- Strategists highlight overlooked earnings momentum, improving fundamentals and room for re-rating
Deutsche Bank has refreshed its UK small and mid-cap (SMID) model portfolio, flagging what it sees as a powerful blend of undervalued growth stories, turnaround potential and defensive compounders.
In its latest quarterly update, the bank kept faith with nine existing names and added engineering group Rotork PLC (LSE:ROR), citing a growing divergence between operational performance and investor expectations across the sector.
The new line-up, drawn from the FTSE 250 excluding investment trusts, is pitched to investors looking for mispriced opportunities in a market where valuation gaps have widened.
Deutsche’s equally weighted £10 million virtual fund includes names from across the industrial, tech, financial and consumer landscape, with an average expected upside of over 50%.
Rotork was the sole newcomer this quarter, replacing easyJet. The German bank sees multiple tailwinds for the actuator specialist, including a rebound in power markets, steady LNG infrastructure spend and a strengthening aftermarket services business.
More notably, sales have accelerated meaningfully since the group shifted strategy under its current leadership. Yet the stock continues to trade on 18x forward earnings, a 15% discount to its long-term average.
A £50 million buyback and solid net cash provide further comfort, while management has begun signalling a more proactive stance on capital deployment.
Rotork’s addition reflects Deutsche’s broader thesis: UK mid-caps are starting to recover from an extended period of de-rating, but investors are still underpricing the resilience and earnings momentum in parts of the market.
That includes names like Kainos Group PLC (LSE:KNOS), the Northern Ireland-based IT services firm, where Deutsche believes Workday implementation growth and public sector digital transformation provide clear visibility.
The shares have come off sharply since early 2024 but still offer what the bank sees as one of the most compelling mid-cap tech exposures in Europe.
In financials, MMan Group PLC (LSE:EMG) continues to stand out. Despite macro headwinds and equity market volatility, the firm’s scale in quant strategies, steady inflows and flexible cost base give it room to manoeuvre.
Analysts believe its capital-light model and cash returns are being overlooked, particularly given how conservatively it is priced versus global peers.
Bellway, one of the UK's largest housebuilders, is also firmly on the list. While the backdrop for housing remains clouded by stamp duty changes and interest rate uncertainty, Deutsche said the company’s land discipline and strong balance sheet position it well to absorb shocks.
Any stabilisation in demand or surprise strength in completions could provide a tailwind. The bank is less focused on a volume recovery than it is on management’s ability to maintain margins and continue returning cash.
Elsewhere, familiar holdings like Tate & Lyle PLC (LSE:TATE), JTC PLC (LSE:JTC) and Coats Group PLC (LSE:COA) remain in place - each reflecting a belief that self-help stories with improving returns and cash flow have yet to see full recognition in the market.
Even Beazley, the Lloyd’s insurer with the lowest expected upside in the group, is included for its stable underwriting performance, consistent capital return track record and defensive sector positioning.
Although the portfolio is rebalanced quarterly, Deutsche is using this update to reiterate its case that UK mid-caps are offering asymmetric opportunities, particularly in names where near-term earnings upgrades or re-rating triggers are already visible.
In a market where investor focus remains fixed on macro risks and large-cap defensives, the bank’s latest picks suggest it believes the best ideas may lie just below the FTSE 100’s surface.