A once-in-a-decade chance to get rich from FTSE 250 stocks?

The FTSE 250 has had a weak spell, hit by the UK’s high interest rates. But I think falling inflation could trigger a new mid-cap surge.

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The FTSE 250 has been beating the FTSE 100 over the long term for decades now.

It’s been more volatile, and carries more risk with a higher weighting of smaller-cap growth shares. But its outperformance has made a lot of money for investors.

In the past year, though, the FTSE 250 has gone off the boil. And it makes me think it could offer the best value we’ve seen in the past decade.

Falling behind

Since a high point in August 2021, the FTSE 250 has fallen 20%, while the FTSE 100 is up 7%. And in the past five years, the smaller index is about 10 percentage points behind.

High interest rates tend to hit smaller firms harder. And that’s likely to be one of the reasons behind the recent poorer performance.

The Bank of England has yet to cut rates. But with inflation falling, almost everyone seems to think it has to happen soon.

And I reckon a new lower-interest spell could give our FTSE 250 stocks a new boost.

Best to buy now?

I want to examine a couple of stocks that have suffered more than most, and which both look cheap to me.

The first is ITV (LSE: ITV), whose share price is down more than 50% in the past five years.

Forecasts show strong earnings growth in the next two years, which would send the price-to-earnings (P/E) ratio falling. And we’re looking at dividend yields in excess of 8%.

2026 targets

In November’s Q3 update, CEO Carolyn McCall told us that “we remain confident in delivering our 2026 targets“. The firm also expects to get two-thirds of its revenue from its Studios and M&E digital business segments.

If the dividend doesn’t live up to hopes, that could dent the ITV share price further. But I do think this is one that can benefit from lower inflation and interest rates, which should help boost ad spend.

FY results are due in 7 March.

Sector rebound?

News of the £2.5bn Barratt Developments buyout of Redrow has livened up the house builder market. And it’s brought my eyes back to Persimmon (LSE: PSN).

The Persimmon share price has picked up in 2024, but it’s still down 40% in five years.

The firm gave us an update in January, ahead of FY results due on 12 March.

It’s been a tough year, but CEO Dean Finch still spoke of “completions ahead of expectations in 2023“. The order book for 2024 is already looking good too.

And the update also said that “build costs continue to moderate“, which is a plus.

Long term

The update pointed out that “the longer-term demand outlook for new homes remains favourable“, and that has to be key.

A business dealing with a chronic housing shortage and an excess of demand has to be a long-term buy, doesn’t it?

Again, I think the dividend is the biggest risk here. The company still has to keep costs down. And if we don’t hear good dividend news, I could see the shares staying low for a while yet.

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.

Alan Oscroft has positions in Persimmon Plc. The Motley Fool UK has recommended ITV and Redrow 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.

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