It’s been a tough start to the year for mid-cap investors after the FTSE 250 index (UKX) retreated below the 20,000 barrier for the first time in more than a year.
Picking potential winners on the back of strong gains in 2017 is increasingly challenging, particularly as cost inflation bites across a number of sectors.
Despite this, UBS sees no reason to make wholesale changes to its UK Mid-Cap First XI, which it launched in December 2016 and has since delivered a return of 20%. That’s better than the equivalent growth of 11% seen in the FTSE 250 over the same period.
There’s just one change in the latest edition, with Cineworld (CINE) backed to make a positive impact now that it has secured shareholder support for its £2.5 billion acquisition of US-based Regal Entertainment.
UBS analyst Heidi Richardson’s price target of 285p represents a 20% potential upside on the basis that management executes the combination successfully.
She believes that structural industry concerns posed by streaming and on-demand services such as Netflix (NFLX) are now priced in.
The other stocks in the UBS First XI are Ashmore (ASHM), Crest Nicholson (CRST), Elementis (ELM), Howden Joinery (HWDN), National Express (NEX), Paragon Banking Group (PAG), Polymetal International (POLY), Rotork (ROR), Serco (SRP) and Vesuvius (VSVS).
The biggest potential upside opportunity comes from outsourcing firm Serco, which UBS analyst Rory McKenzie is backing to deliver sustainable profit growth this year for the first time since 2012.
He said: “We believe profitability can move up faster than is currently priced in, driven by sales momentum.”
UBS has a price target for Serco of 140p, which represents upside of 68% against the position at the end of last week.
The investment bank is also backing Polymetal International to deliver, having upgraded the precious metals company to ‘buy’ in November. Shares have been the weakest performer in the First XI since December, with a drop of 13%, but UBS still thinks the stock can rise 45% to reach a price target of £11.
Analyst Daniel Major said: “We like POLY’s near-term volume growth, sector leading dividend yield and portfolio of long term growth options.”
Top performer in the First XI has been Kaz Minerals (KAZ), which rose 22% before being replaced from the list in January. Rotork also performed strongly with a gain of 12.6%.
Howden Joinery has risen 2.5% since December, which UBS said supported its view that opportunities remain among UK domestic companies where they have a “strong and unique market position”.
Since the last update in mid-December, the UBS First XI is down 2.1%, outperforming the FTSE 250 after a fall of 3.5% for the second-tier index.
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