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PUMP UP YOUR PORTFOLIO WITH OUR GROWTH AND INCOME MID-CAP PICKS
The mid cap space is home to many exciting investment opportunities. They are generally well-established businesses with revenue and profit; yet they also have plenty of room to keep growing at a much faster rate than the UK’s largest quoted companies.
The mid cap space is generally represented by the FTSE 250 index – which is up 8.8% so far this year. That’s more than double the 3.4% return from the FTSE 100 index. The outperformance is even clearer when you look at the chart for the past 10 years.
The recently concluded first half results season cemented this trend. Analysts at investment bank UBS note: ‘Despite the ongoing uncertainty around the UK economic backdrop, the recent results season saw the FTSE 250 outperform the FTSE 100 in terms of both share price performance and net earnings upgrades, with around 60% of the 150 FTSE 250 companies which reported since 1 July seeing their share price rise on the day, and around 25% rising by more than 3%.’
HERE ARE SOME EXAMPLES WHY MID CAP STOCKS ARE AN ATTRACTIVE ALTERNATIVE TO BIG CAPS
First; just by dint of being smaller, mid cap firms typically have more significant growth potential and could increase their profit at a rapid rate if things are going well.
The FTSE 250 is more diverse than the FTSE 100 with areas such as engineering and technology more widely represented.
Potential for earnings upgrades
Companies on the FTSE 250 are not as widely followed as those on the FTSE 100 so equity analysts are more likely to under-estimate (or overestimate) earnings.
This can be both a good and a bad thing. Earnings upgrades can lead to increases in the share price although the reverse is true if a company falls short of earnings forecasts.
And although mid cap stocks are typically more volatile than the largest companies on the FTSE 100 they are unlikely to see the wild swings in share price seen in small and micro-cap companies. They are also much more likely to pay a dividend and can therefore offer a winning combination of growth and income.
CANDIDATES FOR PROMOTION
Another reason to take a good look at the FTSE 250 is that the index contains many contenders for the top tier of the UK market. In simple terms, it provides the pool from which the market giants of tomorrow are drawn.
WHICH STOCKS ARE THE MOST ATTRACTIVE?
Investment bank Berenberg has set itself the task of identifying the large caps of the future, looking not just at the FTSE 250 but also some of the larger companies on AIM.
It comments: ‘Having met over 250 companies in the past four years and screened many more, we have established a framework
for thinking about businesses that tries to identify which of them can become materially bigger on a multi-year view.’ Its top picks include computer games services group Keywords Studios (KWS:AIM), financial services group Sanne (SNN), ligitation specialist Burford Capital
(BUR:AIM), veterinary group CVS (CVSG) and online travel
agent On The Beach (OTB).
The top 10 list is completed with food supplier Cranswick (CWK), identity data firm GB Group (GBG:AIM), document storage specialist Restore
(RST:AIM), leisure stock Dalata Hotels (DAL) and gaming machines technology business
Berenberg has also identified three current themes worth playing alongside these longterm preferences.
Looking to benefit from ‘pockets of optimism’ in the UK economy it highlights the attractions of housebuilder MJ
Gleeson (GLE), baker Greggs (GRG) and building products business Volution (FAN).
It has also identified some good value, good quality names including industrial thread manufacturer Coats (COA), packaging play DS Smith (SMDS) and temporary office space provider IWG (IWG).
Furthermore, it also likes three businesses currently engaged in a restructuring process, namely electronics outfit Laird (LRD), building materials firm Low
& Bonar (LWB) and specialist
retailer Pets at Home (PETS).
Read on to discover the stocks picked by the journalists at
Shares. We highlight six stocks with a mix of value and income attractions from the FTSE 250.