The UK’s FTSE 250 index is full of stocks with significant return potential. In this mid-cap index, there are a lot of undiscovered gems.
Just recently, I added a stock in the FTSE 250 to my portfolio. This company looks undervalued to me, and I see the potential for returns of 40% or more over the next year to 18 months.
An under-the-radar gem
The stock I bought was Pollen Street Group (LSE: POLN). It’s a £540m market cap alternative investment manager that offers private equity and private debt strategies.
I paid around £8.90 for each of my shares in this company. Also note that I started with a small position as I like to average into stocks over time to minimise bad timing risk.
Demand for alternatives is high
I’ll get into the numbers in a minute but first I want to highlight two key factors that drew me to this stock. One was the high demand for alternative investment strategies today.
Right now, sophisticated investors such as wealth management firms, family offices, and high-net-worth individuals can’t get enough exposure to the private markets. In an effort to diversify their portfolios (and generate higher returns), they’re all scrambling to get into private equity and private debt, so Pollen Street seems to be in the right place at the right time.
Another thing that stood out to me here was the focus of Pollen’s private equity investments. Today, it’s invested in a range of innovative companies in industries such as electronic payments, wealth, insurance, tech-enabled services, and lending.
An example of a company it’s invested in is bunq. It’s the second largest neobank in the EU (with around 17m users) and the only player serving both consumers and businesses.
Undervalued today
Turning to the numbers, Pollen shares look undervalued to me. Last year, earnings per share came in at 78.8p. So, at today’s share price of £8.92, we’re looking at a price-to-earnings (P/E) ratio of 11.3. That seems low when you consider that last year, total fee-paying assets under management rose 17% (to £4bn) and earnings per share rose 27%.
I reckon this stock could potentially command a P/E ratio of 15. If the earnings multiple ratio was to rise to that level, we could be looking at share price gains of 33%.
Dividends too
It gets better though. Because this stock also pays a substantial dividend. For 2024, the dividend was 53.6p per share. Assuming we get another dividend of that size for 2025 (and we may not), the yield would be about 6%.
Add that to the 33% and we’re looking at total returns of 39%. And that’s before any earnings growth or dividend growth.
Worth a look
Now, there’s no guarantee that this stock will generate these kinds of attractive returns, of course. The financial services industry can be volatile at times and companies like this can have their ups and downs.
Taking a long-term view, however, I see a lot of potential. In my view, this FTSE 250 stock is worth a look today.
