Key Takeaways
- 14 stocks in the Morningstar Mid-Cap Index are undervalued and three have a wide economic moat.
- The most undervalued UK mid-cap stock is trading nearly 50% below its fair value estimate.
- Lower borrowing costs are expected to boost mid-cap stocks in 2026.
The largest stocks in the UK have outperformed their smaller peers this year, but some UK equity managers believe mid-size companies are set outperform in 2026, driven by moderating inflation and interest rate cuts from the Bank of England. Cheaper relative valuations also support the case for buying UK mid-cap stocks, they say.
Abby Glennie, manager of Aberdeen UK Smaller Companies Growth Trust AUSC, which has a Morningstar Medalist Rating of Bronze, is is looking ahead to the upcoming Q4 earnings season in January and February.
“If UK small and midcaps can deliver on forecast earnings growth, even without a re-rating from today’s cheap base, the return potential looks rewarding.”
The Most Undervalued UK Mid-Cap Stocks
There are several mid-cap stocks that Morningstar’s analysts believe are trading below their fair value estimates. Within the consumer cyclical sector, housebuilders screen as undervalued, and with lower borrowing costs for both the consumer and the corporations, the property sector could rebound.
Going into 2026, 14 companies in the Morningstar Mid-Cap Index are trading below their fair values, according to Morningstar’s analysts. One stock, Croda International CRDA, has a Morningstar Rating of 5 stars, meaning it is considered to be significantly undervalued. A 3-star rating means a stock is fairly valued, while a 1-star rating means a stock is significantly overvalued. Three housebuilders are currently undervalued, trading in 4-star territory: Barratt Redrow BTRW, Taylor Wimpey TW., and Persimmon PSN.
And more than half the undervalued stocks have a narrow or wide Morningstar economic moat rating, an assessment of how likely the company is to keep competitors at bay for an extended period. Morningstar assigns a narrow moat to stocks it believes can maintain a competitive advantage for the next 10 years, while those with a wide economic moat are believed to achieve excess returns for at least 20 years.
Croda International CRDA
- Star Rating: ★★★★★
- Fair Value Estimate: £52.00
- Economic Moat: Narrow
The most undervalued stock in the Morningstar UK Mid-Cap Index is chemicals specialist Croda, trading 47% below its fair value estimate with a share price of £27.24.
Despite a year where the share price has fallen 16.25%, Croda delivered third-quarter sales growth driven by beauty and crop protection. The £3.8 billion company is undergoing a transition away from cyclical, lower-margin businesses to high-value niches across pharmaceutical, consumer, and agricultural end markets.
Morningstar’s analyst Diana Radu is encouraged by management’s continued emphasis on innovation and customer co-development, which underpin Croda’s pricing power and long-term potential across consumer care and life sciences. The stock has a narrow moat rating. Meanwhile, short-term headwinds have made markets skeptical, which has delayed share price recovery, Radu says. The stock has a five-year annual loss of 12.63%.
“We remain confident in the quality of a considerable portion of the portfolio, Croda’s innovation capabilities, and the execution discipline that provides a credible path to margin recovery.”
WPP WPP
- Star Rating: ★★★★
- Fair Value Estimate: £5.05
- Economic Moat: None
Advertising agency WPP has had a tough few years, down 56.20% in 2025 and with an annualized 5-year loss of 8.44%. The stock is trading 33% below fair value. The stock disappointed markets when it released third-quarter earnings with negative organic growth. The stock will leave the FTSE 100 index on Dec. 22 in the upcoming reshuffle.
With a new CEO and an ongoing review of its strategy, WPP is increasingly focusing on ad tech solutions, and the small- and mid-size business segment. Despite trading below the fair value estimate with a share price of £3.30, Morningstar’s analyst Mark Giarelli recommends caution due to declining indicators: “We recommend holding off on this 4-star stock until we see evidence of growth. We strongly prefer Publicis PUB and Omnicom OMC among the agencies due to their possession of PIG data assets.”
