Genus plc (LON:GNS), Sylvania Platinum Ltd (LON:SLP) and Luceco PLC (LON:LUCE) are among the top picks for UK mid and small caps for broker Liberum for the final two months of the year, while JD Wetherspoon PLC (LON:JDW) and Royal Mail PLC (LON:RMG) were among the least preferred.
The FTSE 250 “looks cheap” relative to its blue-chip sibling and should outperform during the new UK lockdown, Liberum analysts reckon, but they prefer international earners within the index that benefit from a stronger US dollar as risk aversion increases.
As lockdowns across Europe combine with continued high uncertainty around the US election, sectors including transportation, leisure and discretionary retail have whipsawed.
“In the short-term, we expect health care, online retail and food retail to outperform,” said Liberum’s Joachim Klement.
This sector weighting favours the mid-caps over the big-cap index, while Klement also believes the 250 is “more attractively valued than the FTSE 100 if we ignore highly uncertain earnings forecasts” for both.
But if looking at earnings, analysts expect a stronger decline for the FTSE 250 and FTSE Small Cap in 2020 and then a more rapid recovery in 2021, which drives the current extreme relative valuations of the FTSE 250 compared to the FTSE 100.
Looking only at dividends and the blue chips looks better value, with the dividend yield of the FTSE 100 now 30% below the dividend yield of the FTSE 250, the biggest discount since 2016.
Among Liberum’s top picks, there are a handful from the FTSE 250, including Civitas Social Housing PLC (LON:CSH) – “2020 has shown the resilience of its business model…and strong cash generation has supported a 1.9% increase in the quarterly dividend”; and Genus, which “has three exciting growth opportunities… the Chinese pork industry… beef-on-dairy is building momentum… gene editing is a major opportunity to help farmers deal with a devastating pig respiratory disease”.
From the FTSE 100, Segro and HomeServe are the top picks.
Among the small caps, there is fully listed Luceo, where guidance has been raised four times in as many months and is now ahead of expectations set pre-Covid and the target price is 260p, and GoCo (LON:GOCO), which “look cheap on all methodologies” as its new AutoSave product catalyses top-line growth and with margins expected to grow too, with a 150p target.
AIM-listed Sylvania has bounced back strongly from the COVID-19 mine shutdowns, with ample cash and the analysts expect improving platinum group metal fundamentals and low worldwide stocks to feed PGM prices, combined with the weakening South African rand, to drive Sylvania’s share price higher.
Elsewhere on AIM, FW Thorpe (LON:TFW) is also liked for its top-line resilience in each of the worst months this year, while £63m of net cash provides significant M&A firepower for a bolt-on growth strategy.
Among the least-liked, AJ Bell’s (LON:AJB) relative valuation is “challenging”; Dechra Pharmaceuticals (LON:DPH) is ramping up R&D investment which “comes with greater risk on returns”; JD Wetherspoon – “better value elsewhere”; Rio Tinto (LON:RIO) is a ‘sell’ amid climbing port stockpiles of iron ore in China and prices looking “set to trend lower for the foreseeable”.
For Royal Mail, the analysts feel the structural challenges faced by the group have been accelerated by the COVID-19 crisis and while regulatory changes to could aid a return to financial sustainability, “they also risk alternative solutions that do not involve Royal Mail at all”.