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All Contents © 2019The Kiplinger Washington Editors
By James Brumley, Contributing Writer
| February 18, 2019
Mid-cap stocks aren’t as prolific as the market’s best-known companies, nor as exciting as nimble newcomers. Rather, mid-caps – typically between $2 billion and $10 billion in market capitalization – are nestled between large and small caps, quietly doing their own thing.
But there’s still much to be said for them.
Mid-caps offer a nice balance of risk and reward; most are beyond the inherent instability of smaller players but aren’t yet experiencing the downside of unwieldy size. That’s why the S&P 400 Mid Cap Index has not only outperformed the Standard & Poor’s 500-stock index – a collection of many of the market’s biggest players – over the past couple of decades, but also kept up with the small-cap-oriented S&P 600. Mid-caps are the happiest of happy mediums.
Investors may want to think about making a major, philosophical shift, with the possibility of a global economic headwind on the horizon. Many large caps, such as Apple (AAPL) and Facebook (FB), are actually struggling under the weight of their own size and dominance. Smaller companies, meanwhile, may find it tough to secure much-needed capital as lenders begin thinking defensively. But mid-cap stocks are in a sweet spot between the two extremes: stable enough without the need for new money, but small enough to fly under most competitive and regulatory radars.
Here are 15 mid-cap stocks that look like the top prospects within this often-overlooked sliver of the market.
Data is as of Feb. 15. Mid-caps typically are considered to be companies between $2 billion and $10 billion in market value, though the range is wider for many mid-cap funds.
Market value: $9.8 billion
Few people fully realize just how much Trimble (TRMB, $39.21) changes their lives for the better.
Trimble is a developer of technologies for agricultural, construction, resource mining and transportation companies. Namely, it makes a variety of equipment that lets those industries make digital maps, determine what’s likely to be lying below the surface, figure out where assets are geographically located and more. Its newest product, called Connected Forest Xchange (CFX), lets timber companies better manage the entire supply chain, all the way from forest to milled product.
In short, Trimble solves problems its customers didn’t even know they had.
Trimble’s results affirm the premise. Last year’s top line was 17% better than 2017’s, and though sales growth is expected to slow to around 8% this year, it beats revenue estimates more often than not. Ditto for per-share earnings, which have been better than estimates in each of its past 10 quarters, and which are expected to expand just as much as revenues in 2019.
Broadly speaking, investors haven’t been on board. Shares have bounced back from December’s move into 52-week-low territory, though they’re still roughly flat over the past 12 months. Analysts haven’t been deterred, though, collectively calling it a “Buy” with an average price target of $43.88 – still 12% better than the stock’s current value.
Market value: $10.4 billion
Tapestry (TPR, $35.91) may not be a name that rings a bell with most investors, but its brand names will. Tapestry is the parent company of apparel labels Coach and recently acquired Kate Spade and Stuart Weitzman. The new moniker was adopted in late 2017, accommodating the new names brought under the same corporate umbrella.
High-end apparel and accessories took the brunt of the so-called retail apocalypse. Function has become a priority, and labels don’t impress the way they once did. Consumers would rather purchase a memory-making experience than shell out big bucks for a handbag.
What inspires consumers is always a moving target, however, and with a forward-looking P/E of only 12.6, investors may be looking past another tidal shift that will work in Tapestry’s favor.
“Although the analysts forecast TPR to keep up recent momentum, after accounting distortions are removed under UAFRS it is clear that market expectations at current valuations are for historically low returns and growth,” says Robert Spivey, Director of Research at Valens Research, adding, “CEO Luis and company have a pretty low bar to jump over in order for this to be a compelling long idea.”
And Valens Research is committing to the idea in full. Spivey notes “TPR is actually a name that is new to our conviction list this quarter,” largely because the company’s finding success in a strategy being employed by a key rival. He explains, “They are re-positioning their brand and focusing on replicating LVMH’s strategy of scooping up premium brands at a discount, which is a strategy that already appears to be working, with profitability rebounding materially since bottoming in fiscal 2015.”
