The FTSE 250 has rocketed higher over the past couple of weeks and is now up 7.6% in the past month. It’s not quite back to the levels seen before the Middle East conflict started, but the stock market recovery has been very clear. If sentiment continues to improve, I think the rally could push ahead much more. On that basis, here are a couple of stocks that could do well.
A travel boom
First up is Saga (LSE:SAGA). The company has already been bucking the broader trend of uncertainty since March, when the market was falling. It’s now up 50% in the past three months and a whopping 362% in the past year.
The numbers over the past year look impressive, but they were based on a very low starting share price. The over-50s specialist has been through a tough period, but recent results suggest a turnaround is gaining traction. The company has swung back to profit for the first time in years, driven by strong demand for its travel division, particularly cruises.
That’s why I think it could do well in this market recovery. Travel is one of the most sentiment-sensitive sectors out there. When geopolitical tensions rise, people cancel trips. When things calm down, bookings rebound, often very quickly. Add in Saga’s restructuring efforts, including streamlining operations and reducing debt, and the case for it to outperform the FTSE 250 into the summer starts to look very compelling.
In terms of risks, debt is still high. The full-year results released earlier this month showed the leverage ratio falling, but still at 3.7x. Further, if global tensions pick up again, it could quickly reverse any travel momentum for the growth stock.
Time for a refresh
The second stock is Morgan Sindall (LSE:MGNS). The stock is up 44% in the past year. Given that this is a construction and regeneration group, some might be surprised by my pick.
When geopolitical risks fall, businesses tend to loosen the purse strings. That’s good news for construction firms tied to commercial investment cycles. If confidence keeps improving, Morgan Sindall could see a material boost to its order book and earnings forecasts.
An update last week said full-year pre-tax profits should be “significantly ahead” of previous guidance. Part of the reason behind this is a boom in office refurbishments, as businesses upgrade workspace quality in a post-pandemic world. What I like here is the combination of strong existing demand, which can be added to as companies in sectors impacted by the Middle East conflict feel more comfortable spending.
One concern is that the construction industry typically operates on very slim margins. The company’s construction division targets an operating margin of just 3.5%, so even minor cost overruns on large projects can quickly erode profitability.
Overall, I think both stocks could do well if the sentiment around the market recovery extends in the coming months. Therefore, investors who agree with my view could consider them.
