After years of underperformance FTSE250 Shares are currently trading for next to nothing. Around 50% of the index’s total returns come from the UK, so it has suffered as economic weakness and political volatility in those countries have prompted investors to look elsewhere.
Bargain hunters need to be cautious when looking for stocks to buy. Although some cheap stocks have produced excellent returns in the past, their low valuations today suggest they face major challenges in the future.
With that in mind, here are two FTSE 250 stocks that I think savvy investors should avoid this month.
Energy
At 995 pence per share, fossil fuel producer Energy (LSE:ENOG) appears attractive from both a yield and income perspective.
The price-earnings ratio (P/E) is 4.4. The dividend yield for this year is an astonishing 10.4%.
However, I do not plan to buy the company for my portfolio. First and foremost, Energean produces most of its natural gas in Israel, which exposes investors to significant geopolitical risk.
In addition, the company’s dependence on this volatile region will increase even further when it sells its assets in Italy, Croatia and Egypt to the Carlyle Group for up to $945 million.
I’m also concerned about the company’s future profits as countries step up their net zero ambitions. Oil and gas companies like this one face massive uncertainties as renewable and nuclear energy sources become more popular.
On the positive side, Energean has shown very impressive operating performance recently, with fossil fuel production increasing 49% in the first quarter, driving revenue up 43%. More positive news could help the company break out of its recent share price decline.
But overall, I still think investing here is too risky.
Diversified energy company
Diversified energy company (LSE:DEC) is another energy stock I’d like to avoid for similar reasons. But that’s not my only concern about investing here.
In December, the company had a debt of $1.3 billion. And to reduce this, Diversified announced plans to cut dividends by two-thirds. If there is new turbulence in oil prices, even more drastic measures could follow.
It’s not all bad news on the dividend front, though. The 8.4% forward yield on Diversified Energy shares still beats the 3.4% average for FTSE 250 stocks.
In addition, the dividend adjustment will give the company more capital for acquisitions that are intended to drive earnings growth.
However, I still believe that the risks associated with owning the company’s shares today outweigh the potential benefits. And I’m not the only one who fears for Diversified Energy. According to shorttracker.co.uk, it is currently the second most shorted stock on the London Stock Exchange at the moment.
There is a short interest of 8.1%, and nine hedge funds are betting against it. Funds and institutional investors are sometimes wrong. But they are right much more often. So this vote of no confidence is a big warning signal for me.
Diversified Energy’s dividend yield suggests good value for money, but I think there are more sensible ways to generate market-beating passive income right now.
The post “2 cheap FTSE 250 dividend stocks I’ll avoid like the plague in July!” appeared first on The Motley Fool UK.
Further reading
Royston Wild does not own any of the stocks mentioned. The Motley Fool UK does not own any of the stocks mentioned. The views expressed in this article about the companies mentioned in this article are those of the author and as such 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 2024
