MILAN (Reuters) - Investors have been lukewarm about the earnings of some of Europe's star performers, which suggests more neglected corners of the market are popping up on their radar screens, particularly as interest-rate cuts become more likely.

Europe's two most valuable companies, ASML and Novo Nordisk, were hit hard on earnings day. ASML burnt $45 billion in four sessions and Novo suffered its biggest two-day drop in 18 months. Ferrari on Tuesday fell nearly 5% - its biggest daily drop in two years.

But the fall in their shares is seen as being less about disappointment over numbers and more a pause for breath after record surges that have stretched valuations to a point where these popular stocks look vulnerable to profit-taking.

So, as investors book profits on the big gainers, they are looking for opportunities elsewhere. A gradual recovery in Europe's economy and the prospect of rate cuts in the region by June make low-valued and under-owned stocks an ideal hunting ground.

"It's all about positioning," said Angelo Meda, head of equities at Italian private bank Banor SIM. "Certain narratives that have driven the markets need to take a breather."

Over the last two months, European utilities and real estate have raced ahead of the market, but are still the two worst-performing sectors in the year to date. ASML and Novo Nordisk have lagged the market in this time.


Stock pickers are betting that a reduction in borrowing costs could boost shares in rate-sensitive utilities, seen as a proxy to bonds, and real estate, which also benefits directly from falling rates.

Under-owned smaller-cap stocks, which have suffered during the rate-hike cycle due to their higher exposure to floating-rate debt, could also be in for a reversal.

Over the past decade, utilities traded on average at par with the overall market's valuation. Now they sit at a 10% discount, per LSEG Datastream estimates based on a PE metric. Real estate now displays a 12% premium, less than half the 30% average premium.

Being this cheap could make them less exposed to possible pullbacks, as uncertainty over the direction of rates in the United States grips markets.

Moreover, these sectors are highly shorted, exposing them to possible short covering should the market turn.

"Positioning has rarely been this extreme. I believe a rotation is going to take place. It could be violent and will inevitably reward the laggards," said Alberto Tocchio, Head of European Equity and Thematics at Kairos Partners SGR.

"Commodities, utilities and small caps are the three areas which I would start to overweight. And we have already started to do so across our funds," he added.


Meanwhile, in another example of fatigue for high-flying stocks, defence shares in Europe have been moving sideways since they suffered their biggest daily drop in a year a month ago, mainly on concerns over their valuation.

The faltering momentum for Europe's highly crowded trades has echoes on Wall Street. Berkshire Hathaway trimmed its stake in Apple this month, but Warren Buffett still heaped praise on the iPhone maker.

More broadly, cheap valuations are among the reasons cited by those who favour Europe over the U.S. on expectations that it could improve on its historical underperformance.

Among them is Emmanuel Cau, a strategist at Barclays, who however noted last week that equity flows to Europe were still subdued, suggesting sentiment was still cautious.

Yet, he said "still-high concentration in quality/growth/tech/US leaves room for broadening out to regions, sectors and styles that have been left behind".

On Wednesday, Barclays upgraded utilities to market-weight, citing potentially peaking rates and stabilising gas prices. It said small caps were likely to benefit from a broadening in market leadership.

($1 = 0.9283 euros)

(Reporting by Danilo Masoni; Editing by Kevin Liffey)

By Danilo Masoni