Are these UK stocks ready to mount a recovery surge?

With the UK economy growing at record speed in the last quarter, the markets are looking at recovery stocks to add to their portfolios. HSBC analysts have revealed some equities that could be ones to watch as the country’s economic recovery rolls on.

UK recovery stocks

HSBC picks British stocks to watch as economy stirs back to life

In a research note published last week, HSBC highlighted several stocks it believes could perform very well in a recovering UK economy.

HSBC analysed 68 midcap stocks, i.e., mid-sized companies, to gauge how their 2019 earnings would compare against their theoretical 2022 levels.

This list is similar to Goldman Sachs’ “conviction stocks” list of equities it thinks can overperform in 2021.

“For the most part the market has already priced in a recovery,” HSBC said. “Of the 68 names, there are 24 where consensus doesn’t expect to see a full recovery by FY22. If we narrow the list further, only 12 are still trading below the prevailing share price on 1 February 2020.”

The implication is that the stocks flagged by HSBC have yet to have recovery fully priced in. As they’re currently trading below their pre-pandemic levels, they have a sheen to them that should attract investors and traders alike.

Of course, no analysis is perfect. HSBC could still be wrong, and these stocks may underperform. Because of their status as “recovery” assets, their performance essentially hinges on how well the UK economy performs from here on out.

The UK economy roared in 2021’s second quarter, accelerating at a rate of 4.8% after a first quarter contraction of -1.6%. Momentum, however, is expected to slow towards the end of the year.  The Bank of England predicts Q3 GDP growth of 3%, for instance, while other analysts suggest it’ll be more like 1.5%.

Despite this, things are still relatively good for Britain, all things considered. 75% of adults have had two jabs. The vast majority of travel and social restrictions have been lifted. There’s a sense of the country coming back to life.

With that in mind, let’s look at some standouts from HSBC’s recovery stocks list.

UK recovery stocks to watch

The headline stocks on HSBC’s recovery watchlist all come from a variety of different sectors and industries. This approach takes in the full sweep of key areas of the UK economy and doesn’t weigh too heavily in one direction.

Stocks to watch, according to the bank, include:

• Marks & Spencer – Retail
• Greencore – Food producer
• WH Smith – Retail
• Nichols – Drinks producer
• IWG – Office & property rentals

“All have been hit hard in the pandemic – in large part due to working from home – and we think they should see a full recovery in due course, but the shares have yet to price this in. We rate all of these names Buy,” HSBC said.

Several stocks also had their target prices raised by HSBC.

TT Electronics, a manufacturer of electronic components and subsystems, was rated up to £0.315 from £0.310.

Likewise, semiconductor supply XP Power saw its target price upgraded from £61.00 to £64.90.

Of the XP Power hike, HSBS analysts said: “We have a Buy rating as we expect growth to surprise on the upside due to the strength of the capex cycle in semiconductors.”

In response to strong trading and faster-than-anticipated recovery, audio-video firm Midwich also enjoyed a target price improvement from HSBC. The bank upped Midwich’s target to £6.30 from £5.85.

“The H1 2021 trading update indicated a strong rebound with healthy organic revenue growth of 25% y-o-y [year-over-year] vs our estimate of -4%,” HSBC said, regarding Midwich.