UK share prices are soaring, sparking speculation that a Santa Rally might be underway. The FTSE 100 is up 1% so far in December. The FTSE 250 meanwhile, has risen by around half a percentage point.
The FTSE 100 is the best-performing major index (bar the Hang Seng) in December, history shows us. But if the past is any guide, the FTSE 250 could significantly outperform its bigger brother this month.
Strong returns
Since its inception in the mid-80s, the Footsie has provided an average December return of 2.29%. That’s according to fresh research from broker eToro.
That’s a pretty decent return, in my view. However, it’s some distance below the average 2.71% return that FTSE 250 shares have provided in Decembers gone by. This 2.71% end-of-year return’s also better than the 2.19% average return typically delivered between January and November.
Room for a bull run?
Given the cheapness of FTSE 250 shares today, I think there’s plenty of scope for the index to rise strongly this particular December.
Today, the price-to-earnings (P/E) ratio on FTSE 250 shares stands at 14.2 times. This is well below the historical average of 22-23 times. And it suggests the index might be packed with brilliant bargains to buy.
I can try to capitalise on this by purchasing an index tracking fund such as the HSBC FTSE 250 ETF. This particular tracker’s delivered an average annual return of 8.5% since spring 2004. It could provide even better returns too, if the index plays catch-up following recent underperformance.
However, I could get better returns by purchasing individual shares. This is higher risk than spreading my capital across the entire index. But the potential for smashing profits may make this worthwhile.
A top FTSE 250 stock
With this in mind, I’m considering adding to my existing position in brickmaker Ibstock (LSE:IBST). I think it looks too cheap to miss, based on predicted earnings for 2025.
At 186p per share, the company trades on a forward P/E ratio of 16.9 times. To put this in context, its P/E has averaged 21.7 times during the last five years.
On top of this, Ibstock shares change hands on a price-to-earnings growth (PEG) multiple of just 0.4. Any reading below 1 implies that a stock is undervalued.
City brokers think the brickmaker’s earnings will soar 22% in 2025 as housebuilding activity gets back to normal. A stream of positive market data supports these forecasts, with latest Nationwide data showing average house prices rose at their quickest since November 2022 last month, at 3.7%.
Of course broker estimates don’t guarantee what will happen. Ibstock’s sales — which dropped 20% in the six months to June — could disappoint if interest rates remain around current highs, dampening demand for new-build homes.
However, I believe this possibility is reflected in the company’s low valuation. Given the housing market’s strong improvement, I think its shares have a chance of rising this December.
This post was originally published on Motley Fool
