I used to think that investing was all about the FTSE 100 (FTSEINDICES:^FTSE). This was the index that had a range of the country’s heavyweight stocks, from BP and GlaxoSmithKline to Unilever and Prudential. These were the biggest companies in the investing firmament, with proven winners in every sector. Why look further?
There is a lot to be said for this argument. But recently I have been wondering I could find better bargains outside of the FTSE 100.
Looking beyond the FTSE 100
If you want to increase your chances of finding a stock market bargain, I am a strong believer that you should cast your net as widely as possible. So many of my investments these days are drawn from, not the FTSE 100, but emerging markets, the small cap market known as AIM and the mid-cap index the FTSE 250 (FTSEINDICES:^FTMX).
Let’s focus on the FTSE 250. This index contains companies that are often overlooked, and tend to be overshadowed by the FTSE 100. But it’s precisely because of this that it also provides us with some of the stock market’s best bargains.
I, of course, still invest in FTSE 100 companies, but some of my most successful investments have come from the FTSE 250.
Yet if you check the averages, the mid-cap index looks more expensive: the FTSE 100 has an average P/E ratio of 14.2, and the FTSE 250 has an average P/E ratio of 19.4.
But this masks the fact that many of the companies in the FTSE 250 are fast growers that have higher P/E ratios, while the FTSE 100 has more mature, slow-growth companies.
Cast your net as widely as you can
I have already written about building and infrastructure company Carillion, which I bought at an absolute bargain price a year ago, and was happy to take a 50% profit after a year.
Then there are also several current bargains in the mid-cap index, including financial broker Tullett Prebon, which I currently hold and I think is a steal at a P/E ratio of 8. Yet there are also companies in this index which I would steer well clear of.
But then I could say just the same about the blue-chip index. My honest viewpoint is that it’s not a case of FTSE 100 vs FTSE 250 at all, but FTSE 100 + FTSE 250.
When I pick shares, I make it a habit to trawl through the numbers for both indices — it’s just a case of increasing your chances of finding a share that will give you a positive return.
