Stock market

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

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Have you seen that? FTSE 250 What has happened in the last few years? I have, and I love it.

Since a peak of more than 24,000 points in August 2021, the mid-cap index has fallen much less than that. FTSE 100. It fell 16 percent, while London’s main index rose 17 percent.

The largest stocks beat the smallest stocks in terms of share price growth, and this is against the trend.

Over the long term, the FTSE 100 is growing at an average rate of around 7% per annum. The FTSE 250, meanwhile, is managing around 11 per cent.

Ups and downs

That said, a long-term investor should expect some short-term pain — such as a 16% decline in the smaller index from 2021. And both indices fell hard in the stock market crash of 2020.

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

I think it has a very good chance.

Having said that, it is very possible that the outperformance was a quirk of the last few decades, and the two indices may outperform each other in the coming years.

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

Accelerate growth

That’s one of the reasons I’m bullish about the FTSE 250 for the next decade. When inflation recovers and interest rates fall, I can see a recovery in growth investing in the UK stock market.

So what potential growth stock deals can I see out there? Enough, and I will choose. Telecom Plus (LSE: TEP) as an example.

The firm operates under the Utility Warehouse brand, and provides shared utilities, including telecom.

Over the past five years, share prices have increased by 25 percent. But it was much higher in 2022, and it went through the previous boom-and-bust cycle that peaked in 2014.

Volatility in growth stocks

High volatility is part and parcel of investing in growth stocks. And I will never buy unless I know I can handle them.

And, since launch, Telecom Plus shares have risen 700% – while the index has gained 190%.

Forecasts put earnings per share (EPS) growth at 37 percent between 2023 and 2026. We are awaiting results for 2024, but the latest update states that “Adjusted pre-tax profit for FY24 is expected at the upper end of market expectations.

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

Profit too

Oh, and there are growing dividends too, with a projected 2024 yield of 4.4%.

Does this mean I will buy Telecom Plus? I don’t know yet, and I haven’t seen more than these few figures. If I do, I will consider the competitive risks of the utilities business and the past volatility of that stock.

But there are more like that in the FTSE 250, and I think it shows that many of them could be very cheap right now.


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