FTSE 250: a forgotten stock I’d buy

Britain’s medium-cap index is a platform for choosing relatively ‘unknown’ stocks to invest in. This allows me to pick potential winners to beat the market. So, this is one of those forgotten stocks that I have identified with potential to outperform FTSE 250.

Fly higher

Forget about retailers WH Smith (LSE:SMWH) has a poor history when it comes to stock performance. This is due to the outdated appearance and general lack of tidiness in a store, leading to poor footfall. This was also not helped by the pandemic, as sales decreased.

Having said that, Smith’s performance since hitting rock bottom in October last year has been nothing short of stellar. Like the rest of the travel industry, its shares have performed well and even outperformed the FTSE 250 over the last quarter.

This strong rally was also futile. Just last month, the business released its Q1 trading update, which was well received by shareholders. The group’s total sales witnessed a healthy 41% increase, with the Rest of World segment showing the best growth.

On the move

But what is most apparent is where most of WH Smith’s revenue comes from. The FTSE 250 company saw the strongest growth in sales from travel shops such as those at airports and train stations. Management has tried to shift the brand from a bookstore to more of a ‘one-stop shop’ for travel needs. This has been proven by the use of new products for travel which include various health and beauty items.

So, acceleration away from the high road will be beneficial for a number of reasons. For one, it will get rid of the store weighing down, while allowing the margin to expand. What’s more, councils can focus on opening more travel shops to capitalize on strong and growing travel demand. After all, IATA predicts that the number of passengers will reach 7.8 billion by 2040. And with the number of seats still at pre-pandemic levels, there are certainly many benefits for WH Smith.

buy expensive?

So, do I think these FTSE 250 stocks are worth investing in? Yes, the price multiples are not profitable. But given its status as a recovering growth stock, it is more important to look at forward multiples. And when considering the two-year forward P/E of 17.6, I’d say the stock is reasonably priced at its current price.

However, there is a lack of finances. WH Smith’s balance sheet is saddled with debt with barely enough cash to cover it. This is a concern that can make an investment case.

However, such brokers Barclays, JP Morgan, and Berenberg all have a ‘buy’ rating on the stock, with an average price target of £19.58. This will give you a handsome 20% increase from the current level.

I am always bullish on WH Smith’s prospects, and the move to open hundreds of new travel stores in the coming year makes it an attractive investment. So, I would like to see more of the business and financial models before starting a position. Thus, I remain on the watch list for now.