Interactive Investor

Eight UK shares make this list of 20 best European small-caps

Smaller companies have had a difficult time recently, but have a great track record of outperforming large caps over the longer term. One expert believes that makes them very attractive to remain invested in.

5th September 2023 15:36

by Graeme Evans from interactive investor

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Ladybirds representing small firms 600

Trainline (LSE:TRN), Jet2 (LSE:JET2) and Hays (LSE:HAS) have been kept on a top 20 list of European companies best placed to benefit from a potential comeback for small and mid-caps in the region.

UBS remains hopeful of  a “Goldilocks” year for the space, believing that falls during 2022’s worst performance since the late 1990s have been overdone.

It has been encouraged by a summer of modest outperformance after small and mid-caps made a return of 0.5% in July and August against blue-chips stocks at 1.7% lower.

While high interest rates and economic uncertainty continue to weigh on sentiment, the bank notes that on some metrics European small and mid-caps are at very “attractive value levels”.

It adds that investors would do well to remember the longer-term record of small and medium-cap stocks. Since inception in December 2006, its top 20 portfolio is up by 573% after benefiting from a run of outperformance over large caps across the past two decades.

UBS said: “Most investors tend to believe that small-caps generally underperform significantly during periods of uncertain macro conditions similar to what we are currently witnessing, but over a longer time frame, small-caps outperform by a very big margin, which makes it very attractive to remain invested in them.”

It notes that the cost of financing is not much more of a problem for many quality unleveraged small-caps and that a current multiple of 12.5 times earnings looks favourable against the Wall Street equivalent at 22 times.

UBS said: “We view 2023 as an interesting year for the small-cap space, and continue to recommend exposure to quality names where we see alpha through active management.”

The top 20 list is up 6.6% so far this year, slightly outperforming the MSCI European Smallcap Index following its 5.4% rise.

Out of more than 1,000 floated small-caps in Europe and the 400 in UBS’ coverage, UK stocks feature heavily in the top 20 list through the continued inclusion of Computacenter (LSE:CCC), Hays, Hiscox Ltd (LSE:HSX), Jet2 and National Express business Mobico Group (LSE:MCG.

More recent additions have been Trainline, Man Group (LSE:EMG) and thermal processing business Bodycote (LSE:BOY), whose shares fell 47% in 2022.

FTSE 250-listed Bodycote has rebounded to 688p this year but UBS sees the potential to reach 940p based on its outlook for structurally higher margins.

Hardware and software reseller Computacenter has also enjoyed a stronger year but is kept in the portfolio based on a price target of 2,580p compared with 2,192p today.

Shares in Hays have disappointed since their inclusion on the list in September 2021, but UBS is keeping faith through a 155p target price.
It notes that the recruitment firm is now valued at the bottom of its through-cycle range, suggesting a 25% peak-to-trough decline in net fees. The company recently announced a 5% increase in its core dividend and a further 2.24p special dividend for a total yield above 9%.

Another high-yielding stock on the list is Mobico, which has materially de-rated due to a less buoyant growth and cost outlook. Reasons for UBS’ “buy” case and target price of 185p include the company’s exposure to the greening of transport and further to go in the traffic recovery for certain markets including the UK.

The bank also highlights the room for consensus upgrades should the company deliver on its five-year margin improvement targets. Mobico trades with a projected 8% yield.

On Jet2, the bank believes the current valuation does not fully factor in the company’s potential traffic, margin and profitability recovery after highlighting a target of 1,580p.

For Trainline , UBS anticipates that ongoing expansion of open access high-speed rail services in the largest European nations will increase the need for price comparisons and lead to market share gains.

The Trainline price target is 315p, while the bank has a figure of 1,530p for specialist insurer Hiscox and 280p for Man Group.

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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