

My preference is to aim for a mix of both, so my portfolio delivers yield and dividend growth that’s above the market average. The three companies I’m looking at today are stocks I’ve picked for dividend growth, but they still offer decent yields too.

Still the best?

FTSE 100 consumer goods group Unilever (LSE: ULVR) is a popular choice for investors wanting income and growth. 

The Anglo-Dutch group’s dividend has risen every year for more than 50 years, thanks to popular brands like Hellmann’s and Lipton. Since 2015, the payout has grown by an average of 7% each year.

Although Unilever shares have fallen by 5% over the last year, the stock has outperformed the market over the last five years.

I’ve been using the recent weakness to buy this dividend growth stock. In my view, the stock’s current dividend yield of 3.4% should be a decent entry point for a long-term holding.

The main risk I can see is that Unilever could struggle to develop successful new brands without sacrificing its profit margins. I don’t know how likely this is, but in my view Unilever’s 150-year history suggests the company will probably continue to adapt and evolve.

Make mine a double

Drinks companies are generally considered to be pretty defensive businesses. Even during recessions, people still keep buying their favourite tipple. One company I own in this sector is Stock Spirits Group (LSE: STCK). This group’s largest markets are Poland — where it has a 31% share of the vodka market — and the Czech Republic.

Stock’s revenue fell only 3% last year, despite the widespread closure of restaurants and bars. This suggests to me customers stayed loyal to Stock’s brands when they were stuck at home.

One concern I have is that the company’s strategy includes growing by acquisition. Not all of its previous deals have delivered good value for money. However, the current management team has promised to stay focused on its core markets, which should reduce this risk.

Stock’s dividend has grown by an average of 10% per year since 2015. The shares currently trade on 15 times forecast earnings, with a 3.1% yield. I recently added to my holding and view the stock as a buy at current levels.

An overlooked dividend growth stock?

My final pick is FTSE 250 banking stock OSB Group (LSE: OSB). Formerly known as OneSavings Bank, OSB is a specialist lender that does most of its business with buy-to-let landlords.

In my experience, smaller specialist banks are often more profitable than the big high street names. That seems to be true here. OSB’s return on equity has averaged more than 20% since 2016, compared to 5% for high street giant Lloyds.

OSB’s dividend has risen by an average of 11% per year since 2015. Lloyds payout has fallen over the same period.

Of course, being smaller and more specialised has risks. If the housing market crashes, OSB could see a sharp rise in the number of borrowers unable to repay their loans. The bank wouldn’t have any other line of business to offset these losses.

Even so, I think OSB’s 4% dividend yield looks pretty safe. This year’s payout should be covered three times by earnings. That looks sensible to me, so I’d be happy to buy.

However, this isn’t always guaranteed. As such, the strategy might not be suitable for all investors.

Still, I’m comfortable with the level of risk and research required to find the right sort of businesses. And with that in mind, here are two cheap UK shares I’d buy for my portfolio today. 

Cheap UK shares

The first company on my list is Reach (LSE: RCH). The publisher, which owns a broad selection of titles, including the Mirror and Daily Express newspapers, is navigating a challenging operating environment. 

Newspaper sales were already sliding before the pandemic and, over the past 12 months, this trend has only accelerated. But Reach hasn’t stood still. The company has been investing heavily in its online operation. As a result, this division is growing rapidly, offsetting some of the declines in the newspaper business. 

According to the company’s latest trading update, in the first four months of 2021, digital revenue grew 35%, while total print revenue was down 10.4%, and circulation eased 7.9%. Thanks to the booming digital business, overall revenues declined just 3.1%.

Reach is targeting further growth. It had 6.2m site registrations at the end of April and wants to take that to 10m by 2022. It’s also slashing costs in an attempt to improve profitability.

Based on current City growth estimates, the stock is trading at a forward price-to-earnings (P/E) multiple of 6.9. Even after taking into account all of the company’s problems, that looks cheap to me. 

Therefore, I’d buy Reach as part of my basket of cheap UK shares, even though the company is facing a significant challenge from falling print revenues. 

Rising home prices 

As well as Reach, I’d buy challenger bank OSB (LSE: OSB) for my portfolio of cheap UK shares. This company specialises in mortgage lending, particularly buy-to-let mortgage lending.

