Why I believe the lagging FTSE 250 is a rare opportunity to buy cheap shares now

The FTSE 250 is showing some attractive numbers and they suggest some cracking value among businesses listed in the index.

The content of this article was relevant at the time of publishing. Circumstances change continuously and caution should therefore be exercised when relying upon any content contained within this article.

Young woman working at modern office. Technical price graph and indicator, red and green candlestick chart and stock trading computer screen background.

Image source: Getty Images

When investing, your capital is at risk. The value of your investments can go down as well as up and you may get back less than you put in.

Read More

The content of this article is provided for information purposes only and is not intended to be, nor does it constitute, any form of personal advice. Investments in a currency other than sterling are exposed to currency exchange risk. Currency exchange rates are constantly changing, which may affect the value of the investment in sterling terms. You could lose money in sterling even if the stock price rises in the currency of origin. Stocks listed on overseas exchanges may be subject to additional dealing and exchange rate charges, and may have other tax implications, and may not provide the same, or any, regulatory protection as in the UK.

You’re reading a free article with opinions that may differ from The Motley Fool’s Premium Investing Services. Become a Motley Fool member today to get instant access to our top analyst recommendations, in-depth research, investing resources, and more. Learn More.

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!

Should you invest, the value of your investment may rise or fall and your capital is at risk. Before investing, your individual circumstances should be assessed. Consider taking independent financial advice.

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.

More on Investing Articles

Mature couple at the beach
Investing Articles

Here’s how I’d aim to get rich investing £89 a week in FTSE 100 shares

Putting under a hundred pounds a week into FTSE 100 shares, here's how our writer would aim to build a…

Read more »

Investing Articles

Could this beaten-down UK growth stock be the next Rolls-Royce?

Mark Hartley feels Rolls shares have had their time and are running out of steam. Now he’s searching for the…

Read more »

Person holding magnifying glass over important document, reading the small print
Investing Articles

Down 10% in a month! What’s gone wrong with the BAE Systems share price?

Harvey Jones suspected all was going a bit too well for the BAE Systems share price. Things went wrong immediately…

Read more »

Young Asian man drinking coffee at home and looking at his phone
Investing Articles

Are BT shares still a bargain after climbing 30%?

BT shares are finally showing signs of life after years in the doldrums. Harvey Jones thinks this may point to…

Read more »

Investing Articles

£10k in an ISA? Here’s how I’d aim to generate a ton of passive income

I dream of escaping the shackles of a salary with financial independence and a steady stream of passive income. Here’s…

Read more »

Investing Articles

Are Burberry shares a bargain or a value trap?

Appearances can be misleading in the stock market. Shares that look like a bargain can turn out to be a…

Read more »

Investing Articles

How I’d target £17,673 passive income with just £100 a week

Our Foolish writer explains how he’d build a portfolio capable of generating a life-changing passive income with limited capital.

Read more »

Middle-aged white man wearing glasses, staring into space over the top of his laptop in a coffee shop
Investing Articles

If I’d put £20k into a FTSE All-Share tracker fund 10 years ago, here’s what I’d have now

A lot of UK investors have money in FTSE All-Share tracker funds. Here, Edward Sheldon looks at how these products…

Read more »