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Best FTSE 250 shares to watch in May 2023

National Express, easyJet, and JD Wetherspoon could be the three best FTSE 250 shares to watch next month.

ftse Source: Bloomberg

The FTSE 100 is a more popular instrument than the FTSE 250. The UK’s senior index boasts multiple globally important companies — oil majors BP and Shell, banks HSBC and Barclays, and miners including Glencore and BHP.

However, FTSE Russell notes that 82% of FTSE 100 companies’ income is derived from overseas, leaving the index relatively underexposed to the domestic UK economy. Instead, crises like the Ukraine War or Silicon Valley Bank collapse affect it far more.

FTSE 250: domestically focused

By contrast, the FTSE 250 is packed with businesses which are predominantly reliant on UK PLC. And there’s been continued mixed economic news this year. Most importantly, CPI inflation rose from 10.1% in February to 10.4% in March — and while a 0.3% rise may seem irrelevant, most analysts had expected inflation to fall below the symbolic 10% level.

Now the Bank of England will almost certainly increase the base rate from the current 4.25%, and markets are pricing in further rate rises to 5%. While the Office for Budget Responsibility considers that inflation will fall to 2.9% by the end of the year, this may now be too optimistic given the timeframe left.

The other big story is the tax burden — which is at its highest since WWII. Amid multiple strikes and a severe cost-of-living crisis, corporation tax has risen from 19% to 25% for larger companies, dividend tax has increased while the dividend allowance has fallen, the Capital Gains allowance has decreased, the super-deduction has been scrapped in favour of a far less favourable scheme, income tax bands are frozen...

And the UK’s largest companies are starting to be affected.

ARM, the country’s most successful tech story, is listing in the States. AstraZeneca, our most successful pharmaceutical company, is building its new million state-of-the-art manufacturing plant in the Republic of Ireland — a direct result of uncompetitive taxation policy.

CRH, Flutter Entertainment, and even Shell are, or are planning on listing stateside, the latter stung by windfall taxes that are sending investment plunging in the North Sea. Legal & General CEO Nigel Wilson has called the country a ‘low growth, low productivity, low wage economy,’ while Marks & Spencer CEO Stuart Machin considers London to be on ‘life support’ after tax-free shopping was scrapped for foreign visitors.

Multiple bodies are arguing that UK growth will lag behind the rest of the G20 — and while predictions are not guarantees, there’s no denying that many UK companies are under fire. All this makes picking the best FTSE 250 stocks somewhat of a challenge.

However, where there’s risk, there’s opportunity.

Best FTSE 250 stocks

1. National Express (LON: NEX)

National Express shares were worth as much as 476p per-pandemic before national lockdowns sent it sharply south — and it remains depressed at just 119p today.

In recent Q1 results, revenues jumped by 17% on a constant currency basis to £774.4 million, ‘reflecting an overall performance in line with expectations.’ The company saw solid contract wins in North America, including in its Transit, Shuffle, and School Bus sectors.

Further, NEX has seen a ‘strong recovery’ in UK coach and German rail. While the UK bus operation was hit by the six-day driver strike, it’s still seeing ‘continued passenger growth’ amid a 27% increase in revenue in the key market.

Better still, scheduled coach revenue rose by 87% year-over-year in the country — while the bus strikes saw a settlement ‘higher than expected,’ the settlement was achieved relatively quickly, and the company can now benefit from the continued chaos in rail.

CEO Ignacio Garat enthuses that ‘we have launched a wide-ranging productivity improvement and cost-reduction programme that will start to deliver benefits in the second half of this year. That initiative will also help to ensure we deploy the right resource most efficiently across the business and capitalise on the significant opportunities for growth that we face.’

2. easyJet (LON: EZJ)

easyJet shares have soared by 48% year-to-date as the airline benefits from a strong quarterly update bolstered by record reported airport activity since the start of the pandemic. It's also worth noting that both Thomas Cook and Monarch were unable to survive the pandemic, so the FTSE 250 airline is fighting with remaining rivals for an even larger slice of the market share.

Q1 revenue increased by 83% to £1.47 billion, while the company’s headline loss before tax was just £133 million, a substantial improvement over the £213 million loss suffered in the same quarter last year. Meanwhile, net det debt fell to £1.1 billion, and the FTSE 250 company expects that the full year will see an overall swing to profit.

CEO Johan Lundgren notes that EZJ has seen ‘strong and sustained demand for travel over the first quarter, carrying almost 50% more customers compared with last year. This strong booking performance, aided by the airline's step changed revenue capability, has driven an £80m year on year boost in the first quarter.’

However, interest rates are rising, fuel costs have doubled, and the FTSE 250 company was forced to raise £5.5 billion in share sales and loans through the pandemic.

3. JD Wetherspoon (LON: JDW)

JD Wetherspoon shares have shot up by 57% year-to-date to 709p. The FTSE 250 pub operator saw like-for-like sales in the most recent half rise by 5% compared to the pre-pandemic H1 2019, and by 13% compared to H1 2022.

Moreover, Wetherspoon flipped to a profit before tax of £4.6 million — far from the £50.3 million profit of 2019, but a welcome result when compared to the £26.1 million loss of 2022. Moreover, net debt has fallen by £176.5 million to £743.9 million. These positive figures are helping the company’s investor base to recover, and more share price growth could be ahead.

Of course, there is high inflation and a cost of living crisis. Labour and stock costs are rising, and no company is immune to reduced customer discretionary spending. But outspoken CEO Tim Martin is ‘cautiously optimistic’ for the budget value company’s near-term prospects, especially given that the traditionally busier summer season is upon us.

The CEO’s campaign for VAT tax parity with supermarkets could also yield results as the hospitality sector is weaned off energy bill support.

The information on this page does not contain a record of our trading prices, or an offer of, or solicitation for, a transaction in any financial instrument. IG Bank S.A. accepts no responsibility for any use that may be made of these comments and for any consequences that result. No representation or warranty is given as to the accuracy or completeness of this information. Consequently any person acting on it does so entirely at their own risk. Any research provided does not have regard to the specific investment objectives, financial situation and needs of any specific person who may receive it and as such is considered to be a marketing communication. Although we are not specifically constrained from dealing ahead of our recommendations we do not seek to take advantage of them before they are provided to our clients. See full non-independent research disclaimer.

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