Berenberg says 'buy' Diploma for earnings momentum

Most companies are trading at or near record high valuations after a rally in late 2020, Berenberg said. Investors should seek out companies with earnings momentum from mergers and acquisitions, overly cautious expectations or end markets that revive faster than expected, the broker said.

"With synchronised global growth on the horizon, the industrials sector is poised for a significant recovery in financial performance," analyst Anthony Plom wrote in a note to clients. "However, we think this strong recovery is already being priced into many share prices. We are therefore convinced that earnings momentum will remain a key factor in share price performance in 2021."

Berenberg listed Ceres Power, Diploma, Rotork, RHI Magnesita and Oxford Instruments as its top 'buy' picks, upgrading Diploma from 'hold' as a "rare entry point into a multiyear compounder". Its least-favoured stocks, all rated 'hold', are Avon Rubber, Morgan and Electrocomponents, both cut from 'buy'.

The broker said there was always money to be made in the UK industrial sector with the top share outperforming the worst by about 150% each year. Its top picks each have 40-100% upside on the bull case and least-preferred names have 20-40% downside in a bear-case scenario, Plom said.

On end markets, Berenberg fabvours clean energy, semiconductors, general manufacturing and steel with oil and gas possessing the biggest surprise potential. Civil aerospace and coronavirus-related healthcare look less positive, it said.

Oxford, Spectris and Rotork have the most options for M&A and private equity firms awash with cash may attempt takeovers, Plom said.

Aside from its top picks Berenberg said consensus expectations appeared conservative for RHI Magnesita, Vesuvius, RPS Group, Vitec and Hill & Smith.