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All Contents © 2020The Kiplinger Washington Editors
By Will Ashworth, Contributing Writer
| February 7, 2020
Mid-cap stocks aren't exactly spotlight hogs.
Many investors buy into large companies because they tends to be more stable, plus information and media coverage are more readily available. Investors also know to buy small-cap stocks if they want to make aggressive growth investments to boost their long-term returns. But mid-caps – typically, stocks between $2 billion and $10 billion in market value – tend to get lost in the mix.
That's unfortunate, because over the long haul, they tend to outperform their larger and smaller brethren.
Between 2015 and 2019, the S&P 500 outperformed both the S&P MidCap 400 and the S&P SmallCap 600 on a total-return basis (price plus dividends). In the 10 years from 2010 and 2019, small caps flipped the script, outperforming the large- and mid-cap indices. But across the entire span, from 2005 to 2019, the MidCap 400 delivered a total return of 293% – 14 percentage points higher than the SmallCap 600, and 33 percentage points better than the S&P 500. Experts point out that outperformance looks even better once you adjust for risk.
"Large-cap stocks offer the stability that comes with mature multinational businesses with diverse revenue sources," Matthew Bartolini, head of SPDR Americas Research, writes in a 2019 note to clients. "Small-cap stocks are unproven, but they offer potential for further expansion and market penetration. And midcaps offer a unique combination of the managerial maturity associated with large caps and the operational dexterity of small caps."
With this in mind, here are 15 of the best mid-cap stocks to buy to give you upside growth potential in stronger economies, along with some downside protection when the market environment looks weaker.
Data is as of Feb. 6. Dividend yields are calculated by annualizing the most recent payout and dividing by the share price. Analysts\' opinion data from The Wall Street Journal.
Market value: $3.2 billion
Dividend yield: N/A
Analysts' opinion: 10 Strong Buy, 2 Buy, 2 Hold, 0 Sell, 0 Strong Sell
Yeti Holdings (YETI, $36.59) makes premium coolers, bottles and other outdoor products. It's coming off a strong 2019 in which its stock gained a whopping 134%, and it appears ready to take its place among the best mid-cap stocks in 2020.
Yeti delivered better-than-expected third-quarter results at the end of October. Sales increased by 17% year-over-year to $229.1 million, and adjusted earnings popped 29% to $26.1 million, or 30 cents per share; both figures topped analyst expectations. For the full year, Yeti is expecting sales growth of at least 14.5% and earnings growth of 23% to 26%. Looking out to 2020, analysts predict revenues and profits will improve by 13% and 20%, respectively. All of these are promising figures.
In January, KeyBanc Capital Markets analyst Brett Andress conducted store checks at eight Lowe's (LOW) locations in Florida to ascertain how well Yeti's partnership with the home improvement retailer was doing. He wrote that Yeti's products were receiving excellent product placement in high-traffic areas, and that each location was stocking approximately $36,000 in products. Andress suggests that if Yeti sold at all Lowe's stores, the company could gain an additional $30 million in annual revenues and 10 cents per share in profits by 2021.
Another info trove – credit card data – indicates that Yeti's online sales in the important month of December grew by more than 100% over 2018. That has Andress suggesting a 62% jump in revenues for Yeti's fourth quarter.
YETI shares trade at 26 times analysts' estimates for next year's earnings and 3.6 times trailing 12-month sales. That's hardly cheap, but it seems reasonable considering Yeti's strong growth prospects and analysts' continued bullishness on the name.
Market value: $2.4 billion
Analysts' opinion: 5 Strong Buy, 1 Buy, 5 Hold, 0 Sell, 0 Strong Sell
Conservative investors might be tempted to lay off New Jersey-based Freshpet (FRPT, $66.65) in 2020.
Don't. While the manufacturer of natural pet food is up 344% since its initial public offering in November 2014, it has only just begun its pathway to profitability and is among several encouraging stories in the budding pet stocks space.
