Jet2, Just Eat, Hays and Keywords among UBS top 10 UK small and mid-caps

Increasingly bullish about the UK small and mid-cap stocks, UBS has unveiled its first list of top picks for 2024, four of which were online and digital platforms, Trainline, Rightmove, Trustpilot and Just Eat.

Two of the others were in the broader leisure space, Keywords Studios and Jet2, while the remaining names were insurer Hiscox, hedge fund manager Man Group, recruiter Hays and industrial play Bodycote. 

"The current macro backdrop presents an opportune time for the FTSE 250 to regain some valuation discount," analysts Beatrice Allen and Natasha Brilliant wrote.

"Signs of economy recovery are in sight, our strategy team sees material upside to consensus earnings on average for FTSE 250 stocks, sentiment on the UK market appears to be improving and yet valuations still look cheap, even when adjusted for quality."

Overall, a total return of around 10% is forecast for the FTSE 250 excluding investment trusts, versus nearer 4% for the FTSE 100.

From the broad pool of almost 100 UK midcap names covered by UBS, Allen and Brilliant pulled out 10 they said they think investors "should be owning for 2024".

This list largely focuses on well managed companies offering attractive or strongly improving cash generation and/or optionality around increasing shareholder cash returns, while some are in what the analysts call "self-help" or "show-me" stages but are believed to offer material potential for profit and cash improvement while being "deeply undervalued" by the market at present.

In alphabetical order: Bodycote Group (LSE:BOY) is seen as offering 24% upside to the investment bank's target price.

"A misunderstood cyclical improver with margin upside, trading at a 10% FCF yield," is the Allen and Brilliant summary.

Hays PLC (LSE:HAS), targeting 33% upside, is a "cyclical recovery play with strong market position and self-help angle, but trading at a near-trough valuation".

Another where the potential upside is seen at 33% is Hiscox Ltd (LSE:HSX), which is expected to enjoy "pricing tailwinds with undervalued structural growth opportunity offering strong earnings momentum with ongoing buyback support".

Jet2 PLC (AIM:JET2), tipped for 23% upside, is a "well positioned market winner with strong brand and balance sheet".

The biggest anticipated upside to the UBS target price is for Just Eat Takeaway.com NV (LSE:JET, NASDAQ:GRUB) at 85%.

This is "a dominant player within a recovering market, benefiting from expanding margins and strongly improving FCF, which should drive increased cash returns".

With the shares down over 40% in the past year. Keywords Studios PLC (AIM:KWS, OTC:KYYWF) is seen as offering 50% upside. This is a "high quality market consolidator with strong growth, stable margins and high returns," where Allen says the shares are "deeply mispriced for the quality on offer".

The targeted upside for Man Group PLC (LSE:EMG) is 25% upside for what is viewed by the bank as "a best-in-class asset manager seeing good momentum with more to come, but trading 2 standard deviations below its historical average".

If the Rightmove PLC (LSE:RMV) target price is hit that would garner 28% upside for this "relatively resilient cash generator with profit acceleration ahead, trading at an unjustified discount to peers".

Last two, Trainline PLC (LSE:TRN) and Trustpilot Group PLC (LSE:TRST) offer sub-20% upside to the UBS target prices.

The former a "market leader, with structural tailwinds where regulatory concerns are overdone and where increasing cash returns are likely", while the latter is "a unique player in an attractive market, with plenty of headroom for growth and a highly scalable SaaS business model".