The FTSE 250 has had a bit of a rough start to the year, falling by almost 6%, or 5% when including dividends. By comparison, the UK’s more popular large-cap index has delivered a total return of 6% since January kicked off. And on the surface, the FTSE 100 appears to be the better choice in terms of performance.
However, despite appearances, the FTSE 250 could deliver some surprising gains later in the year. And one analyst forecast predicts the index could rise as high as 28,300 points by the end of December. That’s a potential 45% surge just around the corner!
The FTSE 250’s cheap
Compared to its long-term annual historical average return of 11%, the UK’s growth index has long been lagging behind. That’s despite earnings growing faster than inflation by around 4% for the last 30 years.
Combining these stronger profits with lacklustre interest from investors has dragged the index’s cyclically adjusted price-to-earnings (P/E) ratio to just 17. For reference, the index’s long-term average is closer to 22. And it goes to show how cheap the index has become over the years. Assuming the index mean reverts back to this average along with continued inflation-beating earnings growth in 2025, the FTSE 250 could enjoy a long-overdue upward correction.
Of course, there’s no guarantee these assumptions come true. With geopolitical tensions and investor uncertainty rising, a flight to safety to more stable indices like the FTSE 100 or commodities like gold may result in the mid-cap index once again underperforming.
However, even if the index itself doesn’t thrive, some of its constituents may still enjoy robust gains.
A potential winner in 2025?
Alpha Group International (LSE:ALPH) only recently joined the FTSE 250 (in June 2024) after climbing through the ranks on AIM.
However, it’s already the 118th largest company in the index as it continues its upward journey to the FTSE 100. And to demonstrate this growth in terms of shareholder gains, the stock’s up over 900% since its IPO in 2017. That’s a 33% annualised return!
Despite this tremendous run, the stock continues to fly relatively under the radar. There are currently only three institutional analysts following this business (each with a Buy or Outperform rating), with an average 12-month share price target of 3,200p versus the current 2,530p share price. And just like its parent index, the stock’s also trading at a seemingly cheap valuation with the forward P/E of just 11.3.
The currency risk management and alternative banking firm is currently facing off against some notable headwinds driven by higher interest rates. Yet that hasn’t stopped revenues and profits from climbing by double-digits. And now that interest rates are steadily falling, demand for its services is expected to rise throughout 2025, accelerating cash flows even further.
Of course, the firm isn’t without its risks. Stubborn inflation could prevent the desired interest rate cuts from materialising. And leadership has also just changed hands with the founder stepping down which could prove disruptive if the new CEO can’t maintain the firm’s momentum.
Nevertheless, despite the risks, it’s a business I remain bullish on. That’s why it’s already one of my largest holdings and why I think investors may want to take a closer look.
