Three stocks enter this top 10 with 33% upside

A strongly performing selection of top picks from the UK’s “deeply undervalued” small and mid-cap space has been updated with the addition of Weir Group (LSE:WEIR), Hiscox Ltd (LSE:HSX) and Pennon Group (LSE:PNN).

Since its inception in May last year, the top 10 compilation of UBS analysts has returned 16.4% on average compared with 5.9% for the FTSE 250 index.

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The bank’s other selections out of a coverage universe of more than 95 companies are ConvaTec Group (LSE:CTEC), Domino's Pizza Group (LSE:DOM), Endeavour Mining (LSE:EDV), Marks & Spencer Group (LSE:MKS), Persimmon (LSE:PSN), Rightmove (LSE:RMV) and Trustpilot Group (LSE:TRST).

British Land Co (LSE:BLND), Beazley (LSE:BEZ) and IG Group Holdings (LSE:IGG) are the stocks to make way, leaving UBS with a top 10 selection that has 33% upside potential based on its current price targets.

The bank notes that UK valuations are trading 14% below their historical average sector-adjusted discount, undoing the recovery seen in the second half of 2024.

In terms of small and mid-caps, the current discount is at roughly the same level as the trough of the 2008-09 recession, directly after Brexit in 2016 and at the peak of the pandemic.

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This highlights one of the top trade ideas of the bank’s strategy team, which is to favour the FTSE 250 over the FTSE 100. It said: “In particular, the valuation spread between small and large on high-quality stocks now looks highly attractive.”

Among the new additions, Hiscox makes a return to the line-up after last month’s capital markets day contained new guidance for a step-up in shareholder returns.

The specialist insurer pledged 20% growth in the dividend alongside 2025 results, with a progressive dividend per share thereafter. It increased the payout by 15% in 2024.

Hiscox said the enhanced return profile reflected the changing shape of the group, with Retail expected to represent a greater proportion as each of its businesses grow over time.

UBS, which sees shares rising 22% on last week’s level to a target of 1,595p, is materially ahead of the City’s earnings estimates due to potential cost savings and share buybacks.

It believes the capital return framework can lead to double-digit sustainable all-in yields by 2027, with the potential for a material price/earnings re-rating closer to historical averages.

In utilities, Pennon trades on a 1% discount to its March 2026 forecast regulated asset base (RAB) compared with premium positions for United Utilities Group Class A (LSE:UU.) and Severn Trent (LSE:SVT). The dividend yield is among the highest in the sector at 6%, versus 4.7% for its listed counterparts.

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UBS, which has a price target of 605p, believes Pennon has scope for a 14% annualised total shareholder return by getting back to a through-the-cycle 8% RAB premium within five years.

On Weir, the bank highlights significant upside to the company’s announced cost-savings programme coupled with attractive end-market exposure.

Weir supplies the equipment and spares needed by mining customers to extract metals in a more sustainable and efficient way. The shares have risen 25% to 2,493p since early April’s tariffs-related slump, with UBS seeing further upside to 2,850p.

It added: “We forecast Weir can generate £125 million of cost savings by 2026, significantly ahead of the targeted £80 million. This drives our above-consensus margin forecasts.”

Other big upsides in the top 10 selection include price targets of 390p for medical products firm Convatec, 380p for Domino’s Pizza and 400p for consumer reviews platform Trustpilot. Endeavour Mining is 2,800p, M&S 435p, Persimmon 1,540p and Rightmove 803p.