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With house prices currently towards the top of their historic range compared to average incomes, a buy-to-let investment may lack appeal. Furthermore, tax changes and challenges in obtaining a mortgage may mean the sector fails to deliver the high returns which it has done in previous years.
By contrast, the FTSE 250 offers a wide range of stocks that could generate high returns in the long run. There are a number of companies that currently trade on low valuations and, while they may experience challenging near-term outlooks, over the long term they could provide an improving financial outlook for their investors.
Here are two prime examples which could be worth buying today in a Stocks and Shares ISA.
Card Factory
Greetings card retailer Card Factory (LSE: CARD) is currently experiencing a period of uncertainty, with weak consumer sentiment producing challenging operating conditions for the business. Despite this, its recent trading update showed it’s performing in line with expectations, with like-for-like sales rising 1.5% and total sales up by 5.5%.
Alongside growing sales, the company plans to improve efficiency in order to strengthen profit growth potential. It’s also opening new stores as it seeks to capitalise on consumer demand for its value proposition.
Since Card Factory’s shares currently trade on a price-to-earnings (P/E) ratio of just 8.8, they seem to offer a wide margin of safety. The company’s strong cash generation is expected to lead to returns of capital to investors over the medium term, which could help to strengthen sentiment towards the business. As such, while the business faces a risky outlook, its return potential could be relatively high.
Royal Mail
Another FTSE 250 share facing a period of uncertainty is Royal Mail (LSE: RMG). Its recent updates have highlighted the challenges it faces as technological change makes using the postal service less appealing for a variety of consumers and businesses.
Alongside this, Royal Mail’s shares could be hit in the short run by continued political uncertainty. The prospect of nationalisation under a Labour government may mean investor caution increases in the short run, especially since a general election now seems very likely before the end of the year.
Despite this, the company’s valuation suggests it may offer long-term reward potential. For example, it currently trades on a P/E ratio of just 6. And, with its parcel delivery and international operations expected to generate growth in the current year, the business is forecast to grow its overall net profit in the 2020 financial year.
As such, from a risk/reward perspective, Royal Mail could hold more appeal for less risk-averse investors who are able to take a long-term view on the prospects for the company. It faces significant challenges, but they appear to be reflected in its valuation.
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Peter Stephens owns shares of Card Factory. The Motley Fool UK owns shares of Card Factory. 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.
Motley Fool UK 2019
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