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All Contents © 2019The Kiplinger Washington Editors
By Daren Fonda, Senior Associate Editor
| March 8, 2018From Kiplinger's Personal Finance
Shares of large companies have been leading the charge in the stock market over the past year. But small- and mid-cap stocks, which account for a wide swath of the market, have some appealing options as well.
Definitions vary, but small-cap stocks often are considered to be the shares of companies worth $1 billion to $2 billion in market value (share price multiplied by shares outstanding). Mid-caps traditionally range from $2 billion to $10 billion in value, though many mutual funds and exchange-traded funds in this arena hold stocks with market capitalizations of up to $25 billion.
Compared with many of their larger, multinational cousins, small and midsize firms tend to conduct much of their business in the U.S. That makes them prime beneficiaries of the expanding economy. But some firms are doing more business abroad, too, benefiting from strength in Asia, Europe and other foreign markets that are growing at a healthy clip. The new tax law could be a boon, too, letting profitable firms pay a 21% federal income tax rate, down from 35%. That will lift their earnings and leave more cash to plow into their businesses, raise dividends or buy back shares.
We’ve identified seven small- and mid-cap stocks you should consider. Some might look a bit pricey, but they all have strong growth prospects over the long run.
Data is as of Feb. 16, 2018. P/E ratio is based on estimated earnings for the next four quarters. Earnings growth is estemated for the next three-to-five years. Sources: Yahoo Finance, Zacks Investment Research. Click on ticker-symbol links in each slide for current share prices and more.
Share price: $232
Market value: $11.4 billion
Price-to-earnings ratio: 20
Annual earnings growth: 10.8%
Globally, sales of contact lenses, Cooper’s primary business, rise by about 4% to 5% a year. But Cooper’s lens sales have increased at about twice the market rate for most of the past decade, and they show no sign of slowing. Cooper and two other firms, Johnson & Johnson (JNJ) and Novartis (NVS), dominate the industry. But Cooper has been gaining on its rivals, increasing its share of the contact-lens market from 15% a decade ago to 23% in 2017. Some 61% of the company’s total lens sales are overseas.
The firm is making gains in the mass market, but it is also prospering in product niches such as multifocals, which correct seamlessly for both near- and farsightedness, and “digital zone optics” lenses, which help the wearer’s eyes adapt to long stints in front of computer screens.
Cooper also sells surgical instruments and other medical devices for women’s health and fertility; those account for about 22% of total sales. That side of the business is growing, too.
Analysts expect Cooper’s profits to climb by 18.6% over the next year. The firm should “grind out” solid earnings growth for years, says Don Easley, manager of T. Rowe Price Diversified Mid-Cap Growth Fund, which owns shares of the stock. That, he says, makes Cooper a compelling long-term holding.
Share price: $199
Market value: $17.8 billion
Price-to-earnings ratio: 21
Annual earnings growth: 16.5%
Fleetcor facilitates payments between businesses, specializing in fuel cards for truck fleets and other corporate customers. Walmart recently chose the firm’s fuel-card program for its 4,000 U.S. employees who use company vehicles. And Fleetcor has deals with major gas-station chains along with foreign oil companies. The business looks appealing for several reasons. For one, the company collects processing fees that are charged on every card swipe. The firm gets a cut of gasoline sales, too, and should benefit from fuel prices that are likely to stay strong with a healthy economy.
Fleetcor has plenty of ways to expand. The firm now provides cards to pay for lodging or building supplies (say, if a house painter runs out of paint on a job). Fleetcor recently bought a travel-booking business and an international-payments firm based in Canada. The company could ramp up sales abroad, which account for about one-third of total sales. Fleetcor owns a toll-payment business in Brazil, and it sells fuel cards in Mexico, the United Kingdom and other foreign markets.
Driverless vehicles may threaten the business eventually, as firms employ fewer human truckers. But even in that case, payment processing will still be needed for unloading cargo or charging an electric vehicle. At 21 times earnings, Fleetcor shares trade below the average P/E for mid-cap stocks, and profits are forecast to rise by a healthy 21.6% over the next year.
Share price: $139
Market value: $8.0 billion
Price-to-earnings ratio: 22
Annual earnings growth: 14.8%
You probably don’t think about the packaging when you buy a box of Cheerios. But the colorful box was made with some high-tech equipment, including a sophisticated adhesive-dispensing system. Nordson makes that equipment, along with other products to apply materials such as coatings and sealants on assembly lines for everything from cereal boxes to computer circuit boards.
As a multinational industrial firm, Nordson is benefiting from an uptick in global economic growth. Yet even if global growth slows a bit, Nordson’s sales should hold up well. Companies that install the firm’s equipment will still need its spare parts and single-use items, such as disposable cartridges. Those goods create a recurring revenue stream that amounts to nearly half of the firm’s annual sales. Nordson has been expanding into the medical business, too, supplying syringes and other disposable products.
Longer term, Nordson will profit from a manufacturing trend called light-weighting, says Dave Carlsen, manager of Buffalo Discovery Fund, which owns the stock. Automakers and other industrial companies are replacing metal fasteners with adhesives and composite materials that are glued, rather than welded, making cars and other machines lighter, more fuel-efficient and cheaper to produce. “Advanced composites are the materials of the future,” Carlsen says.
