With the FTSE 100 recently breaking its all-time record, the leading index has been getting a lot of attention from investors. But while many people might be focussing on the main index, I have been spending time trying to figure out whether now could be a smart time to load up on some FTSE 250 shares.
Room for growth
While the FTSE 100 has hit a high, the smaller index has been falling. Even after climbing 21% since October, the FTSE 250 remains 7% below its level this time last year.
With a membership of medium-sized companies, I see the index as offering me more exposure to growth potential than the FTSE 100. As the economy has been struggling lately, I think we have seen a retreat to large, established companies in mature industries. That helps explain why the FTSE 100 has been hitting highs.
But, technically, the UK has now pulled out of recession. While I remain pessimistic about the outlook for the next couple of years, at some point I do expect significant economic growth to come back. That could be good news for FTSE 250 companies that have a proven track record of revenue growth, such as Kainos and Darktrace.
But if I wait until the economy is flying again, share prices may well have risen too. I think the time for me to invest could be ahead of a possible economic recovery that boosts FTSE 250 growth share valuations. In other words, now.
Finding shares to buy
That is why I have been searching for stocks from the index I can add to my portfolio.
I have looked at Darktrace but do not find its business model sufficiently attractive yet – I would like to see it consistently generating sizeable profits and free cash flows. Kainos appeals to me but its price-to-earnings (P/E) ratio of 49 does not.
What I am looking for is a company like ITV, whose shares I own. It has a proven business model and consistent profitability, and also trades at what I see as an attractive valuation. Indeed, its P/E ratio is just seven. Can an old school broadcaster like ITV really be a growth story? I think it can, thanks to booming demand for its studio services along with a growing digital business thanks to a new streaming platform.
Building a FTSE 250 portfolio
But my confidence in ITV may be misplaced. The chief executive seems to struggle to communicate the business potential to the City.
I have been buying a diversified range of FTSE 250 shares, meaning that if one of them performs worse than I expect then hopefully the overall impact on my portfolio will be limited.
Hopefully I might also be right about what I see as some promising medium-sized companies that currently sell at attractive prices relative to how I think they might perform once the economy is humming again.
The post Could now be the moment to start buying FTSE 250 shares? appeared first on The Motley Fool UK.
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C Ruane has positions in ITV. The Motley Fool UK has recommended ITV and Kainos Group Plc. 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.
