Small and mid caps in April underperformed large caps by the biggest monthly amount since September 2008, according to Liberum Capital. It notes the FTSE 250 fell 2.8% in the month versus a 2.8% gain in the blue chip index.





Despite the recent dip, it says UK small to mid caps – or 'SMID' – are still the best performing asset class globally over the past one and five years, as illustrated by these tables (click to enlarge).




Liberum uses the research to flag its top equity picks for May in the small and mid cap universe. These are the stocks split into 'buys' and 'sells':



Balfour Beatty (BBY) ASOS (ASC)
Bovis Homes (BVS) APR Energy (APR)
Flybe (FLYB) Better Capital (BCAP)
Halfords (HFD) Chemring (CHG)
Imagination Technologies (IMG) Informa (INF)
Ithaca Energy (IAE) Lonmin (LMI)
John Menzies (MNZS) Mothercare (MTC)
Sirius Minerals (SXX) MITIE (MTO)
Spectris (SXS) Rotork (ROR)
St Modwen (SMP) Telecity (TCY)



Its top three buys for May start with Balfour Beatty, saying the infrastructure group is highly-operationally geared (the fundamental principle of operational gearing is that profit will rise at a greater rate than revenue due to predominantly fixed costs), has a strong balance sheet and trades on a 'cheap' rating. Analyst Joe Brent comments: 'Construction margins have a long way to travel from last year's 0.3%. Its balance sheet means that it will be there for the survivors’ photo.'


Liberum sees 'significant recovery potential' from airline Flybe's self-help plan. 'Having cut costs and refocused its network on a smaller number of more defendable bases, the airline has raised equity to fund a return to growth,' says analyst Gerald Khoo. 'Productivity improvements, a more cost-effective aircraft fleet mix and systematic new route analysis should allow this growth to be profitable.'


The investment bank also favours Imagination Technologies, saying there's 100% upside to the share price if targets are met or 13% downside if it misses. 'Margin has declined as Imagination's R&D (research and development) has tripled. The benefits of this rising R&D has not yet fed through into revenue, given the lag between developing new IP (intellectual property) and generating royalty revenue (3 to 5 years). There is hidden value in Imagination's emerging IP blocks (Ensigma, MIPS) outside of graphics,' comments Liberum's Eoin Lambe.

Issue Date: 02 May 2014