Freshpet is projecting 26% revenue growth to $244 million for its fiscal 2019, as well as a 43% jump in adjusted EBITDA (earnings before interest, taxes, deductions and amortization – a popular measure of operational profitability that backs out various accounting deductions) to $29 million. When the company went public five years ago, it had annual sales of just $63 million and an adjusted EBITDA loss of $192,000.
In its Q3 2019 report, Freshpet said that it converted three out of four manufacturing facilities from five-day production to seven-day. In the first quarter of 2020, it plans to convert its fourth facility to seven-day production. FRPT also is adding 90,000 square feet to its Lehigh Valley plant in Pennsylvania.
"With this rapid growth that we have, that capacity will get us about $540 million in net sales," CEO Billy Cyr told those in attendance at January's 2020 ICR Conference in Orlando. "We're already envisioning the next increment in capacity that will provide us the opportunity to get up to $1 billion in sales and that will require new capacity to come online in 2022."
Translation: FRPT is among the best mid-cap stocks to buy for a somewhat longer time horizon, as the next three to five years should see this growth in capacity flowing back to shareholders.
Market value: $3.8 billion
Dividend yield: 0.3%
Analysts' opinion: 9 Strong Buy, 0 Buy, 1 Hold, 0 Sell, 0 Strong Sell
It's hard to fathom a company such as Aaron's (AAN, $56.93), which made a name for itself hawking consumer goods on a lease-to-own basis, would do well in a strong economy. However, because it focuses on consumers with a FICO score between 500 and 700, which represents approximately 40% of the U.S. population, Aaron's is able to find customers in good times and bad.
Aaron's, which boasts 1,163 company-owned and 341 franchised store locations, estimates that the entire U.S. lease-to-own market is worth $25 billion to $35 billion annually, providing the company with a large, addressable market. Furthermore, 78% of Americans are said to live paycheck to paycheck, which suggests the need is high.
Stephens financial analyst Vincent Caintic has Aaron's among the best mid-caps to buy right now, recently naming AAN as one of the independent financial services firm's "top picks" for 2020.
Although Aaron's fleet of traditional brick-and-mortar stores has been its primary growth vehicle, things changed in April 2014 when it acquired Progressive Finance Holdings for $700 million. Progressive provides lease-to-own financing to other traditional retailers, which Aaron's calls virtual rent-to-own.
"In contrast with slowing consumer demand for financing (as we've seen with credit cards and auto lending), virtual rent-to-own should do well in 2020, primarily because the industry is still in its nascent growth stage. Customers who have not had point-of-sale financing opportunities in the past will now increasingly have the option due to the Aaron's offering," Caintic wrote in a January note to clients. He has an Overweight rating (equivalent of Buy) with a 12-month target price of $80 per share, indicating 40% upside from current prices.
Market value: $6.5 billion
Analysts' opinion: 16 Strong Buy, 1 Buy, 4 Hold, 1 Sell, 0 Strong Sell
Five Below (FIVE, $116.11) is a growing discount store that caters to teens and tweens, but also has a large following from adults who simply like the fact most of the retailer's products are sold at $5 or less.
Although Five Below had a choppy year in 2019, it still managed to generate a 25% total return for shareholders. Unfortunately, its stock tumbled more than 11% on Jan. 13 after providing holiday-season sales and updated fourth-quarter guidance figures that weren't as robust as investors were expecting.
"While our comparable sales during key holiday selling periods were positive, they were not strong enough to overcome the headwind of six fewer shopping days between Thanksgiving and Christmas, and overall sales did not meet our expectations," CEO Joel Anderson said in the company's press release.
Five Below isn't the only retailer to suffer an unexpected setback in the holiday shopping season between Thanksgiving and Christmas. Target (TGT), for instance, dropped on Jan. 15 after reporting that its same-store sales in November and December grew by just 1.4%, below the company's expectations.
These things happen, and Wall Street knows it.
