Even though the FTSE 250 recently hit fresh 52-week highs, it doesn’t mean that all constituents are doing well. In fact, there are a couple of value stocks that are down 13% over the past month. Given the sharp divergence from the index performance, does this represent a buying option or a red flag?
In need of repair
The first company is Crest Nicholson (LSE:CRST). It’s one of the leading property developers in the UK. over the past year, the stock is down 14%.
The property sector in general has endured a tough couple of years, ever since interest rates started to rise and inflation surged. Higher inflation means that it’s a lot more costly to build properties. At the same time, high interest rates makes it harder for people to get a mortgage and afford to buy a property.
A 14% fall in the past year has compounded the 55% drop over a broader three-year period. This is why I flag it up as a value stock. The property market is cyclical. Over the next couple of years, I expect interest rates to fall and economic growth to increase. This should support higher demand for housing and better financial results for Crest Nicholson.
However, the firm has also been hit recently with building defects that could cost £15m to fix. Therefore, even though I like the sector in general, I’d prefer to buy a different homebuilder from the FTSE 100 or FTSE 250 that has fewer company-specific issues.
A value stock I like
The second underperformer is Octopus Renewables Infrastructure Trust (LSE:ORIT). The fund aims to provide generous dividend income by investing in a diversified portfolio of renewable energy assets. This isn’t just in the UK, but rather the portfolio includes sites across Europe and even Australia.
Over the past year, the stock is down 29%. I should note that the share price movements are different to the net asset value (NAV) movements of the fund. So the share price is currently trading at a 33% discount to the last reported NAV. This is where I think the value lies going forward.
The fall in the stock can be attributed to what the 2023 annual report noted as “a challenging backdrop both for the asset class and the investment trust sector as a whole.” Lower power prices are also to blame. Risks remain, but there’s nothing I note that should have caused such a large reaction in the share price over the year.
On that basis, I think that the trust is a smart value buy to consider. I’m also influenced by the 8.14% dividend yield. Given the focus of the trust on paying out income, I don’t see this under immediate threat of being cut. Therefore, I can look to benefit from the high yield while waiting patiently for a recover in the stock. I’m thinking about buying the trust now, but staying away from Crest Nicholson.
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Jon Smith has no position in any of the shares mentioned. The Motley Fool UK has no position in any of the shares mentioned. Views expressed on the companies mentioned in this article are those of the writer and therefore may differ from the official recommendations we make in our subscription services such as Share Advisor, Hidden Winners and Pro. Here at The Motley Fool we believe that considering a diverse range of insights makes us better investors.
