Are these the best mid cap shares to watch in May 2024?

Mid-capitalisation stocks are companies that trade on the FTSE 250 index. As its name suggests, the FTSE 250 is an index of the top 250 companies by market capitalisation after the FTSE 100.

Mid caps tend to have a market value of at least one to two billion pounds or more. They may have greater growth potential than larger capitalised companies but, as a result, the shares could be more volatile.

The FTSE 100 also undergoes a reshuffle each quarter and famous names once in the top index can find themselves relegated to the FTSE 250 if they have underperformed. Likewise, out-performers in the FTSE 250 can find themselves promoted to the FTSE 100.

Best mid cap shares to watch

Here are some of the mid cap stocks we think may be worth watching in May 2024. These have been chosen for their prospects, valuation and recent market news.

Past performance is not an indicator of future returns.

1. Qinetiq
2. Serco
3. EasyJet
4. WH Smith
5. Bodycote

Qinetiq – (LON:QQ.)

Qinetiq is a high-tech defence firm servicing the military, which helps fight cyberattacks, provides technology for unmanned planes and virtual training for the armed forces, among many other services. Based in Farnborough, its clients include the UK Ministry of Defence, the US Military and the Royal Navy. Given the myriad current political tensions around the world, the shares are worth watching.

At its recent third quarter results, the company announced its intention to return £100 million to shareholders in a share buyback scheme. Meanwhile, Qinetiq’s current order backlog is worth £1.4 billion, while revenue under contract for the full year stands at 95%, up on last year.

The company says that cash generation has been strong, with 90% plus cash conversion expected for the full year. Its EMEA (Europe, Middle East and Africa) division is performing well, however its Global Solutions division is seeing lower sales due to uncertainty and budget delays in the US market.

Nevertheless, its Avantus division is continuing to pick up new business, with $872 million in new contract wins this year. The shares are up 3% in the past 12 months to 349p but are worth watching given the geopolitical climate. Analysts at broker Berenberg Bank have a price target of 445p on the shares.

Serco – (LON:SRP)

In these financially straitened times, many governments and large companies are trying to save money. This is where Serco, a major outsourcing firm, comes in. It works with governments and local authorities around the globe to deliver major services, such as defence services, prisons and – topically but not necessarily popular – immigration services. It also operates in the space sector.

In December, the company purchased European Home Services, which provides immigration services in Germany, for €40m (£34m), and Climatize, which operates in the sustainable development sector.

In its recent full year results Serco said revenues for the full year 2023 rose by 8% at constant currency rates to £4.9 billion for 2023, while underlying operating profits increased by 5% to £249 million, in line with forecasts. The order book remains strong at £13.6 billion, with a £10 billion pipeline of potential new work.

Meanwhile, Serco is also returning £140 million to investors. The shares are up 20% this year to 184.3p and trade on a price earnings ratio of 10. Analysts at broker Jefferies have a buy recommendation on the shares.

Easyjet - (LON:EZJ)

Easyjet announced in its Q1 trading update that it is taking a £40 million hit for the half-year due to the Israeli/Hamas conflict. Nevertheless, it still expects to see the half year loss reduce compared to last year.

Meanwhile, it continues to benefit from the return to European holidaymaking following the end of the Covid pandemic. The company is seeing strong growth in its Easyjet Holidays division, with the business delivering a £30 million profit in the first quarter compared to a £13 million profit in the same period last year.

The budget airline is well-funded with a strong net cash position of £4.1 million at the full year results in November last year. Indeed, it recently reinstated its dividend.

Shares in the budget airline have had a reasonable run and are up 7% this year to 527p. However, they are still trading some way off their three-year highs of 884p seen in April 2021. Analysts at broker JP Morgan think the shares could reach 689p.

WH Smith - (LON:SMWH)

Another company reaping the rewards of the resurgence in travel is retailer WH Smith. Its focus away from the high street and onto travel terminals, such as airports and stations, is paying off. In its January trading statement, group sales rose by by 5% in the 20 weeks to 20 January 2024, while revenues were up 16% in the travel business. The retailer is seeing good growth in its UK and North American travel businesses and is a strong cash generator. However, like-for-like sales in its UK high street business were down 3% during the period.

The shares are worth watching, given that they are down 16% this year to 1277p. A price earnings ratio of 22 may be a little pricey but not unaffordable. Analysts at broker Berenberg Bank trimmed their target on the shares from 2000p to 1900p last year but maintained their buy recommendation.

Bodycote (LON:BOY)

Bodycote provides heat treatment and thermal processing services and services the aerospace and defence, industrial and automotive sectors. Clients include aerospace manufacturers, including Boeing and Airbus. Full year results posted in March saw sales up by 8% to £802.5 million (£743.6 million) and operating profits up 17% to £127.6 million (£112.2 million).

The company has been hit by increased energy costs but managed to cut usage over the full year by 4%. It is also seeing good growth in its specialist technology, oil and gas, aerospace and medical divisions. Bodycote also announced the acquisition of Lake City, a vacuum heat treatment business, for £52 million and plans to return £60 million to shareholders.

The shares trade on a price earnings ratio of 16 and up 6% this year but offer defensive attractions and a 3.2% dividend yield.

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Top mid cap shares to watch summed up

The above five companies are just a small selection of top stocks to watch among the mid-capitalised companies. Remember that any company can also fail and always do your own research.

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*Based on revenue excluding FX (published financial statements, October 2021).