Since Five Below's holiday-season report, 12 of 13 analysts have sounded off with Buy recommendations, albeit a couple of those lowered their price targets on the stock. However, Credit Suisse analyst Judah Frommer responded by upgrading FIVE from Neutral (equivalent of Hold) to Outperform (equivalent of Buy) with a $125 price target. He believes given that Five Below's same-store sales on Black Friday, CyberWeek and the last seven days of the holiday shopping season were all positive, the worst is behind it.
Future catalysts include thawing U.S.-China trade relations and the remodels of more than 60 locations. Furthermore, Five Below continues to open "Ten Below" sections – stores-within-a-store selling merchandise up to $10 – in new and remodeled locations. Investors should continue to buy this mid-cap stock on any major dips in its price.
Market value: $6.8 billion
Dividend yield: 1.9%
Analysts' opinion: 4 Strong Buy, 0 Buy, 4 Hold, 0 Sell, 0 Strong Sell
If your house has a big patch of grass, you're likely familiar with Ohio-based Scotts Miracle-Gro (SMG, $123.06), whose consumer lawn and garden products are used by millions of Americans to keep their lawns healthy and green.
Scotts isn't a highflier, but rather a company with a modest goal of delivering annual growth of 2% to 4% in sales, 4% to 6% in operating profits and 8% to 10% in per-share earnings growth, ultimately leading to shareholder returns of 10-12% annually.
Core brands such as Scotts, Miracle-Gro and Ortho deliver stable cash flow. However, it is the company's Hawthorne Gardening Company subsidiary, which it created in October 2014, that has driven Scotts' revenue growth in the five years since.
In April 2018, Scotts announced the acquisition of Sunlight Supply – the largest hydroponic distributor in the U.S. – for $450 million. It combined Sunlight with Hawthorne, whose target market is professional growers, including cannabis producers. Scotts said that the combined entity would record annual sales of $600 million and sell to more than 1,800 hydroponic retail stores in North America. Indeed, Hawthorne's 2019 revenues rocketed by 95% to $671.2 million. Excluding the sales from its Sunlight acquisition, sales still grew by 24%, which was three times the revenue growth of its U.S. consumer business. In 2020, SMG expects Hawthorne to grow its sales another 12% to 15%, compared to 1% to 3% for its U.S. consumer division.
"The momentum in Hawthorne has been building all year, and we saw our highest levels of organic growth in the fourth quarter, giving us a high degree of confidence as we look ahead into fiscal 2020," CEO Jim Hagedorn said in the company's Q4 2019 earnings release.
As the cannabis industry continues to mature, Scotts' stock will remain an important holding of most, if not all, cannabis ETFs.
Analysts' opinion: 1 Strong Buy, 0 Buy, 0 Hold, 0 Sell, 0 Strong Sell
Over the past year, Cannae Holdings (CNNE, $40.31) has generated a return of 93% for shareholders over the past year. But … what exactly is it?
Cannae, a Las Vegas-based mid-cap holding company, is the new identity of former Fidelity National Financial (FNF) investment subsidiary Fidelity National Financial Ventures. The company broke away from FNF in November 2017. The architect of that spinoff is Executive Chairman William Foley II, a Fidelity National founder who served as the title insurance firm's CEO until 2007 and has been chairman ever since.
One of Cannae's current biggest investments is a 16.5% stake in Ceridian HCM (CDAY), the human capital management software company behind Dayforce, which Ceridian acquired in 2012. Another big investment is Cannae's 24.5% stake in data analytics firm, which it acquired as part of an investment group that bought the firm for $6.9 billion in February 2019.
Since Cannae was created in 2014, it has generated $1.9 billion in realized value for shareholders from investments in restaurants, human capital management, automotive, data analytics and more. That has translated into a roughly 20% internal rate of return. The most recent realization for Cannae shareholders was four secondary offerings of Ceridian stock that generated $575 million in total net proceeds.
Of the best mid-cap stocks you can buy, Cannae is likely the most unsung. But it's worth considering nonetheless.
