The FTSE 250 has risen by 77% over the last five years, dwarfing the more modest 30% return delivered by the FTSE 100 over the same period.
But if you stretch the comparison back to 1999, the difference becomes even greater. The FTSE 250 has risen by a stonking 264% since April 1999, compared to a gain of just 16% for the FTSE 100. It’s a powerful argument for investing in medium-sized businesses that are still small enough to deliver meaningful growth.
A perfect case study?
One of the companies that’s helped drive FTSE 250 higher over this period is fluid technology group Spirax-Sarco Engineering (LSE: SPX). This stock has risen by 861% since 1999.
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Spirax-Sarco’s outperformance has continued this year. The firm’s share price is up by 24% in 2017, compared to 10% for the FTSE 250. Today’s trading update suggests to me that further gains may be possible.
The group reported solid growth across its business, especially in Asia Pacific and Europe, the Middle East and Africa. The weaker pound has also provided a “significant currency tailwind”, according to the firm.
Although this effect is fading as the pound regains some lost ground, management says that at today’s exchange rates, currency factors should add 5% to sales and 8% to profits in 2017, compared to last year.
Still a buy?
Spirax-Sarco’s impressive track record means that this stock isn’t cheap. However, the firm’s five-year average operating margin of 21.3% suggests to me that it may deserve a premium valuation.
Earnings per share are expected to rise by 24% in 2017 and by a more modest 8.6% in 2018. These figures give a 2017 forecast P/E of 26 and a dividend yield of 1.5%. For investors focused on growth and momentum, I think Spirax-Sarco could be worth a closer look.
Up 39% in four months
Irish building merchant Grafton Group Units (LSE: GFTU) has been a stunning performer this year, climbing almost 40% despite an uncertain market backdrop. The group’s shares have recovered all of the loss which followed the EU referendum vote and are now worth 10% more than they were on 23 June 2016.
Grafton has reported a strong start to the year, with revenue up 7.7% so far in 2017 compared to the same period last year. Like-for-like sales rose by 6.1% during the four months to 30 April, with growth in all markets except Belgium.
Gavin Slark, Grafton’s chief executive, says that “the outlook is positive” and the group expects “favourable trends in the Irish and Netherlands businesses” to continue. However, Mr Slark is more cautious about the UK, noting “recent economic and political developments”.
It’s certainly true that City analysts who cover Grafton have cut their forecasts over the last year. 2017 forecast earnings per share have fallen from 54p one year ago to 48.8p today. That leaves Grafton on a forecast P/E of 15.7 with a prospective yield of about 1.8%.
Like Spirax-Sarco, Grafton has a strong balance sheet and attractive cash flow. Further gains are possible and the stock’s momentum appears strong. However, the UK business accounted for 70% of sales last year, so any weakness at home could hit profits hard. I’d rate Grafton as a hold until market conditions become clearer.