Trading at 22 times earnings, Nordson’s shares are a good buy, Carlsen says. The company is on track to boost profits by 15.8% over the next year, according to analysts’ estimates. The firm pays a modest dividend, too, and has hiked its payout for 54 straight years – a streak that shows no signs of stopping now.
Share price: $79
Market value: $3.1 billion
Price-to-earnings ratio: 42
Annual earnings growth: 15.4%
Most landscaping shops are mom-and-pop businesses. But SiteOne is gradually snapping them up and has amassed a network of 477 stores in 44 states and five Canadian provinces. The acquisitions have made SiteOne the largest national wholesaler of landscape supplies. Revenues have soared 63% since 2013, hitting an estimated $1.8 billion in 2017.
SiteOne still has plenty of room to expand, too. The firm offers its full product line – including fertilizers, plants and nonplant hardscape products, such as stone walls and pavers – in only about one-fourth of its locales. Its stores serve less than half of the country’s metropolitan areas. And sales so far amount to just 10.1% of the $17 billion landscape-supply market.
SiteOne’s business also appears to be shielded from online competition, says Brian Bythrow, manager of Wasatch Micro Cap Value Fund, which owns the stock. Much of what the company sells, such as bags of mulch, is too bulky to ship economically to individual customers. Landscaping crews tend to pick up supplies right before they start working, rather than ordering in advance. About half of SiteOne’s sales are to commercial customers. “The business is Amazon-proof,” Bythrow says.
At 42 times estimated 2018 earnings, SiteOne shares trade substantially above the P/E of the average mid-cap stock. Yet analysts expect SiteOne to boost earnings by 41% this year — nearly twice the average growth rate for mid-caps, according to Standard & Poor’s. Even as the largest national wholesaler of landscape supplies, the firm could triple in size over the next eight years, Bythrow adds, making its high P/E more palatable.
Share price: $104
Market value: $19.0 billion
Price-to-earnings ratio: 15
Annual earnings growth: 15.1%
Computer-chip maker Skyworks is prospering in an increasingly wireless world. The firm makes radio-frequency chips and other components that enable mobile devices to connect wirelessly to the internet. Skyworks’ chips are in the new Apple (AAPL) iPhone X, for example, along with devices made by Samsung (SSNLF) and the huge Chinese technology firm Huawei.
Skyworks competes against other chipmakers in this field. But the pie should keep getting bigger as phone makers cram more RF content into devices and the technology expands with the "internet of things," for which analysts forecast explosive growth.
The wireless industry is also upgrading to 5G networks, which will require a new generation of chips capable of processing and transmitting data at faster speeds. Data will fly up to 10 times more quickly than it does on current 4G networks, Skyworks says, creating substantial opportunities for its chips. Granted, the company could face bumps along the way. In the near term, analysts worry that the iPhone X isn’t selling as well as expected, hurting component makers such as Skyworks. A broader slowdown of mobile device sales would sting, too.
These hurdles may already be reflected in the price of the shares, which trade at a modest 15 times earnings. And Skyworks is thriving, with earnings per share expected to climb 13.2% over the next year.
Share price: $37
Market value: $2.3 billion
Price-to-earnings ratio: N/A
Annual earnings growth: 20.0%
Leading telemedicine company Teladoc provides a network of doctors and other medical experts that patients can consult with via phone, internet or mobile device, 24 hours a day. Telemedicine is handy if your kid wakes up with pinkeye, for example, and you need a prescription for antibiotics. Companies offer Teladoc as a benefit to employees, aiming to keep them in the office by avoiding unnecessary trips to see a doctor in person. The firm aims to address a range of ailments, including mental health. In 2017, Teladoc acquired Best Doctors, a physician-consulting service composed of cardiologists and other specialists, who may now weigh in with a second opinion on a patient’s complex condition.
Teladoc isn’t profitable yet and may not be for years, as the company plows all its cash flow into expanding the business. But sales are expanding rapidly; they’re expected to reach $356 million in 2018, up by 53% from 2017. Teladoc says 23 million workers have access to its service, up from 8 million in 2014.
If the company can maintain this pace of growth, it should triple in size by 2021, says Randolph Gwirtzman, comanager of Baron Discovery Fund, which owns the stock. As for Teladoc’s lack of profits, Gwirtzman says that’s acceptable for a young, fast-growing business.
Share price: $138
Market value: $7.4 billion
Price-to-earnings ratio: 18
Annual earnings growth: 15.0%
Commercial vehicles such as trucks and buses are getting safer and more fuel-efficient, thanks in part to products made by Wabco. The company sells high-tech brakes and advanced safety gear, such as blind-spot detection systems for big rigs. Other products include air compressors, transmissions and fuel-saving technology.
The business is thriving as vehicle production rises around the world. And Wabco should prosper as a supplier of safety technologies for driverless trucks and semi-autonomous vehicles (which still require a driver behind the wheel). Wabco is at the forefront of developing these technologies, says brokerage firm R.W. Baird. Acquisitions, including the 2017 purchase of a firm that makes automated steering systems, have strengthened Wabco’s position, too, Baird says.
Wabco could face a few hurdles if global economic growth stalls. The company does about half its business in Europe, where sales are rising briskly as the economy improves. A slowdown there would hurt, as would weakness in China, another big market for Wabco. For now, though, the firm’s prospects look bright. Analysts expect profits in 2018 to climb 11.8%, compared with 2017.