Market value: $2.2 billion
Analysts' opinion: 7 Strong Buy, 0 Buy, 0 Hold, 0 Sell, 0 Strong Sell
As its name suggests, Gray Television (GTN, $21.97) owns television stations in 93 different American markets. Its stations are ranked either first or second in 95% of those markets.
You might think it odd to see a TV-station owner amid a group of "growthy" mid-cap stocks in 2020. But the Robinson family – who still controls the company 27 years after Georgia entrepreneur Mack Robinson acquired what was then called Gray Communications, a small operation consisting of three TV stations – has nurtured this business into a $2 billion-plus company that delivers strong, albeit volatile, returns. GTN has outperformed the S&P 500, 115% to 63%, over the past five years.
Gray completed a $3.7 billion cash-and-stock acquisition of Raycom Media in January 2019. The deal made Gray's portfolio of 142 stations the third-largest portfolio in the U.S., covering 24% of all households and doubling its annual revenues to more than $2 billion. It also plunged the company into larger markets including Tampa Bay, Charlotte, Cleveland, Cincinnati, West Palm Beach and Birmingham.
In November, Gray announced the company's best third-quarter results in its history, thanks in large part to the Raycom acquisition. Through the first nine months of fiscal 2019, it produced $499 million in adjusted EBITDA and was on target to generate $85 million in annualized first-year synergies.
When Gray announced the Raycom acquisition in June 2018, it committed to paying down the debt quickly. When the deal closed in early 2019, net debt was approximately five times operating cash flow (OCF). By the end of September 2019, it was down to 4.5 times OCF. Gray aims to reduce that figure to below 4 times OCF in fiscal 2020. Most of the cash not going toward debt will pay for stock buybacks as part of the $150 million repurchase authorization the board approved in November.
When it comes to owning television stations, scale is everything. The Raycom deal put Gray in the big leagues.
Market value: $3.9 billion
Analysts' opinion: 7 Strong Buy, 0 Buy, 1 Hold, 0 Sell, 0 Strong Sell
Investors have roughly a year to buy Verint Systems (VRNT, $57.82) before the mid-cap cloud-based software company, which provides customer engagement and cyber intelligence solutions, splits into two publicly traded businesses.
Verint announced the decision on Dec. 4, 2019. It also said at the time that private equity firm Apax Partners would invest $200 million in Verint's customer engagement business in April 2020, and a second sum of $200 million once the two businesses officially separate, which is expected to happen shortly after the company's fiscal year ended Jan. 31, 2021.
"Apax Partners has a proven track record of creating value by partnering with leading software companies around the world, including significant experience in both carve-outs and cloud transitions," Verint CEO Dan Bodner said in a statement. "The investment represents a strong vote of confidence in our strategy and future growth opportunities."
Verint also will undertake a new share repurchase authorization program that permits it to buy back up to $300 million of its stock before Feb. 1, 2021.
VRNT shares have spiked by more than 20% since it announced the split. But the upside remains excellent. Following the split, investors will own shares in a customer engagement business that generates annual revenue of almost $1 billion, and a cyber intelligence unit with annual sales approaching $500 million.
The separation will allow both businesses to focus on growing their respective units while simultaneously making it easier for investors to evaluate both businesses. Buying Verint stock prior to the separation allows you to buy in before their respective growth stories get transmitted to the wider investment community. Better still, at 14.4 times forward-looking earnings estimates, VRNT gets you growth at a reasonable price.
Courtesy Mike Mozart via Flickr
Market value: $2.3 billion
Analysts' opinion: 7 Strong Buy, 2 Buy, 1 Hold, 0 Sell, 0 Strong Sell
If you're familiar with the Atkins diet, you might also be aware of Simply Good Foods (SMPL, $23.84). The company was created in July 2017 with the merger of Conyers Park Acquisition Corp. and Atkins Nutritionals, the health and wellness brand created by cardiologist Dr. Robert Atkins.
