Small company stocks are notoriously volatile. And these days, stocks of large companies seem expensive. So for Goldilocks-style investors, mid-sized companies may seem like a good fit.
After all, companies in the mid-range of the stock market have survived the risky small business stage and “still have a long runway for future growth. They're in the sweet spot.” he says. stephen grantis the manager of the Value Line Mid-Cap Focused Fund, which has a 10-year average annual return of 12.8%, trailing the large-cap S&P 500 index's return of 12.0% over the same period. .
Before investing in a medium-sized company, consider its terms. There is surprising variation in what counts as a medium-sized company. Investors generally measure the size of a company by the value of outstanding shares, or market capitalization. Stocks in the middle range are called midcaps.
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The S&P 400, the most commonly cited index of mid-cap companies, has an average market capitalization of $6.8 billion, but the index lists stocks with values ranging from $1.7 billion to nearly $18 billion. FTSE Russell, which creates a broader index, defines mid-cap stocks as the 800 companies below the top 200 in the Russell 1000 index. Companies included in the Russell Midcap Index range in size from $3 billion to approximately $65 billion, with an average market capitalization of $23 billion.
Investors should choose stocks in this range carefully. Mid-cap performance history serves as a warning against all-out bullishness, says zach johnson, Chief Investment Officer at Stack Financial Management.On average, large-cap stocks outperform their stock prices. mid cap stocks In nine of the past ten years. The S&P 400 returned 16.4% in 2023, which, while strong by historical standards, fell short of indexes of large companies. The S&P 500 index returned 26.3%.
This is one reason why the S&P 500 trades at an average price-to-earnings ratio of 19.5 times, while the S&P 400 trades at an average multiple of just 14.4 times expected earnings over the next 12 months. .
Johnson says bargain hunters need to be cautious and patient. He expects mid-sized companies' valuations to start closing the gap with larger companies, promising relative outperformance, but he says “we don't know when that will happen.” . He advises mid-cap investors to focus on companies with good operations and strong balance sheets. “It comes down to the basics of finance,” he says.
Below, we list five promising companies within the broader mid-cap spectrum. Unless otherwise stated, prices are as of December 31st.
(Image credit: Kiplinger)
markel group
markel group The Richmond, Virginia-based insurance company (MKL) says it's a “mini Berkshire Hathaway.” bruce kennedyDF Dent Midcap Growth Fund Portfolio Manager, Kiplinger 25 Member, Our Favorite List no-load investment trust.
Like Berkshire, the company uses cash from its operations to buy stable (if not flashy) companies. Markel's holdings include Costa Farms, one of the nation's largest ornamental plant growers, and Ellicott Dredges, the oldest ship manufacturer capable of sucking sand and soil from the bottom of waterways. be.
Another similarity to Berkshire is that Markel has more cash than debt.of financial stocks It has been growing steadily for decades. It traded at $12 in 1987 and closed at $1,420 in 2023, representing an annualized growth rate of approximately 14% and a market value of $18.8 billion.
Markel's overall revenue has been steadily increasing. And the profit is bond The company is on pace to report earnings of $113 per share in 2023 to cover insurance claims. Analysts expect profits to rise by an average of about 7% a year over the next three years. The company's stock was recently trading at 16 times its 2024 forward P/E. At this valuation, Kennedy described the investment as a “grinding machine” that he was “happy to own.” He says it won't be the top or bottom performer, but it will accumulate profits over the long term.
On hold
Zurich based On hold ONON manufactures distinctive sports shoes such as running shoes that use lightweight and flexible honeycomb tube soles. Runners clearly love them, and as a result, so do many investors and analysts. “This is a great brand with a huge market opportunity that continues to take share from its competitors,” he says. david barronPortfolio manager of the large mid-cap Baron Focused Growth Fund.
On, listed on the New York Stock Exchange, saw global sales increase more than seven times from 2019 to 2023, reaching $2.1 billion. The stock returned nearly 60% in 2023, ending the year at $27, giving it a market capitalization of $8.6 billion.
Mr. Baron said the company's rapid growth and high profit margins will lead to buyers in the second half of 2023 at prices in the mid-$20s. On's global sales and low-debt balance sheet insulate it from the vagaries of the U.S. economy, he added.
