BAE, Rotork, Ocado and Sage among Goldman's 'best of British'

On defence contractor BAE - which is rated at 'conviction buy' with a 750p price target - Goldman said recent underperformance offers an attractive entry point. It noted the stock has sharply underperformed the FTSE 100 in the past two months, and with 26% upside to its price target, a likely upcoming catalyst in the form of a Typhoon contract award from Saudi Arabia, and an unprecedented valuation disconnect versus US peer, the entry point is compelling.

Engineer Rotork, rated at 'buy' with a 280p price target, is attractive due to inflection demand and tailwinds from US and Chinese infrastructure, GS said. It added that recent results show evidence of inflecting order intake as key end markets recover, with first-half organic order intake up 5% compared with a slowdown of 6% in 2016.

As far as Ocado is concerned, Goldman said the stock continues to divide option, "with 40% of sell-side analysts rating the stock sell (per Bloomberg), and short interest amongst the highest levels across our European coverage (source: Markit)".

"Against this backdrop, our analyst Rob Joyce remains of the view that this stock is significantly undervalued."

GS highlighted the size of the US opportunity for the Ocado Smart Platform and said its US analysts outline a route to more than 10% overall online share in the US grocery market by 2027.

"If Ocado were to gain just 2% share of the market in the US’s nine major conurbations via its Smart Platform, this could add up to 15% to our current price target," it said. The bank rates Ocado at 'conviction buy' with a 440p price target.

It also rates software group Sage at 'conviction buy', with an 825p price target, saying the top-line growth picture is underestimated. The bank's analyst Mo Moawalla sees scope for 6% plus organic top-line growth to accelerate, with EBITA margin expansion of around 250 basis points over the forecast horizon.

"Mo’s recent roadshow with Sage’s CFO provided reassurance that the core business has scope to accelerate beyond the current 6%-7% organic sales growth range, driven by improving renewal rates from the current 86% to the low 90s and the switching of existing customers to a subscription-based model which allows for easier product cross-sell.

"With the stock’s current valuation discounting just 4% top-line growth and no margin expansion (based on our reverse discounted cash flow analysis), Mo sees this as one of the most exciting alpha opportunities across European IT software."

Finally, the bank said sell-rated Lloyds, which has a 58p price target, is between a rock and a hard place. GS said that against a backdrop of aggressive mortgage completions and increasing demand for time deposits and with Lloyds being the largest mortgage lender in the UK and having a higher-yielding mortgage book than peers, the stock looks vulnerable.

At 0940 BST, BAE shares were up 0.9% to 597.50p, Rotork was up 1.2% to 224.90p, Ocado slipped 0.4% to 283.80p, Sage was up 0.1% to 699p and Lloyds slipped 0.4% to 65.15p.