Simply Good Foods, which also includes the Quest Nutrition and Simply Protein brands, provides premium-priced snacks and meal replacement products to North American consumers interested in healthier alternatives.
In November 2019, Simply Good Foods acquired Quest Nutrition LLC for $1 billion in November 2019. Quest brought to the table $345 million in annual sales, 17% annual sales growth, and annual adjusted EBITDA of $70 million, including $20 million in run-rate synergies following the acquisition. Both companies have asset-light, low-capital-spending business models that should provide long-term profit growth.
For the quarter ended Nov. 30 – the first quarter of its 2020 fiscal year – SMPL's revenues grew 25.8% year-over-year to $152.2 million, while adjusted EBITDA rose 19.1% in the quarter, to $31.8 million. Thanks to the Quest Nutrition acquisition, it expects revenues and adjusted EBITDA in fiscal 2020 to hit $850 million and $154 million, respectively.
The base case is simpler: As long as Americans remain concerned about eating healthier, Simply Good Foods should remain an attractive investment.
Dividend yield: 3.3%
Analysts' opinion: 4 Strong Buy, 1 Buy, 1 Hold, 0 Sell, 0 Strong Sell
Newmark Group (NMRK, $12.26) is a New York-based, full-service commercial real estate advisory firm that provides services to both real estate investors, owners and tenants. Newmark was spun off from BGC Partners (BGCP) in November 2018.
Newmark grew its revenues by 18% year-over-year to $2.2 billion during the trailing 12 months ended Sept. 30, 2019. It also boasted an adjusted EBITDA margin of 25% – significantly higher than any of its major peers. Also, the business model generates significant recurring revenue. Roughly 67% of NMRK's sales were recurring over the past year, with the rest considered transactional in nature. That number has been slowly but steadily rising; recurring revenues were 61% of overall sales in 2016.
The estimated global revenue for commercial real estate services is $225 billion. Newmark currently accounts for approximately 1% of this amount and 6.5% of the 10 largest CRE brokerages.
Multifamily investment sales will be a key area over the next few years. That's because an aging population likely will result in many people selling their homes and moving into multifamily rental properties. That should heat up the buying and selling of apartment buildings, creating demand for Newmark's CRE services.
Newmark's overall business is more explosive than it might seem on its face. The company's revenues have grown by 34% compounded annually. In the future, its annual growth should slow to 20% a year – a more sustainable figure for a company with more than $2 billion in annual sales. Now, NMRK shares just need to reflect that reality.
Market value: $4.3 billion
Analysts' opinion: 10 Strong Buy, 2 Buy, 0 Hold, 1 Sell, 0 Strong Sell
Envestnet (ENV, $81.51) got its start in 1999, when the late Judson Bergman, founder and former CEO, recognized that independent investment advisors needed an integrated wealth management platform to meet the growing expectations of investors. Today, Envestnet's platform has total assets of $3.4 trillion and performs billions of transactions on an annual basis, helping more than 100,000 financial advisors manage their growing wealth management practices.
The mid-cap's business model boasts an excellent mix of organic growth combined with an aggressive acquisition strategy. Evestnet grew sales by 24% annually between 2008 and 2018. At the same time, it grew adjusted EBITDA by 28% annually over the same decade. Down the road, ENV plans to grow revenues and adjusted EBITDA by at least 15% and 18%, respectively – slower than before, but still brisk growth given the company's current size.
Despite helping a significant number of financial advisors already, the growth opportunities are significant. Envestnet says that by simply growing its existing relationships with 88,000 of its existing advisors, ENV could add $4 trillion to its platform. By adding 130,000 new advisors, it could add an additional $12 trillion to its platform.
Envestnet generates three streams of revenue: asset-based recurring revenue, which accounted for 54% of sales during the nine months ended September 2019; subscription-based recurring revenue (42%) and professional services (4%). Overall, sales grew by nearly 10% year-over-year.
