Growth stocks have an important place in my portfolio. Since I hope to have many decades left in my investing journey, it’s worth trying to identify companies with significant potential to turbocharge my long-term stock market gains. Buying steady dividend shares alone won’t cut the mustard.
However, not all growth stocks are created equal. Some might appear attractive at first glance, but on closer inspection, they raise too many red flags. After all, risk and reward are two sides of the same coin.
With that in mind, here are a couple of FTSE 250 stocks that I’m avoiding today.
Ocado Group
Once a FTSE 100 darling, Ocado Group (LSE:OCDO) was relegated to the FTSE 250 index last year. Frankly, the grocery technology business has endured a disastrous stock market performance lately. Ocado’s share price is down nearly 79% over five years.
The investment case for this growth stock sounds compelling on the surface. Ocado’s core offering — robotics and automation — has significant potential to boost supply chain efficiency. In the low-margin grocery sector, that’s an appealing proposition.
Plus, Ocado Retail has been Britain’s fastest-growing grocer for 11 successive months, according to Kantar. In FY24, this joint venture with Marks and Spencer delivered a 13.9% revenue improvement and expanded active customer numbers by 12.1%.
However, legal trouble’s brewing for the online food tie-up. M&S is withholding payment of a final instalment worth £190m due to Ocado’s failure to meet performance targets.
Ocado’s stated that it will consider using “all contractual or legal means” to maximise the amount payable if an amicable solution can’t be reached. Considering the firm’s never turned a profit and pre-tax losses were £374m last year, it can ill afford protracted litigation against a close partner.
With job cuts on the agenda and slower growth expected for the group’s technology solutions division in FY25, it’s hard to see the catalyst for an Ocado share price recovery. There’s no clear rationale for me to risk my money on the shares today.
Wizz Air
Another FTSE 250 growth stock I’m sidestepping is low-cost carrier Wizz Air Holdings (LSE:WIZZ). At £14.60, the airline’s current share price is almost exactly where it was a decade ago.
A strategy to capture market share via aggressive expansion makes Wizz Air a disruptive force in the airline industry. On the bright side, a substantial order book and robust balance sheet bolster the investment case.
That said, the share price faces further turbulence ahead. Problems with Pratt & Whitney engines, which the firm uses for its aircraft, mean 40 planes will remain grounded until 2026. That’s nearly 20% of its fleet. The result has been two profit warnings in six months, hammering investor confidence.
Furthermore, the addition of more exotic routes in Wizz Air’s expansion drive has come at a cost. For instance, the budget airline’s exposure to wars in Gaza and Ukraine has curtailed growth.
The business also doesn’t compare favourably to its rivals on some critical metrics. Wizz Air has negative free cash flow, whereas both easyJet and IAG boast positive figures. It’s also the only one of the trio that doesn’t pay a dividend. For me, this growth stock carries too much risk for too little reward.
This post was originally published on Motley Fool
