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He FTSE 250 The index of companies with a medium market capitalization is lagging behind its older brother. FTSE 100 index.
At around 18,470 on December 4, the FTSE 250 is just over 19% lower than two years earlier. But the FTSE 100 is up about 4% over that period.
Companies have fallen on difficult economic times and investor confidence has been poor. But those considerations do not explain the difference in performance between the two indices.
One possible explanation is that large investment institutions tend to opt for the large-cap companies in the leading Footsie index first. One reason for this could be the liquidity on offer. It is easier to park investments measured in millions of pounds in shares backed by large companies.
However, this is a weak argument because many FTSE 250 mid-cap companies have market capitalizations above £1bn and provide plenty of liquidity to investors. For example, names like Games workshop, Rotork, Greggs and Dinerosupermercado.Com Among many others.
A rating that seems low
Another possible reason for the midcap index's lag is that it might have been overvalued before its crash. Many of the companies in their ranks are known to have more growth potential than some of Footsie's large-cap companies. And rising profits can attract higher valuations.
But if overvaluation was the case before, it is no longer the case now. My data provider provides forward-looking valuation figures. And they consider estimates for a company's current business year and the year ahead.
On that basis, the overall FTSE 250 index has a price-to-earnings ratio of just over 12. And the expected dividend yield is around 4.8%.
It seems to me an undemanding assessment. But it doesn't arise because all the companies in the index are on their knees and in difficulty. Instead, many have issued earnings estimates and the average earnings per share growth rate is around 11%.
These are attractive figures and suggest some cracking value contained in the index.
Invest for the long term
A simple way to tap into that value and growth potential would be to invest in a fund tracking the FTSE 250 index. And in part of my portfolio, I'm doing exactly that.
But I think the conditions are perfect to try to outperform the future performance of the index by researching individual companies and trying to buy and hold some of their stocks. Maybe this is the kind of opportunity that only comes around once every decade or so.
Of course, there is always risk in the stock market. And that applies even if valuations seem modest. All companies can sometimes encounter difficulties.
However, I'm working hard on my watchlist and researching FTSE 250 companies like Vesuvius, Morgan Sindal, First class food and others.
My opinion is that it is a good time to be a long-term investor. And I'm looking forward to 2024!