Thanks to the strong UK housing market, borrower demand has been robust over the past 12 months. According to the company’s latest trading update, underlying net loans and advances were up 3% in the three months to March 31 to £19.6bn. For the year as a whole, City analysts reckon the group will report earnings growth of around 30%.

Based on these projections, the stock is trading at a forward P/E of less than 8. I think this multiple looks cheap.

The company is also committed to paying out 25% of its earnings as a dividend. So, on that basis, the shares could yield 3.8% this year, although that’s just a forecast at this stage. 

The most considerable risk the lender faces is the threat of a housing market slump. This could start with an interest rate hike, which may lead to loan losses at the bank. In this scenario, OSB may have to revisit its dividend plans. In addition, earnings may also come in below expectations, leading to a drop in the share price. 

Still, even after taking these risks into account, I’d buy the lender for my portfolio of cheap UK shares today. 

FTSE 250 stocks to buy

The first company on my list is challenger bank OSB (LSE: OSB). I think this lending and savings business should see an increase in the demand for its services as the economy reopens. Consumer and business confidence is growing, and this could translate into higher borrowing demand.

City analysts believe the group’s earnings will increase 23% this year and 12% in 2022. These are just forecasts at this stage, but I think they show its potential for the years ahead. 

There’s always going to be a risk that the FTSE 250 business will not meet growth expectations. Another wave of coronavirus or a sudden increase in interest rates may reduce demand for borrowing. This would have a negative impact on growth. 

Despite the above risks, I’d buy the stock for my portfolio as an economic recovery play. 

Turnaround opportunity

Unlike many other FTSE 250 companies, Serco (LSE: SRP) grew its earnings last year. A string of new government contracts helped the group report a net profit of £134m in 2020, up from £50m in 2019.

After struggling with falling sales and rising losses between 2015 and 2017, that year of growth was precisely what the company needed. It has been able to use these profits to reduce net debt and invest in the business. 

With this tailwind, I think the group’s well-positioned to capitalise on the economic recovery in the months and years ahead.

That said, Serco is still haunted by low-profit margins and a mixed reputation among customers, so it might not suit all investors. Indeed, its past troubles show just how quickly fortunes can change. When losses hit £155m in 2015, shares in the company crashed nearly 60%. 

Even after taking this risk into account, I’d buy the FTSE 250 stock for my portfolio today. 

Jobs recovery 

The UK jobs market is starting to recover. I think an excellent way to invest in this recovery is to buy a recruiter such as Hays (LSE: HAS). 

Recruiters are incredibly cyclical businesses. They can achieve large profits when the economy is booming. However, they’re usually the first to feel the pain of an economic downturn. This means they may not be suitable for all investors. They can be much more volatile investments than other blue-chip stocks. 

The company’s profits plunged last year, falling more than 50% from 2019 levels. However, analysts are expecting a recovery by 2022. Profits could more than double from 2020 levels by 2022, according to current forecasts. 

As such, it could be some time before investors are rewarded for their patience. But, as a way to invest in the global jobs recovery, I’d buy Hays for my portfolio of FTSE 250 stocks. 

A great company in a battered industry

Vistry Group (LSE: VTY) represents a great opportunity for investors, in my opinion. The value of shares across housebuilders has been buffeted by the imposed lockdown. Undoubtedly it will hit sales for some time to come. For the bigger housebuilders though, balance sheets should survive once this is over. There’ll be opportunities to gain market share and new plots to build on.

The government will still be committed to levelling up the regions of the UK. There’s also a systemic imbalance between supply and demand in the UK housing market that favours the builders. This situation is unlikely to change even if the number of houses being built rises.

Vistry Group is the combination of the former Bovis Homes and Linden Homes, which was acquired from Galliford Try. I think this increased scale will give it opportunities to grow in the future.

A challenger in a traditional industry

OneSavings Bank (LSE: OSB) is another company that’s scaled up, the bank completing its acquisition of Charter Court Financial Services in October 2019.

Although coronavirus will have a massive impact on banks, looking longer term, there are reasons for optimism. OneSavings is likely to make it through this crisis as it’s well capitalised. The bank’s capital base has been designed to weather a significant deterioration in credit conditions and loan quality.

