The FTSE 250 is a list of 250 mid-cap UK stocks that aren’t quite big enough for the top 100. Market caps on the index range from £300m to £4.3bn.
The FTSE 100 lists all the larger, more well-established stocks, most of which are household names. Meanwhile, the 250 contains some that may have dropped out of the FTSE 100 as their valuations have fallen, but is also awash with lesser known companies brimming with potential. To some degree, it provides a sneak peek into what the future may hold for the UK economy.
Lately however, it’s been a bit of a downer. UK investors, unable to resist the bright lights of Silicon Valley, increasingly shy away from domestic stocks. The cost-of-living crisis combined with Brexit trade challenges and high inflation make it difficult for local businesses to thrive these days.
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Consequently, the index has delivered below-average performance.
Investors who sunk £10,000 into a FTSE 250 index tracker at the start of 2024 wouldn’t be too overjoyed. With growth of only 7.5%, the £750 in returns would barely beat a good fixed-interest savings account.
That’s near the low end of the average 7% to 10% returns that UK investors typically achieve and somewhat below the FTSE 100 and MSCI World return of around 9.5%.
Looking across the pond, the S&P 500 and Nasdaq 100 achieved upwards of 23%.
Unearthing value on the FTSE 250
All things considered, the index doesn’t appear to be a great investment right now. But individual opportunities still exist, particularly when it comes to dividends.
One I like the look of is B&M European Value Retail (LSE: BME). Sure, it’s down 37.6% over the past year, which doesn’t look great, but it’s recovered from large dips like this in the past.
If that trend continues, the current price, at only nine times earnings, is attractive. The factors that drove the recent dip may also be coming to an end — notably, inflation. On Thursday, 6 February, the Bank of England cut UK interest rates to 4.5%.
If inflation falls further, as is the hope, that could revive B&M’s fortunes. The 4.7% dividend yield adds an attractive incentive, providing value even if the price is slow to recover.
On 9 January, the group posted Q3 results that hinted at a moderate recovery. Like-for-like sales are growing again and constant currency revenue was up 3.5% in the prior nine months.
The low price combined with improved performance seems to give analysts confidence in the stock. The average 12-month price target of 509p is almost 60% higher than today’s price.
The company stands at a risky junction though, with £2.27bn of debt weighing heavily on future performance. If stubborn inflation halts a recovery, it may struggle to meet its debt obligations, limiting further growth. It also faces stiff competition in the UK discount retail sector, with the likes of Asda, Primark and Wilko vying for market share.
In both 2022 and 2023, earnings missed expectations, so its full-year 2024 results will be telling. If they come out positive, the stock could emerge as an unexpected success story in 2025.
Until then, I’ll keep it on my watch list.
