This expert believes the vaccine breakthrough marks the beginning of an early cycle re-rating.
Liberum prefers the FTSE 250 to the FTSE 100 and value stocks over growth after viewing vaccine breakthroughs at the start of November as game-changing for markets.
The other small and mid-cap plays named in this week's note are Cake Box Holdings (LSE:CBOX), real estate investment trust Civitas Social Housing (LSE:CSH), lighting businesses FW Thorpe (LSE:TFW) and Luceco (LSE:LUCE) and metals processor Sylvania Platinum (LSE:SLP). Another of its picks has already paid off after Go Compare owner GoCo Group (LSE:GOCO) recently agreed to be taken over by publisher Future (LSE:FUTR).
Liberum's least preferred list of mid-caps features Royal Mail (LSE:RMG), Pendragon (LSE:PDG), JD Wetherspoon (LSE:JDW) and Safestore Holdings (LSE:SAFE), as well as AJ Bell (LSE:AJB)and animal health business Dechra Pharmaceuticals (LSE:DPH).
The broker told clients this week:
“The vaccine news at the beginning of November has in our view launched a new multi-year bull market.”
Liberum said the early cycle re-rating has been strongest in FTSE 250 companies so far and that this should continue into the first quarter of 2021, Brexit permitting.
- Fund managers turn bullish on Covid-19 vaccine breakthrough
- Moderna, Covid cures and cheap cyclical stocks
- Most-bought FTSE 100 and AIM shares in November 2020
The biggest stock on the list of recommendations is animal genetics company Genus, which Liberum believes can build a significant position in the Chinese pork industry as the country recovers from a recent outbreak of African swine fever. Further out, it sees work in gene editing as a major opportunity to help farmers deal with a devastating pig respiratory disease.
An encouraging trading update at the end of November recently prompted Liberum to lift its target price to 4,490p, compared with 4,320p previously and today's price of 4,106p.
Support for contract-for-difference specialist Plus500 reflects expectations of a record revenues performance in 2020 and the benefits of a best-in-class trading platform.
“Its scalable technology and agile marketing have enabled it to continue to achieve exceptional user growth, and undoubtedly take share.”
The shares offer a dividend yield of 7.6% and trade on a price multiple of 10.4 times the broker's conservative estimate of 2021 earnings. Its target price of 1,950p compares with 1,584p currently.
Spikes in data traffic as a result of Covid-19 have led to increased demand for the services of Spirent Communications from both mobile operators and network equipment customers.
The acceleration of 5G rollouts in Asia and Europe should also drive strength in its testing solutions and make Liberum's 2020 forecasts for sales growth of 6% at an adjusted operating margin of 18.5% “easily achievable”.
Recent weakness means shares are trading below their historical range, and at 22.4 times 2021 earnings the broker sees this as a good buying opportunity. Shares are currently 254.5p but Liberum has a price target of 310p.
FW Thorpe, which designs and manufactures professional lighting equipment, impressed Liberum by turning in a profit in each of the worst months of the Covid-19 crisis and without any need to use the government furlough scheme.
Highlighting a price target of 375p, compared with 340p today, Liberum said £63 million of net cash provided significant firepower for a bolt-on growth strategy.
The same rationale is applied to Luceco, which specialises in LED lighting products and wiring accessories. Its 2020 guidance has been raised four times in as many months and is now ahead of expectations set before Covid-19.
The broker's “conservative” 260p price target compares with 238p:
“With continued strong organic growth, a likely reset in margin targets and a focus on bolt-on M&A we expect shares to continue to re-rate.”
- UK shares: tips on how to find bargains and avoid value traps
- FTSE 100 predicted to boom on back of Brexit trade talks
- Take control of your retirement planning with our award-winning, low-cost Self-Invested Personal Pension (SIPP)
The smallest stock on the list is AIM-traded Cake Box Holdings, having impressed by growing sales 30% year-on-year in the 20 weeks since re-opening stores in May. The success has also led to high demand from potential new franchisees.
Liberum's target price of 265p compares with 208p today:
“We believe that the launch of its delivery proposition will be a key driver of the growth as it broadens the appeal of the offer and opens up further market opportunities.”
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.