The FTSE 250 index of companies with a mid-market capitalisation is lagging its big-brother FTSE 100 index.
At the level of around 18,470 on 4 December, the FTSE 250 is just over 19% lower than it was two years earlier. But the FTSE 100 has risen by about 4% over that period.
Companies have endured some tough economic times and investor sentiment has been poor. But those considerations don’t explain the difference in performance between the two indices.
A possible explanation is that big investment institutions tend to first go for the big-cap companies in the lead Footsie index. One reason for that might be the liquidity on offer. It’s easier to park investments measured in millions of pounds in stocks backed by large businesses.
However, that’s a weak argument because many mid-cap companies in the FTSE 250 have market capitalisations above £1bn and provide plenty of liquidity for investors. For example, names like Games Workshop, Rotork, Greggs and Moneysupermarket.Com among many others.
A low-looking valuation
Another possible reason for the lag of the mid-cap index is that it might have been over-valued before its decline. Many of the businesses in its ranks are known for having more growth potential than some of the big-cap businesses in the Footsie. And growing earnings can attract higher valuations.
But if over-valuation was the case before, it isn’t now. My data provider gives rolling forward-looking valuation figures. And they consider estimates for a company’s current trading year and one-year ahead.
On that basis, The FTSE 250 index overall has a price-to-earnings ratio of just over 12. And the anticipated dividend yield is about 4.8%.
That strikes me as being an undemanding valuation. But it doesn’t arise because all the businesses in the index are on their knees and struggling. Instead, many have issued earnings estimates and the median rolling earnings per share growth rate is around 11%.
Those are attractive numbers and suggest some cracking value contained within the index.
Investing for the long term
One simple way of playing that value and growth potential would be to invest in a FTSE 250 index tracker fund. And for part of my own portfolio, I’m doing exactly that.
But I reckon conditions are just right for aiming to beat the future performance of the index by researching individual businesses and aiming to buy and hold some of their shares. Maybe this is the kind of opportunity that only comes around once every decade or so.
Of course, there’s always risk in the stock market. And that applies even if valuations look modest. All businesses can sometimes run into difficulties.
Nevertheless, I’m working hard on my watchlist and researching FTSE 250 companies such as Vesuvius, Morgan Sindall, Premier Foods and others.
My view is it’s a great time to be a long-term investor. And I’m looking forward to 2024!
The post Why I believe the lagging FTSE 250 is a rare opportunity to buy cheap shares now appeared first on The Motley Fool UK.
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Kevin Godbold has no position in any of the shares mentioned. The Motley Fool UK has recommended Games Workshop Group Plc, Moneysupermarket.com Group Plc, and Rotork Plc. 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.
