One argument for investing in medium-sized companies is that they have more opportunities for growth than large, mature ones. Looking at the five-year performance of the FTSE 100 and FTSE 250 indexes though, this is not immediately obvious. During that time, the leading index of large blue-cap companies has grown by 14.2% while the secondary one is up just 3.6%.
Could that be because of some systemic problem with the sorts of companies seen in the FTSE 250? Or might it point to an undervaluation problem?
Quality street or dead-end alley?
Starting with the first possible explanation, there may be something to be said for the idea that the FTSE 250 contains more than a few fairly uninspiring companies.
We often talk about the index of medium-sized companies as if they are all growing and might yet enter the larger peer. But the opposite is also true. Once a company’s market capitalisation declines to the point where it no longer merits a place in the FTSE 100, it gets relegated to the ‘second division’. In this case, that is the FTSE 250.
So the FTSE 250 contains struggling former FTSE 100 members like Ocado (down 31% in the past year) and Burberry (down a whopping 64% in the past year).
Sure, there are companies with strong growth prospects in there. But it is a mixed bag.
Is there a valuation gap – and will it ever close?
That does not necessarily bother me though, as I tend to buy individual shares rather than tracker funds.
I see arguments for both approaches, but buying an individual share can sometimes mean I do well even when the index of which that share is a member fares poorly.
A number of FTSE 250 shares look undervalued relative to what I see as their long-term potential. But that does not mean those shares will necessarily move up closer to what I see as fair value. One reason is that some investors may think the shares deserve a discount given the typically smaller size of the firms in the 250 compared to their Footsie peers.
Looking for long-term value
But I see others as very promising. Take ME Group (LSE: MEGP) as an example. The operator of Photo-Me booths and similar vending machines worldwide, the company yields over 4%. Its price-to-earnings ratio of 14 looks reasonable to me given what I see as strong business growth prospects.
Last year revenues grew 5% while post-tax profit grew 11%. Operating machines that conveniently provide what people need just when they need it can be a lucrative line of business. Last year, ME Group’s net profit margin was an impressive 15%.
As we saw during the pandemic, any unexpected drop in town centre and shopping centre visitor numbers poses a significant risk to the company’s revenues and profits. But with a proven business model and limited competition, I see ME Group as a share investors should consider buying.
In the past five years, the share has more than doubled.
The post Is the FTSE 250 seriously undervalued? appeared first on The Motley Fool UK.
5 Shares for the Future of Energy
Investors who don’t own energy shares need to see this now.
Because Mark Rogers — The Motley Fool UK’s Director of Investing — sees 2 key reasons why energy is set to soar.
While sanctions slam Russian supplies, nations are also racing to achieve net zero emissions, he says. Mark believes 5 companies in particular are poised for spectacular profits.
Open this new report — 5 Shares for the Future of Energy — and discover:
Britain’s Energy Fort Knox, now controlling 30% of UK energy storage
How to potentially get paid by the weather
Electric Vehicles’ secret backdoor opportunity
One dead simple stock for the new nuclear boom
Click the button below to find out how you can get your hands on the full report now, and as a thank you for your interest, we’ll send you one of the five picks — absolutely free!
Grab your FREE Energy recommendation now
More reading
Analysts rate this Warren Buffett-owned stock a ‘Strong Buy’. Should I purchase it?
Which of these cheap dividend stocks would I buy again for passive income?
UK shares are still on sale and I think there’s investment gold out there
5.6% yield and a P/E of 7.8! Here’s why I’m watching the BT share price
With a spare £300, here are 2 top dividend shares I’m thinking of buying now
C Ruane has positions in Burberry Group Plc. The Motley Fool UK has recommended Burberry Group 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.
