Interactive Investor

10 mid-cap shares investors should own in 2024

There are some great medium-sized companies whose potential is being ‘deeply undervalued’ by the market right now. Graeme Evans runs through this analyst’s top stocks.

15th May 2024 13:29

by Graeme Evans from interactive investor

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Hays (LSE:HAS), Trainline (LSE:TRN) and Keywords Studios (LSE:KWS) are among a City’s bank’s top picks after it said it was “increasingly bullish” about the UK mid-cap space.

The 10-strong list, out of a pool of 95 mid-caps covered by UBS, also features Hiscox Ltd (LSE:HSX), Jet2 Ordinary Shares (LSE:JET2), Just Eat Takeaway.com NV (LSE:JET), Man Group (LSE:EMG), Rightmove (LSE:RMV), Trustpilot Group (LSE:TRST) and the heat treatment firm Bodycote (LSE:BOY).

The bank’s optimistic stance follows the UK's faster-than-expected exit from technical recession and hopes of more meaningful growth later this year as interest rates begin to fall.

It believes the current macro backdrop is an opportune time for the FTSE 250 to regain some of its valuation discount. The benchmark was historically known for outperforming in Europe but, after the 2016 Brexit vote, it cheapened by 20-30% and has never fully recovered.

UBS sees a total return of above 10% for the FTSE 250 excluding trusts, which compares with about 4% for the more crowded large-cap positions in the FTSE 100.

The mid-cap selection that UBS thinks investors should own in 2024 focuses on well-managed companies that offer attractive or strongly improving cash generation.

Several offer optionality around increasing shareholder cash returns, while a handful are in the self-help stage but with the potential for material profit and cash improvement.

The picks include the professional staffing firm Hays, whose current valuation at the bottom end of its through-cycle range suggests the market expects a further slowdown in hiring activity.

UBS sees a 33% upside for shares and believes the current price is underestimating the chance of re-acceleration in 2024 and potential profit recovery beyond this. It said: “Hiring trends remain weak today, but lead indicators suggest we are close to the trough while recent consensus downgrades have de-risked near-term earnings momentum.”

For another cyclical play, the bank regards the valuation of Bodycote as hard to ignore.

The bank continues to forecast an adjusted operating margin above 20% in its 2027 forecast horizon, adding that the under-appreciated growth story in the higher margin specialist technologies division should support a 24% upside for shares.

On Hiscox, the bank believes the current valuation of 7.6 times 2025 earnings is too conservative given the 15%-plus annual earnings growth forecast for the insurer’s retail businesses.

It sees a 33% uplift for shares, adding: “Hiscox benefits from a strong balance sheet, disciplined execution strategy and effective cycle management.”

Brand strength, customer loyalty and a record of beating City expectations on sales and earnings are among the reasons for picking the holidays company Jet2 with a potential 23% upside.

The biggest potential share price lift is 85% at Just Eat as the food delivery firm is backed to benefit from its dominant position in a recovering market. Expanding margins and strongly improving free cash flow should also drive increased cash returns to shareholders.

Keywords Studios is the next best with a 50% upside as the gaming technology firm is viewed as a high-quality market consolidator with strong growth, stable margins and high returns. It also trades at a deep discount to its 10-year historical average.

The bank believes the regulatory headwinds facing Trainline have been overdone and that shares deserve to be 19% higher. This is based on the ticketing firm’s market-leading position, structural tailwinds and likelihood of increasing cash returns.

Rightmove is seen as trading at an unjustified discount to peers, given the bank notes the property portal’s record as a relatively resilient cash generator and the potential for profit acceleration. The shares are backed with a 28% upside.

The other picks are Trustpilot, whose 15% upside reflects a unique player in an attractive market and its highly scalable business model, and the asset manager Man Group based on the potential for shares to add another 25% on top of their recent improvement.

These articles are provided for information purposes only.  Occasionally, an opinion about whether to buy or sell a specific investment may be provided by third parties.  The content is not intended to be a personal recommendation to buy or sell any financial instrument or product, or to adopt any investment strategy as it is not provided based on an assessment of your investing knowledge and experience, your financial situation or your investment objectives. The value of your investments, and the income derived from them, may go down as well as up. You may not get back all the money that you invest. The investments referred to in this article may not be suitable for all investors, and if in doubt, an investor should seek advice from a qualified investment adviser.

Full performance can be found on the company or index summary page on the interactive investor website. Simply click on the company's or index name highlighted in the article.

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