UBS has published its latest HOLT analysis, identifying Crocs, Inc. (NASDAQ:CROX), Maximus, Inc (NYSE:MMS) and K92 Mining Inc (TSX-V:KNT) among the attractively valued small- and mid-cap (SMID) stocks across developed markets – although notably, no London-listed companies were included.
The screen draws from the HOLT framework, focusing on companies that score well on operational quality, have shown strong CFROI (cash flow return on investment) revisions over the past three months, and appear undervalued relative to both their peers and historical levels.
“With the valuation discount between SMID and large-cap stocks near historic highs on the HOLT market implied yield metric,” UBS said, “this week's screen focuses on SMID companies.”
Out of 113 qualifying stocks, 20 were ranked in the top tier based on recent CFROI revisions. A year ago, just 86 companies passed the same screen, reflecting a broader improvement in underlying financial performance or valuation conditions.
UBS analysts noted that despite the uptick in qualifying names, UK equities were absent from the top 20, underscoring the recent relative underperformance of London’s SMID universe.
The companies in this year’s screen were predominantly listed in North America and Japan. The US accounted for the largest number, with names such as Brookfield Infrastructure (NASDAQ:BIPC), McGraw Hill and Crocs, Inc. (NASDAQ:CROX) featured.
Canada also had strong representation, including Topicus.com and K92 Mining Inc (TSX-V:KNT). Several Japanese stocks, such as Mizuho Leasing and Toyo Tire, were also highlighted.
Among European listings, Finland’s Valmet Oyj was selected, trading at a wide discount to EU industrial machinery peers, along with Italy's Philogen SPA, Denmark's Netcompany and Germany's Nagarro.
UBS’s head of HOLT, Michel Lerner, said the underperformance of traditionally high-quality stocks reflects shifting market dynamics.
"About 70% of historically high-quality stocks in the US, Europe and Japan have underperformed this year,” he noted, with their HOLT economic PE premium to the market having dropped to its lowest level in nearly a decade.
Among quality stocks that have underperformed the market, he said many names are "now attractively valued versus the last five years, but not necessarily relative to a longer-term reference point.
"This is a key consideration given that the valuations of quality stocks got bid up after the global financial crisis as markets chased bond yield proxies in a negative bond yield environment, conditions that no longer hold true today."
Nevertheless, he said there are quality “fallen angels” where valuations are now attractive even compared to the long-term and where CFROI headwinds are easing.
Conversely, quality outperformers' PE premiums to the broader market are now at their highest level since the dotcom period, and their HOLT discount rate has dropped to its lowest level on record.
He said that although the market has been rewarding momentum, the HOLT screen continues to focus on quality outperformers at more reasonable valuations and with strong CFROI tailwinds.