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2 cheap FTSE 250 shares! Should investors buy these much-loved stocks?

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Image source: Getty Images

I’m searching for the best FTSE 250 value shares to buy. And I’m looking at more than just earnings multiples and other popular metrics to find them. Many low-cost London Stock Exchange shares are classic investment traps.

Analyst George Sweeney of investment app Freetrade sums up these dangers perfectly. He notes that “sometimes you get what you pay for. Cheap UK stocks aren’t always great, and a great UK stock isn’t always cheap.”

The following FTSE 250 shares are among the 10 most popular value stocks with investors using Freetrade’s platform. Each carries a rock-bottom price-to-earnings (P/E) multiple and price-to-book (P/B) ratio.

But should I buy them for my portfolio today?

Direct Line Insurance Group

Freetrade’s analyst says that Direct Line Insurance Group (LSE:DLG) “is best known for a few brands like Privilege, Green Flag, and Churchill (remember the nodding bulldog?)” And he adds that “these days it’s the P/B ratio of 1.1 and the P/E ratio of 10.4 times (plus a high dividend yield) that has some value investors nodding along too.”

Sweeney is right to highlight the company’s popular line of brands. They command exceptional customer loyalty, thanks to their high satisfaction scores. The Direct Line brand topped price comparison site Finder’s customer satisfaction tables as recently as 2021.

However, as a potential investor, I’m very concerned about high cost inflation and what this means for company profits. Direct Line is attempting to pass elevated costs onto its customers in the form of higher premiums. But this is having an impact as adjusted gross premiums reversed 3.5% between January and September.

The business took the drastic step of scrapping dividends earlier this week too, due to rising motor claim inflation and elevated claims levels in December.

Some economists expect inflationary pressures to remain elevated in the UK for some time too. So I’m avoiding insurers like this for the time being.

Marks & Spencer Group

Sweeney says that 139-year-old retailer Marks & Spencer (LSE:MKS)fits the UK value stock bill quite nicely.” He notes that the FTSE 250 firm has “a solid brand name with a decent-sized market-cap” and looks “relatively cheap” compared to the FTSE 100’s other major grocers

M&S trades on a forward P/E ratio of 7.7 times. This is lower than Tesco’s corresponding multiple of 18.3 times and J Sainsbury’s reading of 9.1 times, the analyst notes. Marks and Spencer also carries a P/B ratio of just 0.8.

I think the retailer could perform more robustly than its rivals over the short-to-medium term. Its regular customer base tends to be more affluent, meaning demand for its goods could remain stable even during the cost-of-living crisis.

But I’m not tempted to invest in M&S shares either today. It still has major work to improve its brand appeal with younger fashion consumers. And it also faces major competition in the grocery category as other supermarkets invest heavily in their premium ranges.

I think there are better cheap stocks for me to choose from.

The post 2 cheap FTSE 250 shares! Should investors buy these much-loved stocks? appeared first on The Motley Fool UK.

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Royston Wild has no position in any of the shares mentioned. The Motley Fool UK has recommended J Sainsbury Plc and Tesco Plc. 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 2023