Here’s why I think FTSE 250 shares are dirt cheap now

After a couple of years of falls, I reckon there are some overlooked growth stock bargains hiding away in the FTSE 250.

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Have you been seen what the FTSE 250 has done in the past few years? I have, and I like it.

Since a peak in August 2021 at over 24,000 points, the mid-cap index has fallen well short of the FTSE 100. It lost 16%, while the main London index gained 17%.

The biggest stocks have beaten the smaller ones in terms of share price growth, and that goes against the trend.

Over the long term, the FTSE 100 has been growing at about 7% per year on average. The FTSE 250, meanwhile, has been managing close to 11%.

Ups and downs

Saying that, anyone investing for the long term should expect short-term pain sometimes — like that 16% drop in the smaller index since 2021. And both indexes fell hard in the 2020 stock market crash.

The big question is… will the stock market get back on trend, and is the FTSE 250 set for a new period of outperformance?

I think there’s a very good chance of it.

Saying that, it’s very possible that the outperformance was a quirk of the past few decades, and the two indexes could move in step in the coming years.

But why would growth stock investors buy smaller stocks if they don’t expect better growth than from mature blue chips?

Bullish on growth

That’s one reason I’m bullish about the FTSE 250 for the next deacade. When inflation settles and interest rates fall, I can see a resurgence in growth investing on the UK stock market.

So what possible growth stock bargains do I see out there? Plenty, and I’ll pick Telecom Plus (LSE: TEP) as an example.

The firm operates under the Utility Warehouse brand, and provides combined utilities including telecoms.

Over the past five years, the share price is up 25%. But it was a lot higher in 2022, and it went through a previous boom-and-bust cycle that peaked in 2014.

Growth stock volatility

Big ups and downs are part and parcel of investing in growth stocks. And I’d never buy one unless I knew I could handle them.

And, since launch, Telecom Plus shares are up 700% — while the index has gained 190%.

Forecasts put earnings per share (EPS) growth at 37% between 2023 and 2026. We’re waiting for 2024 results, but the latest update said that “adjusted pre-tax profits for FY24 are expected to be towards the upper end of market expectations“.

Those forecasts would drop the price-to-earnings (P/E) ratio to 16 by 2026. And I think most growth investors would see that as cheap.

Dividends too

Oh, and there are rising dividends too, with an expected 2024 yield of 4.4%.

Does this mean I’ll buy Telecom Plus? I don’t know yet, and I haven’t looked much beyond these few figures. If I do, I’ll consider the competitive risks of the utilities business and this stock’s past volatility.

But there are more like this in the FTSE 250, and I do think it shows how a lot of them just might be super cheap right now.

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 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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