Investors who haven’t tried to buy a car in Estonia or a house in Latvia might not have heard of Baltic Classifieds Group (LSE:BCG). But they might be missing out on a FTSE 250 gem.

It has a strong competitive position, outstanding margins, and generates huge returns on invested capital. That’s a lot to be excited about, meaning it’s well worth a closer look.

Just like Rightmove, Auto Trader and Indeed

Baltic Classifieds operates a group of advertising websites across Lithuania, Estonia, and Latvia. They cover property (think Rightmove), vehicles (think Auto Trader), and jobs (think Indeed).

Businesses like these can be outstanding. They don’t need much in the way of fixed assets to run, which can result in some huge margins and massive returns on invested capital.

This is the case with Baltic Classifieds. Gross margins have been above 65% for each of the last five years and this provides useful protection against the effects of inflation.

With this type of business, the biggest advantage is having more buyers and sellers than rivals. It’s an advantage that reinforces over time as more buyers attract more sellers and vice-versa.

In the case of Baltic Classifieds, each of its main platforms is at least five times the size of its nearest rival in terms of listings or visits. And in some cases, the difference is as high as 36 times.

This gives the firm a market position that should be very difficult to disrupt. So I think there’s a decent chance it will be able to maintain its impressive financial metrics for some time.

Risks

From an investment perspective, there’s a lot to like about Baltic Classifieds. But there are also some risks to consider – the most obvious being where the business is located. 

Estonia, Lithuania, and Latvia all share borders with countries involved in the ongoing war in Ukraine. The region has a history of Russian occupation.

In my view, this risk shouldn’t cause investors to dismiss the stock out of hand. But I do think they should look for it to be reflected in the share price – and it’s not obvious that it is.

The current share price implies a free cash flow yield of 2.75%, which is lower than Rightmove (3.52%) or Auto Trader (4.29%). But it arguably doesn’t reflect the elevated political risk. 

Unlike Ukraine, all three Baltic states are full members of NATO. That provides a level of defence against the risk of conflict in the region, but I don’t think investors can afford to be complacent.

The additional risk, along with a valuation premium means I’m not convinced Baltic Classifieds is a better opportunity than Rightmove or Auto Trader. But it’s definitely one for the watchlist.

Quality in the FTSE 250

Baltic Classifieds has a lot in common with some of the FTSE 100’s top growth stocks. It has outstanding economics and its leading market positions make it difficult to disrupt.

With Lithuania, Latvia, and Estonia expected to grow GDP at 2% per year, there could be more growth to come. Despite the geographic risks, investors should take a closer look.