Many investors concentrate on the FTSE 100 when they’re looking for stocks to buy. However, I believe this is a mistake. Instead, I look in the FTSE 250 for investments.
I favour this index over its blue-chip peer because smaller businesses, which make up the FTSE 250, tend to grow faster than their larger peers.
Of course, there are many reasons why one business can grow faster than another, but one of the main reasons why smaller companies tend to grow more quickly is the law of large numbers.
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For example, a company that generates sales of £100bn would have to find an additional £20bn of revenues to grow 20%. By comparison, a corporation with sales of just £200m would only need to increase revenues by £40m to grow 20%.
That said, investing in small businesses might not be suitable for all investors. Smaller companies tend to be riskier than blue-chips. As such, some might feel more comfortable sticking to stocks located in the FTSE 100.
Nevertheless, I’m comfortable with the risks involved with buying FTSE 250 stocks, which is why I’d buy 4Imprint (LSE: FOUR).
FTSE 250 growth stock
4Imprint is a direct marketer of promotional products, such as bags and pens. Companies usually give these out at events, such as conferences or annual general meetings.
As these events have moved online over the past 12 months, 4Imprint’s sales have plunged, but a recovery is now starting to take shape.
According to its latest trading update, total order intake in January and February was running at 65% of 2019 levels. However, the figure increased to 80% of 2019 levels in April. And, in the first few weeks of May, sales rose to 85% of 2019 levels.
This seems to suggest the FTSE 250 group is on track to recover the sales it lost last year at some point in the next two or three months. From there, I believe the business will return to growth, compared to 2019 levels of trade.
4Imprint has a strong balance sheet to support this growth. At the end of April, the company reported a net cash balance of $44m. That was compared to $39.8m at the end of 2020.
So not only are the company’s sales recovering, but it looks as if the business is also profitable and generating cash.
Unique opportunity
Considering the company’s recovery and growth potential over the next six months, I’d buy the stock for my portfolio today.
With its cash-rich solid balance sheet, 4Imprint has the financial headroom to invest in marketing to drive growth and expand into new markets. This could provide an additional tailwind to the group’s organic recovery.
That said, 4Imprint could encounter further turbulence in the months ahead. Another coronavirus wave may force governments to rethink reopening plans. This may reduce demand for its products. There’s also a chance inflation could eat away at the company’s profit margins if it can’t pass higher costs on to buyers.
Still, I’m confident in the FTSE 250 company’s potential. That’s why I’d buy the stock for my portfolio as a recovery play in 2021.