The broker Numis forecasts 2020 pre-tax profit will still be £310m. Down slightly on 2019, this is still above where it was in 2018. The b0ttom line tells us this is a profitable business.

I think the share price has fallen too far. The shares trade on a P/E of less than four, so there could be significant upside when markets recover. The net asset value of the shares is 332p versus a current share price around 220p. 

People will keep gambling

Shares in William Hill (LSE: WMH) are at 10-year lows. With sporting events cancelled until who-knows-when, this is understandable. It makes the shares very cheap and, I think, good value.

Management moved quickly to conserve cash by cutting the dividend. The impact of coronavirus will certainly be felt by the business, especially in the US, an area where it was looking to grow before the virus struck.

Despite the challenges of £2 limits on fixed-odds betting terminals in UK shops, William Hill was trading ahead of expectations before the virus. In February, it announced full-year net revenues of £1.6bn, down just 2% year-on-year. That’s despite the regulatory challenges. Online is another area where it can grow and the lockdown might help it grow that part of the business. 

I believe with its valuation now so low, the shares offer long-term recovery potential.

You might therefore be tempted to invest in one of the ‘challenger banks’ snapping at their heels instead.

OneSavings Bank

Savings and mortgage provider OneSavings Bank (LSE: OSB) operates in selected sub-sectors of the mortgage market through brands such as Kent Reliance, Precise Mortgages, Prestige, Interbay and Heritable, which offer their products through brokers, rather than directly to customers. It also offers retail savings accounts.

The OneSavings share price is flat after today’s Q3 trading update, despite a 15% rise in the loan book over nine months. Investors were possibly more concerned about net interest margins, which are expected to be broadly flat for the full year.

Recent acquisition Charter Court Financial Services Group posted loan growth of 4%, and is aiming for the high 20s this year, but saw a slight dip in net asset margins. CEO Andy Golding hailed continuing strong performance from both groups despite the “continued uncertain macroeconomic and political outlook”, although I can see why investors aren’t falling over themselves with excitement today. 

Near-zero interest rates are squeezing bank net lending margins, although happily, margins at OneSavings are currently market-leading. The stock is down a disappointing 12% over two years, although up 75% if measured over five. Could it be ripe for a comeback?

We could be looking at a real bargain here, with a valuation of just 6.2 times forward earnings. The forecast yield of 4.2% is generously covered 3.8 times, giving scope for progression. Earnings growth could disappoint if the economy slows, hitting demand and boosting debt impairments, but at today’s price it looks hard to resist.

Barclays

FTSE 100 listed Barclays (LSE: BARC) is a £30bn big beast, even if it used to be bigger, with the share price trading 25% lower than five years ago.

I have repeatedly highlighted Barclays as a bargain acquisition, but I’m still waiting for it to deliver on all that promise. It is still incredibly cheap, at 7.5 times forward earnings, which are forecast to rise 123% this year. The price-to-book value is just 0.5, well below the figure of 1 that is usually seen as fair value. 

The Barclays share price has also been driven upwards in recent weeks by hopes of a Brexit resolution, although there is the small matter of an election first. Thankfully, PPI is now more or less in the past. The scandal has cost the bank £11.2bn.

Barclays is re-establishing itself as an income stock, with a forecast yield of 5.2%, covered 2.4 times. Its investment bank has been hampered by reduced client activity, lower volatility and a smaller banking fee pool, and is under pressure from activist investors. The group has also been hit by falling margins on its residential mortgage business.

A global slowdown would hurt, driving up debt impairments and further squeezing lending margins. Despite all that, Barclays is still difficult to resist at today’s low price, but be warned, I’ve said that about this stock before.

It was forced to go cap in hand to investors for additional equity in each of the last three years to shore up its capital levels. This has effectively diluted existing investors’ share of company profits. More worrying though is the fact that aren’t any profits to dilute anyway.

Unprofitable 

The bank reported a £5m loss for the third quarter after rising costs and a deteriorating net interest margin. And this comes after customers pulled out £2bn in deposits (13% of the total) in the first half of the year.

As well as an equity raise earlier this year, Metro Bank more recently raised debt in the form of high-yielding bonds with a coupon rate of 9.5%. While this will help to meet its capital requirements, it means that interest costs will eat into future operating profits at a time when the company is already struggling with profitability.

