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.
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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.
