Are these the best FTSE 250 stocks to watch in May 2024?

Despite having risen by 1.8% year-to-date to 19,855 points, the FTSE 250 index continue to outperform alternative index choices including the S&P 500 and tech-heavy NASDAQ 100 in 2024. The FTSE 100’s little brother is arguably an indicator of the UK’s wider economy, which continues to remain on an uncertain trajectory.

Naturally, where there’s uncertainty there is often opportunity — with certain FTSE 250 shares in the spotlight recently for arguably good news.

FTSE 250 macroeconomics

In terms of the wider picture, CPI inflation has now fallen to 3.4% and is expected to fall below 2% within the next few months. However, strong wage data and relatively low unemployment means inflation could start to rise again later on this year — and the base rate remains at a relatively elevated 5.25%.

While Bank of England Governor Andrew Bailey recently advised that rate cuts are ‘on the way,’ language from the US Federal Reserve appears perhaps a little more hawkish after strong than expected employment numbers. Further, JP Morgan CEO Jamie Dimon has just warned that interest rates stateside could rise to ‘8% or even higher’ in the coming years in his annual letter to shareholders.

The surge of the so-called ‘magnificent seven’ is perhaps also relevant — as the largest US tech stocks continue to rise, they are swallowing ever more investor capital. However, should this prove to be a bubble that eventually bursts, value stocks on the FTSE 250 could benefit over the longer run.

And of course, the UK just entered a new tax year — with new ISA and SIPP allowances.

Best FTSE 250 stocks to watch

These shares have been selected for recent market news.

1. Future PLC
2. Royal Mail
3. Carnival
4. Direct Line
5. JD Wetherspoon

Future PLC

Future PLC's recently released trading statement saw the company report that ‘expected revenue improvement to the Q4 2023 exit rate has continued, resulting in a return to organic revenue growth in Q2 for the Group.’

The long-awaited return to growth was driven by a strong performance by the Go Compare brand, B2B, and magazines. However, Future continues to contend with challenges in affiliate products and digital advertising given the wider macroeconomic pressures.

But its Growth Acceleration Strategy appears to be working, and there has been a ‘stronger performance in US direct advertising.’ Overall, the company is now highly cash generative, with cash conversion in the past six months described as strong. This leaves Future on track to deliver on previously set out positive expectations for FY24.

Shore Capital analyst Roddy Davidson noted that with Future’s valuation at 4.8 times earnings and a 0.6% yield as "anomalously low and leaves it vulnerable" to being taken over. Meanwhile, Panmure Gordon’s Jessica Pok noted that the company is showing ‘encouraging sings’ and the shares ‘, trading on 5x FY25E PE, continue to look attractive.’

Royal Mail

Royal Mail shares are down sharply over the past three years, but a significant part of the business’s woes is tied up in the universal service obligation, which is the minimum service level that must be provided by Royal Mail for letter deliveries set out by legislation.

The current obligation is for the company to deliver letters six days a week, and parcels five days a week — to every address in the UK, at affordable uniform prices.

Royal Mail’s parent International Distribution Services is calling for second-class post to be delivered only every other weekday, and further that more ‘realistic’ speed targets could be introduced from April 2025. These changes would not require legislative change.

OFCOM has now acknowledged that the obligation ‘risks becoming financially and operationally unsustainable in the long term’ especially as letter sending has dramatically decreased over the past decade or so. The regulator notes that the net cost to Royal Mail was between £325 million and £675 million in 2021/22.

For context, Royal Mail made an operating loss of £1 billion last year — and OFCOM plans to provide an update on the proposals in the summer.

Carnival

Carnival recently saw Q1 revenues hit a record $5.4 billion and reported an all-time high of booking levels. This has seen the stock rise by more than 50% over the past year, but it also announced in the earnings call that it expects a $10 million hit as a result of the Baltimore bridge collapse disaster.

Specifically, this is because it will need to change its homeport — it noted ‘our guidance does not include the current estimated impact of up to $10 million on both adjusted EBITDA and adjusted net income for the full year 2024.’

However, this setback may prove temporary both in terms of operations and share price, as Carnival continues to expect record revenues and EBITDA for the full year.

At the end of 2023, CEO Josh Weinstein enthused that the company ‘entered the year with the best booked position we have ever seen, and now have nearly two-thirds of our occupancy already on the books for 2024, at considerably higher prices (in constant currency).’

Direct Line

Direct Line shares are now flat year-to-date after losing much of its gains due to a takeover approach from Belgian insurer Ageas — which has now decided not to make a further takeover offer.

For context, Ageas had made two bids, both of which were rejected by Direct Line’s board. Ageas CEO Hans de Cuyper noted that he is ‘convinced that given the circumstances we took the right decision not to make an offer, staying true to who we are and what we stand for in terms of maintaining a friendly approach and respecting our financial discipline.’

The initial bid, comprised of cash and shares, had an implied value of 231p per share of Direct Line — and the second was for 237p, worth some £3.17 billion.

However, Ageas was ‘not able to identify additional elements based on publicly available information that would justify significant adjustments to the terms of its possible offer.’ But further offers from alternative bidders may come, and at the least, the interest has highlighted a potential value disconnect.

JD Wetherspoon

JD Wetherspoon's half-year results may not have been warmly welcomed by the market, perhaps due to narrow margins on sales. For context, while margins improved from 4.1% to 6.6%, this remains below 7.1% pre-pandemic margins amid a desire to remain a value offering.

And debt increased by 5% year-over-year to £1.11 billion, while free cash flow fell to an outflow of 4.9p per share compared to an inflow of 132.4p last year. This was attributed to payments owed to entities including the tax office and suppliers.

But operating profit was up by 81% year-over-year to £67.7 million, while revenue increased by 8.2% to £991 million and like-for-like sales rose by 9.9%.

CEO Tim Martin notes that ‘the company currently anticipates a reasonable outcome for the financial year, subject to our future sales performance.’

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