2 top FTSE 250 stocks for the next bull market

Girl showing thumb up, excited about upcoming shopping

It hasn’t been a great year for FTSE 250 shares. The mid-cap index fell by 11% over the past year, while its large-cap sibling, the FTSE 100, gained 8%.

That wide difference is largely due to their composition. The FTSE 100 holds several energy and defensive companies, both of which have performed well.

Meanwhile, the FTSE 250 holds many retailers and travel shares, both of which tend to suffer in a recessionary environment.

But today, I’m looking to the future. I’m searching for shares to buy for the next bull market. Recessions come and go, but eventually growth will pick up and many shares that have performed poorly this year could do well in the coming years.

Finding the best shares

There are several factors I’d consider when looking for the best shares to buy. First, I only want to own high-quality businesses with double-digit profit margins.

Like hugely successful investor Warren Buffett, I’d also look for companies with a ‘moat’. That means they must have a competitive advantage, like a unique product or a popular brand.

Companies that are currently growing their earnings are preferable. But equally, I’d be interested in new products or services that could lead to higher sales in the future.

Balance sheet strength is important. I’d like to own companies with low levels of debt and plenty of cash flow.

FTSE 250 top pick

That leads me to companies that look well-positioned for the next bull market. At the top of my list is fantasy miniatures business Games Workshop (LSE:GAW). This is a well-run business that aims to survive forever. That long-term goal results in a conservatively managed firm that has a keen eye on longevity.

A word of warning, however. As the cost of living continues to rise, many people might find they have less spare cash to spend on hobbies like this. Rising manufacturing costs might also put some pressure on margins.

That said, it operates some strong brands and customers are unlikely to go elsewhere. Also, Games Workshop is a high-margin business, even when faced with greater costs. That’s why I’d consider buying it, and I’ve added it to my watchlist.

A star retailer

Next, I’d look at Dunelm (LSE:DNLM). This homewares retailer is growing market share ahead of its competitors. In turn, that has led to sales that are 40% higher than pre-Covid levels.

A strategy of developing its digital offering is paying off too. Digital sales are more than two-and-a-half times higher than pre-Covid levels.

But it’s never just about sales. Profits are important too. So it’s great to see that Dunelm operates with a double-digit profit margin that has gradually climbed over several years.

That said, tightening customer finances could still impact sales and profits over the coming months. How this share performs during a recession is uncertain. Also, a new CEO takes the lead early next year, which could mean further uncertainty.

Overall though, this FTSE 250 retailer looks like a quality share to me. It has a return on capital employed of over 40%, a 6% dividend yield and a price-to-earnings ratio of just 11 times. That’s a cracking combination, and I’d consider buying it this year.

The post 2 top FTSE 250 stocks for the next bull market appeared first on The Motley Fool UK.

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Harshil Patel has no position in any of the shares mentioned. The Motley Fool UK has recommended Games Workshop. Views expressed on the companies mentioned in this article are those of the writer and therefore may differ from the official recommendations we make in our subscription services such as Share Advisor, Hidden Winners and Pro. Here at The Motley Fool we believe that considering a diverse range of insights makes us better investors.