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According to my market data provider, the FTSE 250 The mid-cap index is showing better value than its big brother, the FTSE 100 large cap index.
For example, on Friday (January 12), the average rolling dividend yield for the Footsie was 3.5% and the FTSE 250 was 4.5%.
Meanwhile, the FTSE 100's average trailing price-to-earnings ratio was around 13.8, but the FTSE 250 looks cheaper at 3.1.
This situation seems unusual to me. The mid-cap index is known to have a greater bias toward growth than the Footsie, and growth typically attracts a higher valuation.
Meanwhile, the large cap index is known to be good at generating dividends and less capable of generating growth. Therefore, you would expect the yield to be higher and the earnings multiple to be sharper than that of the FTSE 250.
My conclusion is that select companies within the FTSE 250 index are probably showing good value at the moment compared to their growth prospects. All we have to do now is find them!
An attractive operating model
A worthy candidate to consider is a home construction company. Vistry (LSE: VTY).
The company stands out among the group of builders on the UK stock market for its attractiveness, “high growth and few assets” operating model.
The company focuses its operations “completely” in partnerships with other organizations such as local authorities, housing associations and other public sector organisations.
These development opportunities help the company deliver new affordable housing and value to the partner organizations involved. These deals often attract grants, helping to make Vistry's investment commitments efficient.
We are talking about projects ranging from complete property regeneration to new build projects. Agreements between Vistry and its partners allow for the sharing of risks and rewards.
In today's 2023 trading update, the company said it is ensuring “high quality” Partnership development opportunities targeting 5%-8% annual revenue growth.
If Vistry can maintain that growth rate over the next few years, the stock could make a steady reversal from where it is today.
A fair assessment
Term sales increased 12.4% year-on-year. Directors believe that position bodes well for an increase in total completions by 2024. Meanwhile, the easing of mortgage rates in recent weeks is “encouraging”. The directors are “optimistic” Lower rates will help spur demand this year.
It's no secret that housebuilders suffered setbacks in 2023 and many saw their profits fall, including Vistry. However, City analysts have forecast a modest mid-single-digit percentage rebound in 2024. On top of that, they expect a 15% increase in the dividend for shareholders.
Contrary to those expectations and with the share price near 995p, the expected earnings multiple for 2024 is around 11. The expected dividend yield is almost 4.9%.
I see that assessment as undemanding. However, there are risks. The most notable is the cyclical nature of the business and the sector. As we have seen recently, general economic events can sometimes derail a company's business.
However, I see Vistry as a decent candidate for further research with a view to holding the stock for several more years.