4028mdk09 via Wikipedia
Market value: $3.3 billion
Automated vacuum cleaners were the stuff of science fiction a few decades ago. But iRobot (IRBT, $119.39) made them a mass-market reality back in 2002 with the Roomba. They’ve been one of the well-touted revolutionary ideas that have lived up to all expectations, and iRobot deservedly dominates the robotic vacuum cleaner (RVC) market with a 62% share.
The market is maturing, yes, and the company’s growth pace is slowing as a result. Last year’s sales growth of 24% is expected to cool to 18% in 2019, and earnings expansion will be curbed as a result.
But don’t mistake the slowing growth rate as evidence that the company is falling behind. Indeed, if anything, iRobot is even better positioned to maintain its lead now than it was just a few months, for a couple of different reasons.
One of them is the December ruling from the International Trade Commission that bans the sale of competing, foreign-made robotic vacuum cleaners in the United States. The commission determined that in many cases, iRobot’s patent protection had been unfairly utilized by lower-priced competing devices.
The other reason IRBT remains an impressive mid-cap growth prospect? Even though it already has the top tech in the industry at its disposal, it continues to innovate. The recently launched Roomba models, the i7 and i7+, include not only a superior map-making technology, but the option of an accessory that automatically dumps the debris and dust scooped up by the RVCs. They’ll even accept voice-based commands given through popular smart speakers.
Market value: $8.9 billion
Last year was a brutal one for shareholders of home appliance company Whirlpool (WHR, $139.36). The stock fell more than 40% from its January high to its December low, partly in response to steep tariffs on imported steel, and partly because the housing market cooled off. The once-iconic brand name also doesn’t enjoy the customer loyalty it used to, in an environment where appliance shoppers enjoy a wide array of high-quality options. Whirlpool even has landed on the wrong side of a few Wall Street analysts.
Hefren-Tillotson Chief Investment Officer Brian Koble, however, thinks Whirlpool may be at a turning point.
“The multiyear sales outlook is bright,” explains Koble, pointing out that “appliance sales are tied to the housing market – and millennials are moving into their peak home-buying years.”
The data supports his claim. In 2020, the largest sliver of millennials will turn 30 years of age – the age at which most people make their first home purchase. Millennials also already make up an oversized portion of people interested in buying a home, and despite affordability challenges, they’re still 52% more likely to buy a home than Baby Boomers or members of Generation X. Millennials also are more likely than not to upgrade home appliances with “smart” and more efficient devices that work as part of a smart home.
Koble adds that the stock looks cheap, which it does at a forward P/E of just more than 8, as well as a 3.3% yield.
Market value: $6.3 billion
Utility stocks are anything but scintillating, and water utility companies are especially dull. But, there’s much to be said for the middlemen that sell the one natural resource we can’t make more of, or survive without.
Enter Aqua America (WTR, $35.62), a mid-cap utility stock that pipes water to 3 million people in eight different states, with acquisitions perpetually adding more.
The industry doesn’t like to admit it, but water utility companies are effectively legalized monopolies. Rival providers theoretically have the right to tap into existing infrastructure, but doing so is prohibitively expensive. So is establishing a new facility near an unused water source. Factor in that all markets are overseen by local or state-based regulatory boards wary of disrupting the status quo, an established provider isn’t apt to be ousted.
The other reason water utility stocks make for solid long-term plays: Most rate-hike requests are approved by local utility boards.
Nationwide, water prices have steadily grown every year since 2010. Aqua America is plugged into that trend, with the state of North Carolina being the most recent to approve the company’s requested price increase. That bump should drive Aqua America’s North Carolina subsidiary’s revenue up by 5.2%. And that wasn’t the only rate increase WTR was granted last year.