Taking all of this into account, I expect the bank to report a loss for the full year and struggle to see how it will return to profitability in 2020. Metro Bank has some serious underlying profitability issues that need to be addressed, and if I was a shareholder, I reckon I’d sell out and put my money to better use.

A better option

Sticking with challenger banks, I think One Savings Bank (LSE: OSB) is a much better company to invest in.

In the last month, it has completed a combination with Charter Court Financial Services Group, that brings together two specialist mortgage providers, with growing loan books and lean cost structures.

As standalone banks, financial performance was impressive. Revenues at One Savings have more than doubled from £125m in 2014, to £287m last year, with after-tax profits rising from £51m to £140m over the same period. Over at Charter Court, after-tax profits have more than tripled in just two years, from £37m in 2016, to £120m in 2018.

This financial performance is underpinned by strong banking metrics. Both boast industry-leading net interest margins and cost-to-income ratios of under 30%, while return on equity is over 20% at both.

Post-combination, the company should be even stronger. Management believes that there will be additional operating and cost synergies as a result of the merger, which has the potential to improve operating models that are already very good. Cost savings from the merger are expected to be in the region of £22m a year, for the first few years. The combination should also make it easier to raise finance, as well as reduce the cost of debt.

With the combined group’s shares priced at just over six times last year’s earnings, I think they look remarkably cheap, considering growth prospects and profitability. A dividend payout of 25% of after-tax profits and a yield of over 4% is the icing on the cake for me.

Housing prices are expected to enjoy an uptick if a deal is worked out between the two sides that avoids this most undesirable outcome. Foreign demand would be hard hit in the event of a no-deal Brexit. Fortunately, factors like a supply shortage and historically low mortgage rates are serving as a buffer for the broader market.

Stocks linked to housing may look like a dicey proposition to many investors ahead of Brexit. OneSavings Bank (LSE: OSB) is a mortgage-focused specialist lending and retail savings group and its shares have dropped 19.6% year-on-year. The stock managed to reach 52-week highs in mid-April, but has since succumbed to broader headwinds. Is there any reason for optimism ahead of October 31?

Mortgage lenders have faced headwinds due to an intense price war that has emerged in 2019. Increased competition and new regulation have seen banks commit to riskier methods. This includes lending out a greater amount of mortgage deals with loan-to-value (LTV) ratios up to 95%.

OSB had managed to avoid the worst impacts of the price war due to its specialised lending business, but its net interest margin (NIM) dropped to 2.78% in the first six months of 2019. This is compared to 3.01% at the same time in 2018. It has said that the trend in NIM had “largely run its course” and has bumped up its full-year forecasts for loan growth. OSB’s underlying profit before taxes rose 6% year-on-year to £96.9m in H1 2019 and underlying basic earnings per share increased 5% to 29p.

The bank was explicit in its warnings about Brexit in its first-half earnings report. OSB said that the broader housing market was “subdued” by Brexit concerns and anxiety over the state of the global economy. However, it reiterated its confidence that its underwriting business would be able to weather a substantial increase in market risk.

Why I’m high on OSB right now

The summer sell-off at OSB appears overdone to me, even after its post-earnings share bump. The shares still boast a favourable price-to-earnings ratio of 6.1. OSB stock spent the first half of August in technically oversold territory, but it has rebounded after its earnings report. Income investors can also bank its solid 4.4% dividend yield.

Brexit is an ever-present concern, but OSB is better prepared than most in its sector to wade through the potential storm. Its stock has fallen off sharply since the spring but is well-positioned to rebound on the back of improved forecasts in the back half of 2019. I’m looking to buy-low in the late summer.

Usually, when a stock’s valuation drops to this level, it is a sign that something is wrong with the business, and the market is avoiding the company because it believes earnings are going to fall substantially.

We can’t predict the future, so at this stage, it is impossible to tell if this is the case, but based on what we know today, OneSavings is still expanding. 

Results show growth

According to the bank’s interim earnings report for the six months ended 30 June, underlying profit before tax increased 6% in the first half of 2019 to £96.9m. Underlying basic earnings per share increased 5% to 29p.

