Top mid-caps ahead of Brexit vote

Hunting among the beat-up second tier, this stock picker has found the mid-caps to outperform. Graeme Evans reveals some great high conviction ideas here.

It's been a particularly gruelling few months for mid-cap investors, with the recent global sell-off compounded by Brexit worries in the FTSE 250 Index.

The second-tier hasn't just underperformed the FTSE 100 over the previous 12 months, broker UBS said London's non-blue-chip segment represented the worst performing set of indices in Europe over the last year.

This reflects the deteriorating UK economic picture and the fact that, compared with the FTSE 100, a larger proportion of earnings are in sterling. On the brighter side, a 15.6% slide in the FTSE 250 index in 2018 means some interesting valuations depending on your viewpoint on the outcome of Brexit.

Some useful pointers come from UBS's updated list of high conviction ideas in its UK Mid-Cap First XI, which has delivered a return of 15% against 3.1% for the FTSE 250 index since its launch in December 2016.

UBS is making two interesting changes to the list, with Victrex (LSE:VCT) and Electrocomponents (LSE:ECM) taking the places of Ashmore (LSE:ASHM) and Serco (LSE:SRP).

The remaining constituents are Bellway (LSE:BWY), Cairn (LSE:CNE), Card Factory (LSE:CARD), Cineworld (LSE:CINE), Cobham (LSE:COB), Derwent London (LSE:DLN), Howden Joinery (LSE:HWDN), Paragon (LSE:PAG) and Rotork (LSE:ROR). Seven of the shares in the first XI outperformed the FTSE 250 in the period since early September, including Serco and Ashmore.

Source: TradingView (*)  Past performance is not a guide to future performance

The appearance of Victrex in the list follows a slump of 30% for its shares since early October. The company makes a particular kind of polymer that is lighter and more durable than metal, meaning that companies designing parts for planes and vehicles can improve efficiency. Victrex's PAEK polymers are also used extensively in mobile phones and medical implants.

However, it is the expectations of a market-beating performance from Victrex's PEEK polymer that has captured the interest of UBS analysts. As a result, they are confident there’s potential for Victrex to recoup those recent share price losses.

Our own companies analyst Richard Beddard is also a fan of the Lancashire-based company, which was spun out of ICI in 1993. Last year, he described Victrex as a good share to hold for the long term, so long as you can withstand the inevitable turbulence when the economy falters.

• Victrex: One to own through thick and thin

• Electrocomponents shares backed to keep rising

FTSE 250 stalwart Electrocomponents suffered a similar fate over the final quarter of 2018, unwinding a big chunk of the 300% share price rally achieved since 2015.

UBS thinks the sell-off has been overdone as it fails to take into account the company's potential for self-help in order to drive earnings growth. They have a price target of 650p, which compares with 537p today and 760p in June.

The supplier of more than 500,000 industrial and electronic components has transformed its fortunes in recent years, helped by cost savings and a focus on targeting new markets in Asia Pacific.

UBS analyst Rory McKenzie said:

"Digital investments can sustain share gains and we expect Electrocomponents to remain in positive growth territory versus investors now pricing in declines."

Among the other stocks in the mid-cap first XI, the biggest potential upsides come from Bellway and Cairn. Based on Tuesday night's prices, the pair have price targets of 3,800p and 280p, representing growth of 41% and 76% respectively.

On Bellway, UBS said:

"The business is run well and it continues to have a conservative view of leverage. Its superior margins are a reflection of disciplined land buying and execution."

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.