Historically, there’s a reason to believe the FTSE 250 could do well in the coming years. Following periods of high interest rates, the mid-cap index typically fares well once they go down again.
With the first cuts already administered this year, now may be the time. Here, I examine why this happens and what stocks to consider.
Debt allocation
Debt’s a necessary part of any business but it can be used in different ways. Smaller companies commonly use debt primarily to fund operations until they turn enough profit to pay it off. Whereas larger, more established firms often balance debt and equity to maximise their market value and reduce tax obligations.
When interest rates soar, smaller companies with lots of debt can struggle to make payments. This strangles their finances, making it hard to grow the business or even remain solvent. But when interest rates drop, those who survived suddenly have lots of spare cash to play with.
With interest rates set to fall, I think these two FTSE 250 companies could stand to benefit.
Computacenter
I’ve been getting more bullish about the UK tech industry lately. For decades, we’ve lagged behind the US despite trailblazing the development of computers in the 20th century.
Established in 1981, Computacenter‘s (LSE: CCC) relatively old for a tech company with only a £3bn market-cap. It’s also highly established, with 20,000 employees working in offices around the world.
After a slump in 2022, sales recovered 11.3% in 2023, pushing gross profit to a record-breaking £1bn. With strong cash flows expected to continue, the shares are estimated to be undervalued by almost 50%. It has a price-to-earnings (P/E) ratio of 15.3, slightly below the industry average of 20.
One risk is that businesses are increasingly adopting low-cost AI for their customer service and IT management needs. Computacenter must meet that demand or lose out. But considering it was named ‘AI Transformation Partner of the Year’ at the Dell Technologies UK Partner Awards 2024, I think it’s already ahead of the game.
That’s why I plan to buy the shares this month before they take off.
Ocado
Down 61%, Ocado‘s (LSE:OCDO) one of the worst-performing shares on the FTSE 250 over the past year. The company operates high-tech customer fulfilment centres (CFCs) that deliver goods for retailers such as Marks & Spencer. On the face of things, it’s a good company with excellent tech and a host of high-value partnerships.
But years of high inflation hit the company hard. It carries a heavy debt load of £1.48bn, slightly more than its £1.37bn in equity. Since late 2022, equity’s been falling while debt rises — not an ideal situation.
However, more recently, it looks like a recovery could be on the cards. In its half-year 2024 results, revenue was up 12.6% and it reduced its losses before tax by 46.8%. It remains unprofitable but earnings per share (EPS) rose from a 29p a share loss to only a 17p loss.
It still has lots of work to do but falling interest rates could certainly help it better manage its debt. I’m not planning to buy the shares today as I think the price could still fall further. But for the first time this year, I’m optimistic about its long-term prospects.
This post was originally published on Motley Fool
