Top stocks: Lloyds Bank, Tesco and Vodafone make the list

Lloyds Banking Group, Tesco and Vodafone are among several UK names on a 31-strong list of European "top stocks" that together have the potential to deliver earnings per share (EPS) growth far greater than the wider market.

The European Top Macro-to-Micro Stocks research by UBS also features Royal Dutch Shell, CRH, Cobham, Carnival, IAG and British American Tobacco.

This week's report uses five macro levers, such as the strength of the euro or the resilience of the European consumer, to show which stocks are best placed to benefit. Overall, the Top Stocks list offers EPS growth of about 16% in 2018, which is significantly higher than the 8% promised in the Stoxx 600.

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This also comes at a cheaper price, with a combined PE multiple of 14x compared with 14.7x for the wider market. On top of this, the list offers a much higher projected dividend yield at 4.3%, versus 3.6%.

Source: interactive investor         Past performance is not a guide to future performance

Operating leverage is the macro trend helping many of the UK firms in the list, including Lloyds, Shell, CRH, Cobham, Tesco and Top Stock new entry Carnival.

The resulting significant bounce in profits and margins has been the pillar of the European recovery, although UBS notes that there are now other potential levers to pull in the next stage of the European recovery cycle.

In particular, it points to capital expenditure and the fact that a balance of 30% of firms in a separate UBS study expect to increase fixed investment spending over the next 12 months.

Vodafone is the only UK stock out of 11 European players featured in this capex category. The mobile phone giant is also represented in the more thinly populated areas covering euro strength and re-leveraging.

The second of these macro levers highlights companies - including airline IAG - that could re-leverage at low rates before interest rates rise.

Cyclical sectors have been the drivers of the earnings recovery so far and UBS thinks that this trend is likely to continue.

There are nuances, however, as some defensive sectors did not behave as defensives in recent years (such as Food Retail and Telecoms) and are now in a position where they could bounce back.

The upside to price targets in the UBS research includes a 29% improvement for Vodafone, 34.5% for Lloyds, and 6.2% at Shell. The overall upside across the Top Stock lists is 19.9%, based on prices at the end of last week.

Combined EPS growth across the years 2018 and 2019 is almost 15%, with Tesco set for one of the top performances at over 50%. Shell is at 18%, Cobham 16% and IAG 17%, with Lloyds showing 0.9%.