Bunzl BNZL
- Star Rating: ★★★★
- Fair Value Estimate: £32.80
- Economic Moat: Narrow
Bunzl is the largest worldwide distributor of nonfood consumables, and the stock is currently trading 33% below fair value after an earnings reduction in April and softer revenue in North America, its largest market. The stock has fallen 32.52% so far this year, and has a five-year annualized return of 0.07%. In addition, Morningstar has raised the uncertainty rating to High from Medium due to macro uncertainty.
Bunzl has a narrow economic moat, and Morningstar’s analyst Ben Slupecki remains bullish on North America’s turnaround: “Bunzl’s struggles are due to short-term execution issues in its distribution business from the switch to a sales-and-operations model from a branch model. However, Bunzl’s cost advantage remains intact and will continue bearing fruit in the long run.”
Barratt Redrow BTRW
- Star Rating: ★★★★
- Fair Value Estimate: 530p
- Economic Moat: None
Shares in housebuilder Barratt Redrow, the UK’s largest residential property developer by revenue, have fallen 14.47% so far this year, leaving the company trading 32% below the 530p fair value estimate. Morningstar’s analyst Jack Fletcher-Price says homebuilders have had a torrid downcycle since rates started rising in 2021 and build-cost inflation spiked. Over the past five years, the company’s annualized loss has been 3.33%. However, Barratt is set to capitalize on underlying demand for new homes in the UK.
Fletcher-Price says: “Despite lacking an economic moat, we view Barratt Redrow among the best positioned in the UK residential market value chain. With its sizable land bank and distinctive strategic land sourcing capabilities, we believe Barratt Redrow can capitalize on the government’s pledge to expand homeownership and address the housing crisis.”
Melrose Industries MRO
- Star Rating: ★★★★
- Fair Value Estimate: 800p
- Economic Moat: Wide
Defense company Melrose Industries, which specializes in engines structure components, is currently trading 30% below fair value, but remains the only stock among the five most undervalued mid-cap stocks that has grown this year, up 2.31% this year.
In a recent note, Morningstar analyst Loredana Muharremi says the stock has been affected by reports of the US-driven Russia-Ukraine peace deal, which triggered a downturn in European defense stocks.
She says the market reaction is overstated: “European defense valuations are anchored in structural budget increases rather than short-term Ukraine revenue, and rearmament plans are unlikely to reverse even in the event of a peace agreement.”
The stock has a five-year annualized return of 6.46% and a wide economic moat. Morningstar raised the fair value estimate in July due to increased aftermarket share, and the company is a long-term partner with all engine original equipment manufacturers such as Pratt & Whitney, GE Aerospace, Safran, and Rolls-Royce.
What Are UK Mid-Caps Stocks?
The definition of what constitutes a mid-cap and large-cap stock ranges across markets, as well as across index providers.
The FTSE 100 index, for example, includes 100 or so of the largest companies in the UK by market capitalization and is reshuffled quarterly: Currently the smallest stock on the index is worth £3 billion and the largest, AstraZeneca AZN, is worth more than £200 billion.
The FTSE 250 index constitutes the next 250 stocks bi size. The gap between the biggest and smallest companies in the index is significant, from the smallest constituent Paypoint PAY with a market cap of £283 million, up to the £4 billion Lion Finance Group BGEO—a company 14 times bigger.
Morningstar’s indexes divide large and mid-caps based on percentages of the total investable universe. The Morningstar UK Large-Cap Index represents the top 70% of stocks, resulting in a selection of 39 companies. The Morningstar Mid-Cap Index includes the securities that fall between the 70% and 90% market cap thresholds of the UK’s investable universe. Here, only 72 stocks qualify, with a market cap range from the £21 billion Fresnillo FRES at the top, which is also 14 times bigger than the smallest constituent, the £1.5 billion B&M European Value Retail BME.
The FTSE 100 Index’s smallest constituent is the £3 billion Hikma Pharmaceuticals HIK, while the Morningstar Large-Cap Index’s smallest stock is life insurance giant Legal & General LGEN with a market cap of £14 billion.