Market value: $13.5 billion
“Garmin (GRMN, $71.62) is another name that we have liked for a long time,” says Valens Research’s Robert Spivey, who adds to the thesis, “When you remove accounting distortions these guys trade at a material discount to corporate averages, which is generally reserved for companies that are bleeding money or shrinking the balance sheet, neither of which holds true for the firm.”
Garmin’s roots may be in GPS/navigational devices, but its portfolio has expanded tremendously since its 1989 founding. Smartwatches and cameras now round out its lineup, which serves marine and aviation markets as well as it caters to drivers. It even offers fitness-tracking solutions.
Competition abounds within this increasingly crowded market, but Garmin’s growth remains mostly uninterrupted. The company hasn’t reported a year-over-year dip in quarterly sales since the final three months of 2015, and operating income growth has been similarly reliable. Spivey attributes the organization’s persistent success to how it positions itself with consumers, and against its competition, explaining “As the firm faced competitive pressures from the likes of Google, they have been able to pivot towards a lifestyle brand, and have actually seen returns improve markedly.”
The best may be yet to come for the stock, however, according to Valens Research’s director. Spivey points out Garmin continues to “invest in the business, compounding an economically profitable balance sheet, which should be driving far greater multiples than they see right now.”
Market value: $10.7 billion
In almost all regards, United Rentals (URI, $134.86) is perfectly positioned. The economy is strong enough to drive demand for tool and equipment rentals, but fragile enough that construction and demolition organizations aren’t willing to commit to outright purchases.
Investors haven’t exactly embraced the idea. It’s not an idea investors have embraced. Despite the rebound off December’s lows, URI still is down roughly 40% from its March 2018 peak. Broadly speaking, the market has been and remains convinced the construction and infrastructure market are poised to bump into a headwind, partially spurred by an ongoing tariff war.
Nothing about the company’s 2018 results or 2019 outlook suggests such a headwind has taken shape, though. Last year’s top line rolled in 20% better than 2017’s. This year’s revenue projection is 16% better than last year’s, which should drive per-share profits from 2018’s expected $16.26 to $19.03. Those past and projected profit figures translate into a low 10.3 trailing P/E and an unusually low forward-looking P/E of 6.3.
Analysts like what they’re seeing, projecting 14% improvement on average with a collective price target of $153.15.
Paycom Software (PAYC, $182.47) won’t win any value-oriented awards anytime soon. But the market isn’t weighing this fintech stock by normal standards. Not only is PAYC viewed through a growth-stock lens, but it’s closer to being a startup than not. Its human resources software Talent Management platform was launched in 2012, but only in the past few years have cloud-based software-as-a-service (Saas) become the norm within the business world. That adoption, in fact, is still underway.
Last year’s revenues were 31% better than 2017’s total – analysts were calling for a roughly 26% increase in this year’s top line. But that’s not the eye-popping story. What really stands out is how profitable Paycom is becoming now that its human resources software suite is reaching a critical mass.
Paycom’s full-year bottom line came to $2.67 per share, beating estimates and representing 19% growth over 2017’s profits. That growth pace should cool this year, but just barely, at a projection of 18% expansion to $3.16 per share. And that still might underestimate how well PAYC will do in 2019; the company has topped profit estimates in every quarter for more than three years now.
Market value: $6.7 billion
Slow but reliable sales and earnings growth has given Berry Global Group (BERY, $51.56) a significant degree of financial flexibility, and the company has used it wisely.
Berry Global is anything but a household name, though it’s entirely possible a product made by Berry was used by all U.S. households just within the past week. The company makes plastic beverage bottles, air filters, surgical tape, dryer sheets, cling-wrap and more.
It’s anything but a high-tech arena; however, that doesn’t mean packaging can’t be a high-growth, high-profit opportunity. The key is careful management of assets, and knowing when deal-making is prudent.
