There’s great value right now in the FTSE 250, especially in stocks like this one

Here’s why I think this FTSE 250 stock could soar in the coming years as operational progress drives higher earnings.

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According to my market data provider, the FTSE 250 mid-cap index is showing better value than its big brother, the FTSE 100 large-cap index.

For example, on Friday (12 January), the Footsie’s median rolling dividend yield was 3.5% and the FTSE 250’s was a chunkier 4.5%.

Meanwhile, the median rolling price-to-earnings ratio of the FTSE 100 was around 13.8, but the FTSE 250 looks cheaper at 3.1.

That situation strikes me as being unusual. The mid-cap index is known to have a stronger leaning towards growth than the Footsie, and growth usually attracts a higher valuation.

Meanwhile, the large-cap index is known to be good at supplying dividends and less able to deliver growth. So I’d expect the yield to be higher and the earnings multiple to be keener than the FTSE 250’s.

My conclusion is that select companies within the FTSE 250 index are likely displaying good value right now compared to their growth prospects. All we need do now is find them!

An attractive operating model

One decent candidate for consideration is housebuilding company Vistry (LSE: VTY).

The business stands out among the cohort of builders on the UK stock market because of its attractive, “high-growth, asset-light” operating model.

The company is focusing its operations “fully” on partnerships with other organisations such as local authorities, housing associations and other public sector organisations.

Such development opportunities help the company to deliver new affordable housing and value for the partner organisations involved. Often, such arrangements attract grant funding, which helps to make Vistry’s investment commitments efficient.

We’re talking about schemes ranging from complete estate regeneration through to new-build projects. The set-ups between Vistry and its partners enable the sharing of risks and rewards.

In today’s 2023 trading update, the company said it’s securing “high quality” partnership development opportunities targeting revenue growth of between 5% and 8% a year.

If Vistry can keep up that rate of growth in the coming years, the stock could make a steady investment from where it is today.

A fair valuation

Forward sales are up 12.4% year on year. The directors reckon that position augurs well for a step-up in total completions for 2024. Meanwhile, the easing of mortgage rates in recent weeks is “encouraging”. The directors are “optimistic” the lower rates will help stimulate demand this year.

It’s no secret that housebuilders suffered reversals in 2023 with many seeing plunging earnings, including Vistry. However, City analysts have pencilled in a modest mid-single-digit percentage rebound in 2024. On top of that, they expect a 15% hike in the shareholder dividend.

Set against those expectations and with the share price near 995p, the forward-looking earnings multiple for 2024 is around 11. The anticipated dividend yield is almost 4.9%.

I see that valuation as undemanding. However, there are risks. The most prominent one is the cyclicality in the business and the sector. As we’ve seen recently, general economic events can derail the company’s business at times.

Nevertheless, I see Vistry as a decent candidate for further research with a view to holding the stock for multiple years ahead.

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 no position in any of the shares mentioned. 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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