Picture supply: Getty Photos
The FTSE 250 index accommodates listed firms with smaller market capitalisations than these within the flagship FTSE 100 index.
That may imply some smaller firms with large development prospects are within the index. With much less deal with it than the FTSE 100, the index may also provide some potential bargains that not all buyers have noticed. I intention to search out such bargains – however listed below are a trio of dangers I’m conscious of when doing so.
Complicated cyclical development with sustainable development
Some firms are in a position to 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 adjustments.
That may be a danger for firms 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 prior to now 5 years. The FTSE 250 share has greater than trebled in worth throughout that interval.
However its deal with one primary steel (copper) and one primary manufacturing space (Spain) provides a degree of focus danger completely different to that seen in a FTSE 100 miner like Rio Tinto.
After I see a FTSE 250 share with a observe report of development, I attempt to perceive how sustainable that development 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 once in a while – money is king. Even massive FTSE 100 firms can discover that entry to credit score strains turns into more durable, or dry up altogether.
Getting sufficient liquidity when everybody else is screaming for money might be much more difficult for smaller firms. When investing, I have a look at the stability sheet of an organization it doesn’t matter what its measurement.
That definitely contains FTSE 250 companies. Some spend closely on development, racking up massive money owed. On the flawed second, that may be lethal.
Avoiding what you don’t perceive
I at all times attempt to keep inside what Warren Buffett refers to as my “circle of competence” when investing.
New, rising firms 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 essential as a result of in any other case buyers can’t correctly assess their worth as an investor.
For instance, my holding in Topps Tiles (LSE:TPT) has not carried out nicely, to date. So I’ve needed to contemplate what to do: dangle 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% prior to now yr.
To do this, I’ve appeared on the firm’s accounts. I take some cheer from sturdy gross sales in recent times, with acquisitions of commerce and digital platforms providing extra scope for development.
Final yr, the agency fell to a £13m web loss and reduce 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 yr encouragingly and I plan to maintain holding the share.