To that end, Berry Global Group made two acquisitions last year that set the stage for a fruitful 2019. In February 2018 it purchased Clopay Plastics, and in August it snatched up Laddawn. Clopay will add exposure to the health and hygiene markets, and result in roughly $40 million worth of synergies. Laddawn’s upside won’t be quite as robust, only adding about $5 million in savings. But it will give Berry an even better toe-hold in the engineered products market with its polyethylene bags and films products.
Bolstering the already bullish case is the $500 million in stock buybacks unveiled in August, and the $335 million worth of debt paid down over the course of last fiscal year.
Market value: $8.5 billion
Contrary to popular belief, the tariff war between China and the United States isn’t taking a universal toll. In some cases, it may actually be helping.
As a secondary and scrap producer, Steel Dynamics (STLD, $37.09) has an “advantage over foreign competitors that has increased greatly by the trade tariffs President Donald Trump has placed on foreign steel makers,” explains Ric Runestad, president and CEO of Indiana-based retirement planning firm Runestad Financial Services. Runestad isn’t concerned about China’s brewing economic headwind either, noting, “If growth is slowing in China, the desire to dump steel into the U.S. may run headlong into a stiff tariff wall that could shield Steel Dynamics from the perceived glut in global steel production.”
Nevertheless, investors haven’t quite known what to make of the company. Even with last quarter’s revenue growth of 24% and an 86% year-over-year increase in earnings, shares still are down more than 25% since May’s peak, leaving STLD at an uncommonly low trailing P/E of 7 and a forward-looking earnings multiple of less than 10.
Falling short of analysts’ quarterly revenue estimates casts a shadow of doubt on the company’s future. But Runestad thinks time will change perceptions, saying Steel Dynamics is a “well-run company with sound financials” that looks like a “solid value stock pick at this time.”
Market value: $5.2 billion
First Solar (FSLR, $49.18) has fallen off most investors’ radars since solar’s heyday back in 2008. But the company never went away. In fact, it arguably has more going for it now than it ever has.
Those who follow the solar power industry, and First Solar in particular, may find that’s a tough idea to swallow. 2018 was difficult across the board, with demand in China drying up as the country hacked away at incentives, while demand of U.S.-made panels spiked in 2017 in front of then-impending tariffs on imported solar panels. That frenzy made for tough comparisons, underscored by a slowing pace of installations all over the world. Further crimping First Solar’s top and bottom line were the increasingly outdated Series 4 panels being made at many of its production plants. The Series 5 is superior, and the recently unveiled Series 6 line is better still.
The perfect storm of problems should abate this year. Not only will the company transition most of its factories to the higher-margin and more efficient Series 6 panels by the end of the year, the environment is rebounding too. Goldman Sachs analyst Brian Lee recently upgraded a handful of solar stocks including FSLR, explaining, “Heading into 2019, green shoots are emerging: demand is improving, ASPs are stabilizing, and China is likely a positive catalyst in terms of policy.”
All told, the company offered fiscal 2019 revenue guidance of between $3.25 billion and $3.45 billion, up from what should be around $2.35 billion for fiscal 2018.
Market value: $5.8 billion
Planet Fitness (PLNT, $58.97) is one of North America’s most recognizable names in gyms, with 1,600 fitness centers peppered across the United States, Canada and in parts of Latin America. But there’s something about the company most consumers and investors may not realize: Many of its locations are actually franchises.
Valens Research’s Spivey says, “As a franchise business, for PLNT to grow store count by roughly 200 per year as management is targeting, they don’t have to commit the kind of capital that you would traditionally see.” Spivey goes on to explain the majority of the income from those openings flows to the bottom line, translating into significant cash flow potential investors broadly aren’t pricing into the stock’s value.
“When you remove the distortions associated with GAAP reporting, PLNT is a company with +100% returns on assets, with valuations near corporate averages,” Spivey says.
His conclusion? “We’ve recommended PLNT to investors since the summer of 2017 because of its high profitability, smart operating model, and most importantly, demand from franchisees that rivals demand for any other franchise offering,” making it something Valens Research “will continue to recommend.”
