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Should I buy these 7 stocks due to be promoted to the FTSE 250?

Young mixed-race woman looking out of the window with a look of consternation on her face

Each quarter, the FTSE indices rebalance. This means stocks that have performed badly risk being dropped down, whereas those that have seen a rise in the market cap could get promoted. Even though most focus is on stocks moving into the FTSE 100, I’m keen to note the ones that could get promoted to the FTSE 250. These smaller-cap stocks could offer strong growth opportunities.

Please welcome the contenders

Technically we’ll only know for sure next week which companies will make the transition for September. But at the moment, it’s looking likely that seven stocks will join the index.

These are Breedon, 888 Holdings, CAB Payments Holdings, Ceres Power Holdings, Foresight Group Holdings, Moonpig Group and Tullow Oil.

On the face of it, some of these companies will already be known by retail investors. I’m particularly referring to Moonpig and Tullow Oil, both of which have been popular in the recent past with investors.

However, other firms such as CAB Payments have flown more under the radar, despite recent outperformance.

Why buying now could be smart

There are plenty of FTSE 250 tracker funds that try and mimic the performance of the index. The fund buys all the constituents and it makes it a lot easier for the retail investor to simply buy just one.

Therefore, if the above stocks get promoted, a host of funds will need to step in and buy. This allows them to add the individual stocks to the tracker. This could act as a short-term boost for each of the companies.

I believe the larger move will come throughout coming months when the companies start to enjoy a lot more media limelight. Being a FTSE 250 stock is a badge of honour (versus simply being on the All Share index). More investors will hear about the products and services offered and do their homework about potentially buying.

To front-run and be ahead of the crowd, it could offer a chance to jump in before the share price spikes.

Risk but also reward

Despite the optimism associated with the likely promotion, it doesn’t take away the normal risk of the specific stocks.

For example, Tullow Oil is an oil and gas exploration company. As such, it has volatile share price movements based on the success of any projects in the pipeline. 888 Holdings is the parent company of various gambling brands. This could see some investors want to steer clear because it doesn’t fit in with the ESG filters that some like to apply.

The point here is that each stock needs to be assessed on individual merit. Granted, the fact that each one is likely to jump to the FTSE 250 is a great starting point to consider investing. Yet that alone shouldn’t be the only reason associated with an investor buying shares in those companies. So I will consider buying some of the companies if they get promoted, but not all.

The post Should I buy these 7 stocks due to be promoted to the FTSE 250? appeared first on The Motley Fool UK.

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Jon Smith has no position in any of the shares mentioned. The Motley Fool UK has no position in any of the shares mentioned. Views expressed on the companies mentioned in this article are those of the writer and therefore may differ from the official recommendations we make in our subscription services such as Share Advisor, Hidden Winners and Pro. Here at The Motley Fool we believe that considering a diverse range of insights makes us better investors.