Even though the lender’s net interest margin — the difference between what it pays out to depositors and receives from lenders — declined from 301 basis points (bps) to 278bps year-on-year, the group was able to report an increase in profitability thanks to net loan book growth of 10% “driven by 13% growth in organic originations with high demand across our core market segments.“

Management doesn’t expect this trend to come to an end any time soon, even with Brexit on the horizon. “Despite ongoing uncertainty around Brexit,” the trading update notes, given the strong growth already achieved this year and the “current strong pipeline” of loan applications, the company expects to “deliver high-teens net loan book growth in 2019 at attractive margins.” 

Merger of equals

OneSavings’ management believes the company’s all-share merger with Charter Court Financial Services Group plc (LSE: CCFS), which received approval from shareholders at the end of July, will only bolster growth.

Charter and OneSavings both offer relatively similar credit products. They specialise in buy-to-let mortgages and specialist residential lending. Considering the growth in OneSavings’ loan book during the first half of 2019 looks as if the demand for these products is moving.

Charter also reported strong lending growth during the first half of the year. The company grew its loan book 23.8% to £7bn on originations of £1.5bn. Unfortunately, profits dipped slightly, from £93m to £83m for the six months ending 30 June, due to higher costs associated with the merger. 

Boost to growth 

While OneSavings’ takeover of its smaller rival still has to receive the green light from regulators, I think the deal will be an excellent outcome for shareholders of both businesses. By combining, the two challenger banks should be able to reduce operating costs, funding costs and improve efficiency, leading to overall increased profitability.

Right now, shares in both businesses are dealing at forward P/Es of less than six and support dividend yields of 5.2%. In my opinion, these multiples undervalue the companies and their prospects, and I would be quite happy to buy both of these FTSE 250 income stocks for my portfolio today.

However, right now, shares in the business are trading at such a low valuation that I think investors buying today could pocket substantial profits even though Dixons’s earnings are not expected to return to growth perhaps until 2021.

Indeed, at the time of writing, shares in the company are changing hands at a forward P/E ratio of around 5 compared to the market average of 12.7. This implies that when growth returns, the stock could rise 100% from current levels. Granted, it is going to be some time before turnaround starts to bear fruit. Last week the firm said it expects to report overall headline profit before tax for the current year of £210m, down from £298m last year. Nevertheless, management seems confident that growth will return in the second half of the next decade. 

In the meantime, shares in this consumer electronics business will pay a dividend of 6.75p per share this year, giving a dividend yield of 6% at current prices. 

Surging profits

Another undervalued FTSE 250 stock that I think could double from current levels is OneSavings Bank (LSE: OSB). This challenger bank has carved out a niche for itself in the buy-to-let lending market over the past nine years. As the company has won over new customers with its refreshing lending proposition, net profit has increased at a compound annual rate of 39% since 2013, rising from £27m to £140m for 2018. City analysts are expecting this trend to continue for the next two years. Net profit is expected to hit £172m in 2020, which implies the bank will report earnings per share of 65.8p for the year, giving a 2020 PE of 5.8.

In my opinion, this valuation severely undervalues the bank and its prospects. Considering OneSavings is one of the fastest growing banks in the UK, I think it deserves a premium valuation to the rest of the banking sector, which is currently dealing at a median P/E multiple of 7.6.

And as well as the discount valuation, the stock supports a dividend yield of 4.4%, which analysts believe will hit 5% in 2020 as the group increases its distribution to shareholders in line with earnings growth.

Boring but essential

TI Fluid Systems (LSE: TIFS) isn’t the most exciting business on the market, but when it comes to undervalued growth, this company looks to me to be a steal. The firm manufactures fluid storage, carrying and delivery systems primarily for vehicles, and over the past few years, revenues have increased at a compound annual rate of 7%.

Net profit has risen from just €13.4m in 2014 to €138m for 2018 and City analysts are expecting the group to report €151m of net profit in 2019. However, despite this explosive growth, shares in the company are currently dealing at what I believe to be a discount valuation of just 6.4 times forward earnings.

On top of this attractive multiple, the stock supports a dividend yield of 4.5%, which analysts believe will increase to 4.8% next year with scope to rise above 5% by 2021 as management continues to hike the dividend in line with earnings growth. The payout is covered 3.3 times by earnings per share, leaving plenty of room for further increases in the years ahead as well.