After over two years of negative sentiment and downward momentum, FTSE 250 stocks are finally moving back in the right direction. The UK’s flagship growth index bore the brunt of the stock market volatility in recent years, dropping by almost 30% between August 2021 and October 2023. But since then, the situation appears to be improving.
With inflation cooling during this period, the Bank of England’s taken its foot off the pedal for now. As such, interest rates have now stabilised. And while 5.25% is significantly higher than the 0.1% enjoyed in 2021, this stability eliminates a lot of uncertainty allowing businesses to more effectively plan ahead.
As such, the business outlook’s improving, as is investor sentiment. And providing no additional spanners are thrown into the works, there’s a chance we may be looking at the start of a long-awaited new bull market.
Buy quality at a low price
It should be no surprise that buying top-notch stocks near the end of a correction or at the start of a recovery has almost always been a lucrative decision. This brief window of opportunity grants investors the possibility to open new positions or bolster existing ones at a discounted price that quickly climbs as recovery tailwinds kick in.
It’s the epitome of buying low. However, just because a stock looks cheap doesn’t necessarily mean it’s a bargain. Even panicking investors have reasons for their decision-making. Whether those reasons are justified is up to an opportunistic investor to investigate and determine.
Simply looking at a stock price chart isn’t going to cut it. A once-thriving business may now be fundamentally flawed. Don’t forget higher interest rates are a serious problem for companies that have grown complacent and dependent on debt over the last decade. As such, it’s possible for even industry leaders to find themselves losing market share as leadership teams switch their focus from expansion to survival.
Therefore, while everyone loves seeing a fantastic business on sale, it’s essential to find out whether the low price is actually a value trap.
Recoveries aren’t straight lines
Considering the power and value that recovery tailwinds can provide a portfolio, it’s hard not to get excited about the opportunities hiding in plain sight this year. However, just like during a market downturn, investors need to keep a cool head.
Recoveries can be just as volatile as corrections, especially in the early days where sentiment is rising but there continues to be a lot of scepticism. That’s why I’m using a pound-cost averaging strategy. Instead of throwing all my capital into the markets in one giant lump sum, I’m slowly drip-feeding it each month.
This approach does incur more transaction fees. However, it also enables me to benefit should the share price of a terrific enterprise suddenly take a turn for the worse. Provided that the drop in market capitalisation isn’t being driven by a thesis-breaking revelation, buying more shares at a cheaper price brings my average cost down and pushes the potential profit up.
