At the end of last week, the mid-cap FTSE 250 index closed at 21,157 points. From its high of 24,354 points back in September, this is a fall of over 13%. Generally, any fall in an index of 10% or more is known as a stock market correction. As such, it hasn’t been a great period for the UK’s mid-cap index.
But looking under the bonnet of the index shows that a number of stocks have fallen considerably more than 10%. I think there could be opportunity here to snap up some bargains. Here’s how I’m planning a £10,000 investment.
Investigating the index
There have been many risks for investors to consider recently. Of course, the war in Ukraine is terrible. But one of the consequences for financial markets has been rocketing energy prices. This will likely lead to a squeeze on consumer spending.
Inflation is also rising, and just this past week the Bank of England said it expects inflation to reach 8% this spring.
Therefore, it’s no surprise that stock markets have fallen recently. One question I’m asking is: are there any quality companies in the FTSE 250 with beaten up share prices? I think there might be.
The first company I’ve found is Liontrust Asset Management, an investment management firm based in the UK. It’s understandable why the share price has fallen given that it generates fees on its assets under management. When stock markets correct, it’ll generate less fee income as its assets fall in value. This is certainly a risk to consider.
Nevertheless, the share price has fallen 43% this year alone. And over one year, the share price is down 12%. However, on a forward price-to-earnings (P/E) basis, the shares trade on a multiple of only 10. For a quality and cash-generative company, this appears too cheap to me.
I also like the look of Games Workshop, the tabletop gaming company. The share price is down by 24% over one year. To me, it’s another quality company as it achieves double-digit profit margins. Granted it’s suffered from lower growth rates this year due to its games release schedule. But a forward P/E of 18 says to me the risks are fully priced in.
Using an ETF after a stock market correction
As I’ve already got a number of stocks in my portfolio, I’d be happy to use my £10,000 investment to buy shares of Liontrust and Games Workshop. For example, I could invest £5,000 in each company.
One other strategy I use in my portfolio is buying exchange-traded funds, or ETFs. This spreads the risk across a number of companies. I view this as a great way to diversify my portfolio.
I’d consider buying the iShares FTSE 250 ETF in my portfolio. It would mean I’d gain exposure to every stock in the FTSE 250 index. It’s more closely exposed to the UK economy, so should be more sheltered from global tensions. Rising inflation is certainly still a risk. But if I take a long-term buy-and-hold approach, there’s a good chance I’ll generate a decent return on my £10,000 investment.
Dan Appleby owns shares of Games Workshop. The Motley Fool UK has recommended Games Workshop. Views expressed on the companies mentioned in this article are those of the writer and therefore may differ from the official recommendations we make in our subscription services such as Share Advisor, Hidden Winners and Pro. Here at The Motley Fool we believe that considering a diverse range of insights makes us better investors.