The UK mid-cap equity market is filled with cutting-edge companies and exciting investment opportunities, many of which are more exposed to future growth drivers than larger companies in the FTSE 100.
However, the past few years have been a mixed bag for mid-cap stocks, with market uncertainty affecting domestically focused stocks particularly hard. Recent supply constraints have also led to a surge in inflation, which will no doubt remain a key focus for markets. Nevertheless, long-term performance has been healthy. Today, there is recognition that mid-cap UK companies are substantially undervalued, which could offer an attractive buying opportunity.
Watches of Switzerland – inflation-hedging through luxury retail
Despite a decline in overseas sales during the pandemic, luxury retailer Watches of Switzerland (LSE: WOSG) ended 2021 as one of the biggest risers in the FTSE 250, having gained almost 140% and trading more than four times its 2019 offer price. Consensus forecasts are for revenue in the coming 12 months to be more than double its pre-pandemic peak and earnings to increase almost four-fold. This is bolstered by the brand’s inflation-proofing potential – luxury watches are durable assets with higher demand than supply, and retailers can pass on cost pressures to their largely price-insensitive base of customers.
Subscribe to MoneyWeek
Subscribe to MoneyWeek today and get your first six magazine issues absolutely FREE
Sign up to Money Morning
Don't miss the latest investment and personal finances news, market analysis, plus money-saving tips with our free twice-daily newsletter
Don't miss the latest investment and personal finances news, market analysis, plus money-saving tips with our free twice-daily newsletter
The retailer’s long-term growth prospects also look attractive. Sales of luxury watches in the US are 40% lower per capita than in the UK, providing Watches of Switzerland with a potential growth opportunity. The company has also just made its first foray into the $14bn European luxury watch market, thanks in part to its strong relationships with suppliers.
Dunelm – a cash-rich homeware champion
Dunelm (LSE: DNLM) is a leading homewares retailer with a long-standing reputation for offering high quality products at a reasonable price. It has consistently grown sales, predominantly through market-share gains. The company is differentiated by its scale, expertise and a supplier network that has been built up over many years. The refresh of its web platform in 2019 further enhanced its customer service offering and enabled it to produce excellent results during the pandemic.
The company is continuing to take market share across its multichannel offering while also expanding into adjacent categories, such as furniture. This, along with a store rollout programme, should enable it to continue growing the topline for many years to come. Dunelm has a net cash balance sheet and strong cash generation. This has resulted in two special dividends to shareholders within the last year alone – a trend we expect to continue.
Alpha FX – setting higher standards in FX
Alpha FX (Aim: AFX) provides foreign exchange services to corporate clients who are undertaking cross-border transactions with customers or suppliers. These services have seen increasing demand as the global economy has become more integrated in recent decades.
Alpha FX has a technology- and customer service-led approach in what has historically been a poorly-served sector, which has helped grow its client base ten-fold and revenue per client five-fold in the last ten years. Clients are supporting it in setting-up across the globe, which should continue to drive revenue growth. Its results have consistently beaten market expectations since it floated in 2017.
-
Side hustle tax changes: HMRC reforms could save thousands from filing self-assessment tax returnsThe government plans to raise the tax-free threshold for trading income – here is how it could help your side hustle
-
Return to the office: is working from home coming to an end?More and more employers want their staff to return to the office. Is it a good idea?
-
Cash in on the growth prospects of Europe's companiesOpinion Marcel Stötzel, co-portfolio manager of the Fidelity European Trust, selects three stocks
-
Global investors have overlooked these top tips in emerging marketsOpinion Chris Tennant, co-portfolio manager of Fidelity Emerging Markets, picks three attractive companies in emerging markets
-
Leading companies cashing in on India’s compelling growth prospectsOpinion Ewan Thompson, manager of the Liontrust India fund, highlights three companies he thinks are well-positioned to generate attractive economic returns
-
Should you invest in emerging markets?Emerging markets offer strong, long-term growth and excellent value, says Rupert Hargreaves
-
The best ways to invest in Vietnam – Asia’s communist dynamoVietnam has long been one of our favourite markets. The prognosis remains auspicious, says Alex Rankine.
-
India is a new global powerhouse — should you invest?India’s growth rate has slowed recently, but there is still ample scope for investors to benefit from its development.
-
Three companies that dominate their markets with critical productsA professional investor tells us where he’d put his money. This week: Charlie Huggins, manager of Wealth Club’s Quality Shares Portfolio, picks three stocks.
-
Should you continue to hold Smithson Investment Trust?Opinion Smithson Investment Trust, a small- and mid-cap fund, has struggled to live up to lofty expectations, says Rupert Hargreaves.
