After years of underperformance, many top FTSE 250 shares trade for next to nothing right now. Around 50% of the index’s total earnings come from the UK. Therefore, it’s suffered as economic weakness and political volatility on these shores have seen investors look elsewhere.
Bargain hunters need to exercise caution when searching for stocks to buy. Although some cheap shares have historically yielded excellent returns, their low valuations today indicate huge challenges going forwards.
With this in mind, here are two FTSE 250 stocks I think savvy investors should consider avoiding this month.
Energean
At 995p per share, fossil fuel producer Energean (LSE:ENOG) looks cheap from both an earnings and income perspective.
Its forward price-to-earnings (P/E) ratio sits at 4.4 times. Its dividend yield for this year, meanwhile, is an astonishing 10.4%.
But I’ve no plans to buy the company for my portfolio. First and foremost, Energean produces most of its natural gas from Israel, a fact which exposes investors to significant geopolitical risk.
Furthermore, its dependence on this volatile region will be even higher when the firm sells its Italian, Croatian and Egyptian assets to Carlyle Group for up to $945m.
I’m also concerned about the company’s future profits as countries step up their net zero ambitions. Oil and gas companies like this face massive uncertainty as renewable and nuclear energy sources become more popular.
On the plus side, Energean’s operational performance has been highly impressive of late. Fossil fuel production soared 49% in the first quarter, which consequently pushed revenues 43% higher. More solid news could help the company break out of its recent share price downturn.
But on balance, I think investing here remains too risky.
Diversified Energy Company
Diversified Energy Company (LSE:DEC) is another energy share I’m keen to avoid for similar reasons. But this is not my only worry about investing here.
As of December, the company had a debt mountain of $1.3bn. And to try and get this down, Diversified announced plans to slash dividends by two-thirds. More severe action could come down the tracks too if oil prices experience fresh turbulence.
However, it’s not all bad news on the dividend front. The 8.4% forward yield on Diversifed Energy shares still smashes the 3.4% average for FTSE 250 shares.
In addition, the dividend rebase will give it more capital to make acquisitions to drive earnings growth.
That said, I still believe the risks of owning the company’s shares today outweigh the potential benefits. I’m not alone in fearing for Diversified Energy either. According to shorttracker.co.uk, it’s currently the second most shorted stock on the London Stock Exchange right now.
It has short interest of 8.1%, with nine hedge funds betting against it. Funds and institutional investors are sometimes mistaken. But they tend to get it right far more often. So this vote of no confidence is a big red flag to me.
Diversified Energy’s dividend yield suggests good value. But I think there are more sensible ways to source a market-beating passive income right now,
This post was originally published on Motley Fool
