The FTSE 250‘s on a roll. In the last six months, the UK’s flagship growth index has climbed almost 20%, including dividends. Yet, the majority of its constituents continue to trade at historically low multiples. It seems that the impact of the recent stock market correction has yet to reverse itself. And for opportunistic investors, snapping up sold-off stocks today could unlock chunky returns in the long run.
Heading to a million?
With inflation down considerably over the past year, the outlook for the UK stock market is looking far more promising. But last month, the British economy entered a technical recession as GDP growth fell into the red.
However, the stock market is a forward-thinking machine. Analysts and investors have been calling for this economic development since inflation started climbing. As such, the impact of this announcement on the FTSE 250 index was fairly muted. Why? Because it had already been priced in by earlier expectations.
In fact, throughout history, the stock market typically performs worse the year before a recession is announced than actually during one. And I doubt this pattern is likely to change in 2024.
In other words, valuations may continue to recover throughout the rest of the year. And that’s why drip feeding capital into discounted companies seems prudent. By steadily loading up on quality sold-off stocks over time, any unexpected price drops can be capitalised on. At the same time, investors can also lock in potential returns of existing bargains right now.
What’s more, by deploying this tactic over decades, a portfolio can reach impressive levels. Starting from scratch, investing £500 a month into the FTSE 250, which has historically delivered 11% total annualised returns, would yield a portfolio worth £1.4m in 30 years.
A bargain worth considering?
The UK growth index has a perfect track record of recovering from even the most disastrous of financial catastrophes. However, the same can’t be said for all of its constituents. In fact, there have been many FTSE 250 stocks that have fallen from grace never to recover. And in 2024, plenty of beaten-down companies may end up sharing this fate.
Therefore, investors need to closely examine each constituent to verify that a seemingly cheap price is indeed a bargain rather than a value trap. Looking at my own portfolio, Games Workshop (LSE:GAW) is looking interesting.
The plastic miniatures business is the mastermind behind the various Warhammer franchises. And despite being an expensive discretionary product, it seems fans continue to splurge on new models, paints, and accessories. The latest results revealed record sales and profits. But they also contained the announcement that CFO Rachel Tongue will be stepping down after nine years in the role.
CFO departures are rarely taken well by investors. And when paired with a slowdown in growth, it’s possible that the state of the UK economy is finally catching up to this enterprise.
However, it’s worth pointing out that these results were up against some tough comparables. And with a line-up of new models and books scheduled to be released throughout 2024 and beyond, the long-term potential of this business continues to excite me. That’s why the recent slip in share price looks like a possible buying opportunity, in my eyes.
This post was originally published on Motley Fool
