Over the past decade, the FTSE 250 has climbed ahead of the FTSE 100 a couple of times. Each time, it fell back.
Mid-cap stocks were hit harder in the Covid crash. And they’re down again since high inflation set in.
Smaller stock risk
That shouldn’t be a surprise. Smaller companies generally just don’t have the same financial strength to handle those down spells. And so their risk at these times is greater.
They also tend to be more UK-focused than FTSE 100 stocks. And that adds UK-specific risk, with less of a global buffer to even it out.
That is changing, though, as the proportion of FTSE 250 revenue from overseas has been growing.
Volatile growth
In the longer term, FTSE 250 stocks have come out on top. But they’ve been more volatile. Does that mean it’s a good time to buy when the smaller index falls back in line?
I’m loath to try to time the market. But I think it can help to think in terms of valuations. So I’ll do that, with the index itself and with a stock that I think might be a prime example.
Index valuation
A number of forecasts put the FTSE 250 on a forward price-to-earnings (P/E) ratio of about 20. That’s about where it was before Covid, and way below its highs in 2021 and 2023.
We also see an average forecast dividend yield of 3.4%. And I think that’s very good for an index with more growth stocks that don’t pay dividends.
Earnings forecasts are strong now too. I see forecasts for total annual returns of betwen 8% and 10% from the index in the next 10 years. I like that.
ITV
What about my stock pick, ITV (LSE: ITV)?
The ITV share price has picked up in March, after an upbeat set of 2023 results. But it’s still down 44% in the past five years.
The forecast P/E for 2024 stands at about 12.5, which might not look that cheap. But if earnings grow as expected, it could fall to only about nine in 2025.
There’s also a 6.9% dividend yield on the cards. Forecasts show that being sustained, and increasingly covered by rising earnings.
Typical?
Why might ITV be a typical example of a cheap FTSE 250 stock?
Well, I think it’s suffered from the two key drags on the index itself. First, it’s largely UK-focused, so there’s more domestic risk.
Also, ad revenue suffers in times of high inflation. Companies just don’t want to advertise their stuff so much when people have less free cash to buy them.
Time to buy?
I do see a clear risk buying into the FTSE 250 just because the timing looks right. We’ll have more rocky rides for sure, and the next bad news could send the index down again.
I even fear that delays in cutting interest rates might be enough. And mid-cap stocks could fall again in the second half of 2024. ITV itself shares that risk, in my view.
But I do see this as a great time to look for value in individual FTSE 250 stocks, with a 10-year horizon.
The post Is this the best chance to buy cheap FTSE 250 shares in a decade? appeared first on The Motley Fool UK.
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Alan Oscroft has no position in any of the shares mentioned. The Motley Fool UK has recommended ITV. 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.
