Why the FTSE 250 looks an incredible bargain

While all the attention is on the elite FTSE 100, the mid-cap FTSE 250 index looks unbelievably cheap. I don’t want to miss this opportunity in 2024!

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In July 2023, there were 1,900 businesses listed on the London stock market. The 100 largest by market value are members of the elite FTSE 100 (‘Footsie‘) index, known as blue-chip shares. The next 250 companies by size constitute the mid-cap FTSE 250 index.

Together, these two indexes make up the FTSE 350 index. And these FTSE 350 firms plus a few hundred smaller companies comprise the FTSE All-Share Index. There we have it — the London stock market in a nutshell.

What listed London looks like

Right now, the Footsie’s total market cap is £1.84bn, which is about 6.5 times the £284bn the mid-cap index is worth. Meanwhile, the FTSE All-Share weighs in at around £2.17bn, adding a further £47bn of market value from small companies to the FTSE 350.

In other words, blue-chip stocks account for around 84.8% of the entire London market’s valuation. That’s why these big players generally attract most of the media’s coverage of the UK market and its movements.

As for me, I’ve often found that when it comes to buying company shares, big is beautiful. Thus, that’s why my family portfolio includes 15 Footsie shares and seven US mega-cap stocks, but only five FTSE 250 holdings.

UK shares are dirt cheap

Writing in Bloomberg today (Tuesday, 5 December), John Stepek sets out some compelling arguments for why British shares are remarkably cheap — and mid-cap stocks especially so.

This is something I’ve said since late 2021, yet little has changed. FTSE stocks started this year cheap and end it even cheaper. That’s despite the British economy avoiding a recession, something that economists and pundits widely predicted 12 months ago.

Quoting Simon French of UK investment bank Panmure Gordon, Stepek explains that London shares have suffered from a structural ‘equity discount’ since the Brexit vote in mid-2016. As a result, in relative, absolute, and historical terms, UK stocks look cheap.

Indeed, the London market “currently trades near the bottom of its 30-year range based on price/earnings, enterprise value/EBITDA, and price/book ratios”, as Stepek and French explain.

Also, London’s earnings multiple is 10.7, against 15.4 for the rest of the world — a 30.5% discount. On another earnings rating known as EV/EBITDA, the UK’s 7.3 versus 10.2 produces a 28.4% discount. And London’s price-to-book-value of 0.8 is less than a third of the 2.5 ratio for the rest of the world.

I keep overlooking the FTSE 250

One reason that some global investors shun the Footsie is that it’s packed with ‘boring, old-world, old-school’ businesses in sectors including mining, oil & gas, banking and insurance, consumer goods, and telecoms.

Even so, I can’t help feeling that I’ve missed out by overlooking the deep value hidden inside the mid-cap index. For value investors like me, the FTSE 250 appears a bargain bin of undervalued, overlooked, and unloved stocks.

Lastly, Stepek adds that the median large-cap UK share is currently valued in the 40th percentile — below the 50 average of the last 20 years. Meanwhile, the median mid-cap share is on the 21st percentile, which is insanely cheap.

Summing up, as a hardcore value investor, the mid-cap index looks to be a magnificent bargain to me. Therefore, I aim to invest in a cheap, simple FTSE 250 tracker fund in 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.

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.

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