Market value: $4.6 billion
Investors on the hunt for semiconductor picks generally don’t stumble across Entegris (ENTG, $34.18). Bigger names such as Intel (INTC) or Texas Instruments (TXN) often get in the way. But the mid-cap tech stock is an off-the-beaten-path name worth a closer look.
Entegris isn’t so much a semiconductor manufacturer as it is a supplier to more prolific suppliers. If offers filters that create a clean chip-making environment, ways of handling fragile or sensitive products and specialty materials used in the foundry process. While its fate is still largely linked to the fate of semiconductor makers themselves, what’s arguably more diversity than bigger direct rival Lam Research (LRCX) boasts, ENTG is actually better equipped to drive consistent – or at least less volatile – results.
The stock’s performance since July suggests most investors don’t embrace the theory. Although the rebound from the late-December low is respectable, the current price of $34.18 remains well below last year’s peak above $39. Entegris wasn’t immune to the sector-wide headwind that Goldman Sachs says could linger through the better part of 2019. Almost as if cued, the company missed third-quarter profit estimates … the first earnings shortfall the company has suffered in years.
If there’s truly trouble ahead, though, analysts don’t see it. The pros are calling for a 5% increase in 2019’s revenue to drive a similar improvement in per-share profits.
Market value: $2.2 billion
It’s difficult to imagine a networking and data center company that can compete with industry powerhouses such as Cisco Systems (CSCO) or Amazon.com (AMZN). They’re better established and certainly more recognizable. Those companies’ sheer size, however, is a liability of sorts. A smaller, nimbler niche player can actually win business that Cisco or Amazon too big to nab.
Enter Switch (SWCH, $8.77).
Switch is a relatively young company, and an even younger stock. The organization was founded by data center design guru Rob Roy in 2000, but it didn’t become a publicly traded outfit until October 2017, finally giving investors a chance to own name focused on high-performance, hyperscale data centers.
It’s been a rough start for stockholders, with SWCH shares making a fairly straight line from their IPO price of $17 to their current value of near $9. However, Yale Bock – a portfolio manager with investment advisor Interactive Brokers Asset Management – suspects that tide could be close to turning.
Switch is “an investment in the future need for more data storage because of the never-ending demand of video and internet traffic,” notes Bock, adding “new services like internet of things, cloud, artificial intelligence, virtual reality make it a necessity.”
The kicker: Bock says the data center specialist, capitalizing on incentives while simultaneously addressing distance-based network latency, is “positioned nicely for future growth with land ownership and tax advantages in Tahoe, Michigan, and Atlanta.”
Market value: $4.2 billion
July 27, 2018, couldn’t end soon enough to suit LogMeIn (LOGM, $82.87) stockholders. Shares fell 25% that day, mostly only a poor revenue outlook that prompted four downgrades. It was, simply put, a miserable day.
Curiously, though, that hard landing also kicked off what has been a slow (and admittedly extremely uneven) rebound effort from LOGM stock. As it turns out, the sky isn’t quite falling the way it felt like it was at the time.
LogMeIn provides a platform that connects remote workers with a specific computer. IT managers love the simplicity and security it offers for a workforce found outside of a centralized location, and organizations that offer tech support love how easily it lets employees access customers’ devices. Its flagship customer-engagement solution, in fact, was picked as one of the best new product features of 2018 by Best in Biz Awards.
More important, despite the dialed-back guidance bomb dropped on investors a few months back, earnings still are growing along with revenue. The bottom line is expected to improve from 2018’s per-share non-GAAP profit of $5.39 to $5.78 this year – translating to a forward P/E of 13.1 – before it expands again to $6.34 in 2020.
The near-term could be difficult, however, as the company recently embarked on a global restructuring meant to “streamline our organization and reallocate resources to better align with our growth acceleration goals.” The company also said co-founder and Chairman Michael Simon will resign from the board as of May 30, and from the chairman post as of March 1. In short, LOGM could be a very bumpy ride, but one with high potential.
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