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£2k to invest? I’d buy this FTSE 250 growth stock and FTSE 100 falling knife Centrica

Harvey Jones
Saucepan on a gas hob

Home repairs business Homeserve (LSE: HSV) is cementing its reputation as one of the fastest-growing stocks on the FTSE 250, jumping more than 6% this morning after posting a rise in interim revenues and setting its sights on further expansion in the US.

Up and down

The Homeserve share price is up a stonking 238% over the past five years, and with a market cap of £4.27bn, it is knocking on the door of the FTSE 100. It’s only slightly smaller than British Gas owner Centrica (LSE: CNA), which is clinging on to its place in the FTSE 100, after seeing its share price fall 50% over the last year alone.

Homeserve is a momentum stock that seems to have further to run, while Centrica is a falling knife that just won’t stop. Both look tempting, but for opposing reasons.

Homeserve’s revenues jumped 13% to £457.7m in the six months to 30 September, while statutory profit before tax climbed 2% to £19.7m. In North America, continued profitable growth saw customer numbers rise 13% to 4.2m and adjusted operating profit jump 24% to $23.4m. The group has now acquired a controlling stake in US-based home experts business eLocal for around $140m.

Its core business is home assistance membership in the UK, US, France and Spain, which offers protection against an unexpected plumbing, heating or electrical emergency. It therefore appeals to risk-averse customers, who I suspect are also relatively older and financially solid, giving protection against a downturn.

Some like it hot

Homeserve aims to underpin its growth with strong cash generation and a robust balance sheet, and it has maintained its progressive dividend policy, hiking the dividend 12% to 5.8p today, which reflects “continued confidence in the group’s growth prospects”. The current forward yield is 2%, covered 1.7 times.

The danger is that Homeserve is priced for growth, trading at 28.1 times forward earnings, so any setbacks could knock that. However, earnings are forecast to grow 9% this year and 11% next. It looks like a buy to me, especially if we get a correction at any point.

Things are so bad at Centrica, by contrast, that it has been selling off as much of its business as it can, including its stakes in wind farms, power stations, nuclear plants and oil and gas firm Spirit Energy, while taking an axe to costs. 

In July, it reported a pre-tax loss of £446m for the six months to June, down from a £704m profit the year before, so nobody was surprised by the whopping 60% dividend cut.

Risky bargain buy

The Centrica share price peaked at 400p over five years ago, but today you can pick it up at just 75p, around 10 times forward earnings. On the positive side, City analysts reckon those earnings could rise 36% next year.

By then, the forward yield will be 6.9%, covered 1.9 times by forecast earnings (despite that 60% cut). The group is looking to deliver more stable, streamlined earnings and a more resilient balance sheet. If it can manage that, now could be a good time to buy, although you need to be brave given the punishment Centrica has dished out to shareholders lately. 

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Harvey Jones has no position in any of the shares mentioned. The Motley Fool UK has recommended Homeserve. 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