When times get tough, sometimes focus goes to the centre of things and less attention is paid to the margins. That can also be true in the stock market. The FTSE 250 index of medium-sized companies often does not get the same attention as its big brother the FTSE 100.
But I think that can present me with an interesting chance as an investor.
After all, if shares fall in popularity but the underlying businesses remain strong, that could present me with a buying opportunity. In fact, I would be happy to start drip-feeding money into FTSE 250 shares today on a regular basis.
Here’s why.
Variable businesses, mixed investor sentiment
To illustrate, consider the five biggest FTSE 250 businesses.
They are Intermediate Capital (up 18% this year), Persimmon (down 8% this year), Games Workshop (up 19% this year), Hiscox (down 9% this year) and Spectris (up 8% this year).
Over the long run, performance is equally mixed. Intermediate Capital and Spectris are up 40% and 5% respectively in five years while Games Workshop has more than tripled. But Persimmon has lost 45% and Hiscox 37%.
In other words, even at the top end of the index, share price performance has been mixed.
At the bottom end (in terms of size), things look even starker. The five smallest FTSE 250 firms are CAB Payments, CLS Holdings, Liontrust Asset Management, 888 Holdings and Mobico. All five shares are in the red so far this year.
Three (CAB, Liontrust and Mobico) have lost over half their value. On a five-year timeframe (or, if applicable, since listing under five years ago), all five shares have fallen in value.
Hunting for bargains
Partly that is explained by statistics, in fairness. As companies lose value, their market capitalisation shrinks so they fall down the ranking within the FTSE 250 by market cap.
But I think the bigger picture here is also interesting. Both at the top and bottom end of the index, many companies have seen their valuations contract.
Yet in some cases they look like good businesses to me.
Games Workshop’s share price rise speaks for itself. But what about Hiscox, for example? It had a positive trading statement last week that pointed to excellent trading in Europe.
Likewise, I own Persimmon in my portfolio precisely because I think its share price undervalues its long-term prospects, despite the risk of a housing market downturn further hurting profits.
Why I’d invest — today
In fact I think there are quite a few bargain FTSE 250 companies hiding in plain sight right now.
Falling prices could give me an opportunity to snap up what I see as a strong business at a good price: Topps Tiles is one such FTSE 250 stock I have bought for my portfolio this year.
If I had a spare £300 per month, I would happily drip-feed it into a diversified range of carefully selected FTSE 250 shares where I see a mismatch between the current price and longer term business prospects. Today’s market opportunities may not last forever — so I would like to seize them while I can.
