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Two FTSE 250 names that have roughly doubled over the last six months are Spectris (LSE: SXS) and Goodwin (LSE: GDWN).
While both stocks have rallied, the drivers of each have been quite different, for two very different companies.
What’s been happening
Spectris is a precision measurement company with portfolio brands including HBK and Malvern Panalytical. The company’s valuation has surged after an all-cash takeover bid from an entity associated with KKR, which the board of directors and shareholders have backed.
The final price of £41.75 per share is almost double the pre-bid 6 June closing share price of £20.38. The stock surged after an initial offer was lobbed by Advent International. The stock is trading at £41.04 as I write on 28 October.
Goodwin’s gains have been driven by good old-fashioned fundamentals. The engineering group recently posted record trading profits of £35.5m for the year ended 30 April. That came on the back of rising revenues and strong profit margins.
Reduced net debt, promising nuclear and defence contracts, and a strong forward order book have given investors optimism.
The stock has surged again in recent days after announcing a bumper 532p per share special dividend. The company’s share price is sitting at £215 as I write, having gained 216% in six months.
Should investors consider buying?
What could go right from here? For Spectris, a firm, court-sanctioned deal would crystallise value swiftly. But once a cash offer is on the table and the shares trade near the bid price, there is limited room for share price growth. That means the return for potential gains is effectively limited to the bid price at the absolute maximum.
Institutional investors typically play in this space with significant leverage, but it’s not really a worthwhile game for the average retail investor.
If the transaction were delayed or fell through, the shares could drop significantly towards the pre-bid levels.
Goodwin, by contrast, remains driven by operational progress. The latest results showed trading profit up 47% year on year and net operating cash flow more than doubling to £58.2m alongside a robust outlook for its Mechanical division.
Clearly, there are risks to buying the stock. After the recent rally, its trailing price-to-earnings (P/E) ratio of 46 is well above the FTSE 250 average. The company also has many long-cycle, capital-intensive contracts, so future cash flows could be lumpy.
However, the strong order book and exposure in hot sectors like nuclear and defence are big positives in my view.
My verdict
Given Spectris’ gains are driven by the takeover bid rather than fundamentals, it’s not a stock that I want to be investing in right now. There may be some gains to be had but for the risk involved, I think there are better opportunities.
Goodwin, however, I think is worth considering. Patient, long-term investors who can look through some potential ups and downs through the economic cycle could purchase a really solid, cash-generative business.
There are certainly risks, but if it can continue building and converting opportunities in its strong pipeline, it’s one that I’m considering buying when I get some spare cash.
