I asked ChatGPT for the cheapest FTSE 250 share and this is what it suggested…
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Value stocks can be a good addition to a portfolio. Over time, oversold companies should return to fair value, with profits taken as the share price appreciates. Within the index, there are many FTSE 250 shares can be considered valuable. I asked ChatGPT what they thought was the best option, and I was surprised by the result.
Finding information
First of all, ChatGPT didn’t understand the question. Decided to pick the stock with the lowest index price. This is a mistake, as the actual value of the share does not correspond to the cheapness. The stock may trade at 10p, but it is overvalued. So, I had to clarify with the chatbot what the value actually meant. Not a good start!
When he understood my question, he decided to make a choice B&M European Marketing (LSE:BME). As for thinking, highlight the low price-to-earnings ratio. A lower rating suggests that the market is not expecting much growth, but if earnings stabilize or recover, the rating could rise, driving share price gains.
Interestingly, it also flagged the potential of the dividend. It believes that retailers that generate stable cash flow tend to pay dividends. Although modest, the dividend yield becomes more attractive when valuations are low. This is true in the case of B&M, which has a high dividend yield of 7.82%.
The flipside
There are several reasons why I disagree with ChatGPT on this selection. It is true that on the surface, the price-to-earnings ratio is low. But using this metric alone can cause problems.
As a result, B&M’s share price has fallen by 58% over the past year. During this time, it posted repeated profit warnings and disappointing trading updates. In the latest half-year results posted in November, the group’s adjusted EBITDA fell by 30.2% compared to the same period last year. Total liabilities increased by 9.1%, with the CEO trying to calm investors by saying “We are taking serious steps to improve our retail operations and restore our financial performance.”
In my opinion, the rating is low because it does not perform well. To justify being called cheap, I have to be sure that the valuation is low but the outlook for the company is good. Therefore, the future share price does not reflect the current price. However for B&M, I think the current share price is right! So on that basis, I don’t see it as cheap.
As for the dividend yield, it is quite high. But this is the result of a sharp share price fall. Actual earnings per share have been declining over the past few years. This does not make it less valuable in choosing income. Rather, it seems untenable.
It’s rare to 100% disagree with ChatGPT, but in this case, I think it missed the mark. I could be wrong, in that income buyers have picked it up and incomes may stabilize this year, which would give people more confidence to buy. But I feel there are better stocks for investors to consider right now.