“I'm even more bullish on the stock now than I was six or seven months ago,” Baron says. He expects the company's sales to increase further in late 2024, when the Swiss Olympic team will wear On uniforms.
16 out of 20 analysts who follow this stock, which trades at a P/E ratio of 39 times, rate it a “buy.”morgan stanley's Alex Stratton On calls it one of the most attractive companies in the sports apparel niche. One reason for this is that the company was able to increase sales without deep discounts. The company's tennis shoes, named Roger after investor and brand president Roger Federer, retail for $199.
Teradata
Teradata (TDC) is a cloud computing company that helps businesses analyze and get the most out of their data.of tech stocks The company has had a rocky past five years, closing in December at $44 a share, close to its share price at the end of 2018.
With a market capitalization of just $4.3 billion, it's one of the smaller mid-cap companies. However, it is the Heartland Midcap Value Fund's single largest holding. lead manager of the fund; Colin McWaybelieves the stock is cheaper than its near-19 P/E ratio suggests.
Teradata's recurring revenue from cloud computing services snowballed by more than 60% in 2023. McWay expects this rapid growth to continue, boosting the company's total revenue by more than 10% annually. Teradata's stock price relative to sales doesn't reflect its potential, he said. “Teradata trades at a recurring revenue multiple that means there is no growth.”
Eight of the 11 Wall Street analysts who follow the company are similarly bullish. Analysts have an average price target of $62 for the stock over the next 18 months, suggesting they see upside potential of more than 40%.
waste connection
ValueLine's Grant says investors who focus on Wall Street darlings could be missing out on lucrative opportunities. “It's the attractive stocks that people tend to overpay for,” he says.That's one of the reasons he sees opportunity in such a decidedly unglamorous field. waste connection (WCN) is the third largest non-hazardous waste hauler and recycler in the United States.
Although the company is headquartered in Canada, it trades on the New York Stock Exchange and trades at a relatively high P/E of 33, reflecting its “growth” outlook. Grant says the single most important criterion when choosing a stock is whether a company has a 10-year track record of growing earnings per share, and Waste Connections ticks that box. It is said that it is checked. In 2013, his earnings per share were reported at $1.58, and in 2023, he is expected to earn $3.42. The company's 10-year compound annual profit growth rate is over 8%.
Of the 22 Wall Street analysts who follow Waste Connections, 17 rate the stock as a buy. Analysts at Trust Securities like the fact that trash hauling is not affected by the ups and downs of business cycles. They say the stock is an “attractive place to park capital amid the current macro uncertainty.” Trading at $149 per share, the company has a market capitalization of just over $38 billion. Trust analysts have a 2024 price target for the company of $160.
Zoom video communication
The apps we all used to talk to each other during the COVID-19 shutdown were no longer usable when we were able to connect in real life again. At the end of 2023, Zoom Video Communications” (ZM) stock is trading at $72, a far cry from its October 2020 high of $568. The latest price translates to a market capitalization of $21.9 billion.
Ark Investment CEO Cathie Wood “I’m really excited about the artificial intelligence products and services that Zoom is evolving,” she says. Her one such service is automatic meeting summaries. Zoom is among the top five stocks in the ARK Innovation Exchange Traded Fund and has recently returned to profitability. For the fiscal year ending Jan. 31, Zoom is on pace to report earnings of $1.33 per share, up from just 34 cents a year ago.
The company's stock price is attractive, trading at less than 16 times expected earnings over the next 12 months. Perhaps more important for growth-focused investors is the stock's PEG ratio, which is the P/E divided by the expected growth rate over the next three to five years. His PEG ratio at Zoom was recently below 0.4. Generally, values below 1 are considered a sign of strong growth.
Morningstar Senior Equity Analyst Dan Romanoff We believe there is plenty of room for the stock price to rise. He pegged Zoom's fair value at $89 per share, suggesting 24% upside, noting that the company is debt-free and demand for online meeting space remains strong. .
Note: This item first appeared in Kiplinger's Personal Finance Magazine, your trusted monthly source of advice and guidance.Subscribe to help us make more money and keep more of what we earn here.
