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In Europe — much like in the U.S. — a few key stocks have been driving the market, especially earlier this year, according to Morgan Stanley. In late February, just five stocks were responsible for 60% of European stock market gains year-to-date, the bank said. But it believes that the performance will start to broaden out, as history indicates that small-cap stocks typically lead the market higher in the following six months. “As this theme of ‘broadening out’ becomes more important, we think investors will increasingly look to quality small caps at attractive valuations as sources of alpha,” said Morgan Stanley in an April 3 note. It names three “overlooked” stocks that it says are cheap and quality names, with significant upside: healthcare software provider CompuGroup , cybersecurity firm Exclusive Network s, and W.A.G. Payment Solutions . The bank has an overweight rating on all three stocks. CompuGroup Morgan Stanley says this stock screens as the cheapest in its coverage of software names, and upgraded the stock to overweight on the attractive valuation. It also holds leading market positions in several countries including Germany, France and Austria, the bank added. “CGM benefits from the typical attributes of the software business model e.g. high customer stickiness given the high switching costs, highly recurring revenue (~70%) providing high visibility, the ability to put through annual price increases, healthy margins which should be boosted by operating leverage and price increases, and healthy [free cash flow] generation,” the analysts wrote. Morgan Stanley gave CompuGroup a price target of 37 euros, or 23% upside. W.A.G. Payment Solutions W.A.G. Payment Solutions’ core is in fuel payment cards, but it has since expanded to cater to the needs of the European trucking industry, the bank noted. The company has grown into one of the largest, most integrated payment providers, Morgan Stanley said. The bank says this is also a cheap stock – on an absolute basis as well as relative to peers. It gave the stock a price target of 135 pence, or 98.5% upside. Exclusive Networks Morgan Stanley says this is one of the largest and fastest-growing specialist distributors of cybersecurity products globally. “We continue to view Exclusive as an attractive way for European investors to play the theme of cybersecurity in a diversified manner,” the bank said. “The challenge in cyber — unlike other software markets — is that the basic problem you are trying to solve is ever present. The nature of threats is constantly changing, and so the products offered by the vendors – and the vendors themselves – are constantly changing,” Morgan Stanley said. “This means there is significantly more value a specialist distributor can bring to the channel.” It said Exclusive’s ability to attract and expand with best-in-class cybersecurity vendors enables the firm to attract more partners and customers. The bank increased Exclusive’s price target from 24.5 euros to 26.5 euros, representing 15.7% upside. — CNBC’s Michael Bloom contributed to this report.
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