Picture supply: Getty Photographs
The FTSE 250 index comprises listed corporations with smaller market capitalisations than these within the flagship FTSE 100 index.
That may imply some smaller corporations with large progress prospects are within the index. With much less concentrate on it than the FTSE 100, the index may supply some potential bargains that not all traders have noticed. I intention to seek out such bargains – however listed below are a trio of dangers I’m aware of when doing so.
Complicated cyclical progress with sustainable progress
Some corporations are capable of develop their enterprise over the long run. Others develop quick throughout an upwards transfer of their enterprise cycle, earlier than revenues and earnings crash again down when the cycle modifications.
That may be a danger for corporations of any measurement that function in cyclical industries. However smaller companies can, by their very nature, be much less diversified of their operations, magnifying that danger.
For instance, Atalaya Mining Copper SA has carried out brilliantly up to now 5 years. The FTSE 250 share has greater than trebled in worth throughout that interval.
However its concentrate on one principal steel (copper) and one principal manufacturing space (Spain) provides a stage of focus danger totally different to that seen in a FTSE 100 miner like Rio Tinto.
Once I see a FTSE 250 share with a observe report of progress, I attempt to perceive how sustainable that progress could also be over the long run, together with throughout the financial cycle.
Underestimating the significance of liquidity
When tight instances arrive – as they do now and again – money is king. Even massive FTSE 100 corporations can discover that entry to credit score strains turns into tougher, or dry up altogether.
Getting sufficient liquidity when everybody else is screaming for money may be much more difficult for smaller corporations. When investing, I take a look at the stability sheet of an organization it doesn’t matter what its measurement.
That definitely consists of FTSE 250 companies. Some spend closely on progress, racking up massive money owed. On the improper second, that may be lethal.
Avoiding what you don’t perceive
I all the time attempt to keep inside what Warren Buffett refers to as my “circle of competence” when investing.
New, rising corporations that develop quick will usually enter the FTSE 250 earlier than they ever get near the FTSE 100. So I attempt to watch out to not get sucked into the hype and stick solely to companies I really feel I perceive. That’s vital as a result of in any other case traders can’t correctly assess their worth as an investor.
For instance, my holding in Topps Tiles (LSE:TPT) has not performed effectively, thus far. So I’ve needed to take into account what to do: hold on, promote, or use a weaker share worth to prime up my holding within the FTSE 250 constructing supplies provider after its share worth fell 10% up to now 12 months.
To try this, I’ve seemed on the firm’s accounts. I take some cheer from sturdy gross sales lately, with acquisitions of commerce and digital platforms providing extra scope for progress.
Final 12 months, the agency fell to a £13m web loss and minimize its dividend. I see a danger that weak shopper confidence might result in much less spending on residence renovation, hurting earnings.
However Topps’ enterprise has began this 12 months encouragingly and I plan to maintain holding the share.