A new growth opportunity to watch: In January, Envestnet's portfolio consulting group, in conjunction with Invesco (IVZ), launched seven new model portfolios that combine passive and active fund management, providing advisors with enhanced returns for their clients while managing the downside risk. Including these seven portfolios, Envestnet's ActivePassive Portfolios account for $4 billion in assets under management on its platform. This number could grow considerably in the coming years.
Dividend yield: 3.9%
Analysts' opinion: 4 Strong Buy, 0 Buy, 1 Hold, 0 Sell, 0 Strong Sell
Kennedy-Wilson Holdings (KW, $22.42) is another real estate play among these mid-cap stocks to buy. It owns, operates, and invests in multifamily and office properties in the Western part of the U.S., U.K. and Ireland. As of Sept. 30, 2019, KW had an ownership interest in approximately 48.1 million square feet of property, including 28,173 multifamily rental units. Its investment portfolio has a book value of $11.8 billion. On average, Kennedy-Wilson has an ownership stake of 60% in each of its investment properties.
Kennedy-Wilson has two operating units: KW Investments, which holds the real estate interests it owns, and KW Investment Management and Real Estate Services (IMRES), which generates fees by managing and operating real estate owned by other investors.
In late December, Kennedy-Wilson announced the closing of Kennedy Wilson Real Estate Fund VI – a $775 million fund that will focus on value-add real estate investments. The company put $82 million of its own capital into the fund, which will be able to acquire up to $2 billion in commercial real estate. As of the start of the year, Real Estate Fund VI had already committed $386 million in capital, acquiring $1.1 billion in real estate and adding to the revenue generation potential of its investment management unit.
"Institutional investors continue to show a strong appetite for real estate in West Coast markets, many of which are leading the country in job creation, wage gains and technology trends," Nicholas Colonna, Kennedy Wilson's president of commercial investments and fund management, said in a press release.
One last note: CEO William McMorrow has been chief executive of the company since 1988, and he owns 9.3% of its stock. Remember: Insiders with considerable "skin in the game" have additional motivation to drive shareholder value.
Market value: $4.9 billion
Analysts' opinion: 4 Strong Buy, 1 Buy, 0 Hold, 0 Sell, 0 Strong Sell
Helen of Troy (HELE, $195.77) likely brings to mind Greek mythology. Helen was the daughter of Zeus and Leda, and her twin brothers were Castor and Pollux. Interestingly, Castor & Pollux is a fairly well-known natural pet food brand in the U.S.
Helen of Troy is a consumer products company, too, but it deals in the health, housewares and beauty segments. Its brands include Vicks humidifiers and vaporizers, OXO cooking and baking utensils and Sure deodorant, and most of them have been cobbled together through more than a dozen acquisitions since 2003.
However, Helen of Troy broke a roughly three-year M&A dry spell in January 2020, when it paid $255 million in cash for Drybar Products LLC. You might be familiar with the Drybar blowout hair salons that have become popular in recent years. HELE is purchasing Drybar's line of hair-care products, while Drybar Holdings LLC will continue to operate its hair salons.
"Drybar will complement our Revlon and HOT Tools products, allowing our brands to resonate with consumers and professionals across the good, better, and best (hair appliance) segments," CEO Julien Mininberg said about the transaction.
Helen of Troy might continue to seek out acquisitions that add value to its three operating segments, whether it be of the smaller, tuck-in variety or larger, transformational deals, but the latter are more difficult to come by.
In its most recent quarter ended Nov. 30, HELE boasted sales growth of 10.1% to $474.7 million, and a 25.2% pop in adjusted operating profits to $79.1 million. Results like that, which have driven 69% price gains over the past year, will keep Helen of Troy among the best mid-cap stocks to buy.
Market value: $9.3 billion
Dividend yield: 4.2%
Analysts' opinion: 2 Strong Buy, 0 Buy, 8 Hold, 0 Sell, 1 Strong Sell
Brookfield Renewable Partners LP (BEP, $52.02) is one of the world's largest publicly traded owners and operators of renewable energy facilities. Its current portfolio has more than 18,000 megawatts of capacity from 5,253 generating facilities on four continents, including North America.
Hydroelectric power accounts for 74% of BEP's assets, with wind, solar, distributed generation and storage facilities accounting for the rest. The global investment in new renewable energy in the 2010s was estimated to be more than $2.6 trillion, and yet it still accounts for a small percentage of the global power generation.
"Investing in renewable energy is investing in a sustainable and profitable future, as the last decade of incredible growth in renewables has shown," Inger Andersen, executive director of the United Nations Environment Program said in September. "It is clear that we need to rapidly step up the pace of the global switch to renewables if we are to meet international climate and development goals."
Brookfield expects to be a leader in the years to come. Its goal is to deliver long-term total returns of 12% to 15% per unit (for master limited partnerships like Brookfield, a unit is like a share of a traditional company's stock) from its $50 billion in worldwide power assets. Between 1999 and 2018, Brookfield Renewable generated an annual total return of 16%, which is significantly higher than the 6% total return for the S&P 500.
While BEP might be one of the best mid-cap stocks to buy, it's also among the easiest to accidentally trip over. That's because you can buy the company in three different ways. First, you can buy BEP units, which are listed on the New York Stock Exchange. Second, the company plans to create a second investment vehicle, a Canadian corporation, which will also list on the NYSE under the symbol BEPC; Brookfield is doing this to increase the company's inclusion in major indexes that can't invest in master limited partnerships. The third option is to invest in Brookfield Asset Management (BAM), which owns 60% of the company.
No matter what you choose to do, Brookfield Renewable is participating in one of the biggest secular trends of the 21st century. It makes sense to own a piece of history.
Market value: $3.7 billion
Analysts' opinion: 9 Strong Buy, 0 Buy, 4 Hold, 0 Sell, 0 Strong Sell
Canada Goose (GOOS, $33.30) – the company best known for its down jackets filled with real goose feathers, and worn by celebrities and average consumers alike – is a mid-cap stock that might soar eventually. But it's also one of those companies that clearly will suffer growing pains on its way to greatness. Lululemon (LULU), another great Canadian brand, went through a number of highs and lows before it took flight in 2019.
Canada Goose did not take flight last year. In 2019, GOOS shares lost 17% while the S&P 500 logged a 29% gain – its best year since 2013. The firm has experienced a rough start to 2020, too. Most recently, it warned on Feb. 7 that various headwinds, including the impact of the coronavirus on Chinese sales, would weigh on its 2020 results. That's unfortunate, because outside the temporary setback, the company's Chinese expansion has been proceeding nicely.
One of Canada Goose's biggest problems hasn't been operational, but in setting expectations – something that has frustrated analysts and investors alike.
"Demand remains exceptional, but communication leaves our feathers ruffled," Susquehanna Financial Group analyst Sam Poser wrote in a note to investors in November, after Canada Goose warned about a significant revenue decline for its fiscal third quarter.
However, Poser also called GOOS "one of the few true growth stories in the consumer discretionary sector" and said that "if communication does improve, multiple expansion will follow, in our view." While he recently lowered his price target to $50 per share to reflect the company's current hurdles and recent price movement, he maintained a Buy-equivalent rating, and his target still reflects 50% upside. Poser's hardly alone – despite Canada Goose's issues, nine of 13 analysts tracked by The Wall Street Journal say to buy the company's shares.
One thing to watch for going forward is whether Canada Goose proves it can compete with luxury players such as Italy's Moncler SpA.
"Canada Goose is still a relatively small brand, with about two thirds of its sales in North America," Bloomberg Intelligence analyst Maxime Boucher recently told Financial Post. "It must use the next few quarters to establish itself as a top global luxury player." Boucher goes on to suggest that it also needs to reduce its inventories to levels more befitting a luxury brand.
Should it do that, GOOS will unlock the potential that drove investors into a buying frenzy for the first year after its 2017 IPO.