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All Contents © 2020The Kiplinger Washington Editors
By Dan Burrows, Contributing Writer
| June 28, 2019
When chosen wisely, mid-cap stocks can offer outsize growth potential and stability. Like their small-cap cousins, mid-caps – typically stocks with market values of roughly $2 billion to $10 billion, but some systems allow up to $20 billion – have ample room to grow. On the other hand, like large-cap firms, they tend to have more balance sheet strength and a surer footing in their respective industries.
When it comes to finding this happy middle of risk vs. reward, investors can lean on quantitative analysis. QA takes a wide swath of fundamental, technical and other data, runs it through a mathematical model and calculates a recommendation. This usually is the preserve of so-called quant funds, which guard their methods jealously. But thanks to StockReports+ from Refinitiv, we know what at least one quant model has to say.
StockReports+ combines a weighted quantitative analysis of six widely used factors: earnings (including estimate surprises and analyst recommendation changes, among other factors; fundamental analysis, which encompasses profitability, debt and dividends, among other considerations; relative valuation, which looks at measures such as price-to-sales and price-to-earnings ratios; risk, which considers magnitude of returns, volatility and other factors; price momentum, which is based on technical performance factors such as seasonality and relative strength; and insider trading, which looks at whether top corporate executives have been net buyers or sellers of their company’s stock.
The result is a score from 1-10 (10 being the most positive), then certain factor scores are weighted to spit out an “optimized score” that has shown to be the best predictor of future returns.
It’s a lot to digest. But these are the top 10 mid-cap stocks to buy right now, based off their high marks from quantitative analysis by StockReports+. They all have earned 10s, but are ordered by the underlying strength of their perfect grades, from weakest to strongest.
Data is as of June 27, 2019. Quantitative analysis is from StockReports+ from Refintiv. Analysts’ recommendations, price targets, price-to-earnings ratios and long-term growth forecasts are from Refinitiv. Dividend yields are calculated by annualizing the most recent quarterly payout and dividing by the share price. Stocks are listed by strength of optimized score, from lowest to highest.
Market value: $17.6 billion
Dividend yield: 0.1%
StockReports+ scores: Earnings (10), Fundamental (10), Relative Valuation (1), Risk (7), Price Momentum (10), Insider Trading (8)
Optimized total score: 10
Heico (HEI, $131.55), provides replacement parts, services and accessories for the aerospace, defense and telecommunications industries. Its market cap of $17 billion-plus is larger than what many consider to be mid-cap stocks, but parameters differ from system to system.
It’s something of a niche business, but a nicely profitable one. For the 12 months ended April 30, Heico enjoyed operating profit margins of more than 22%. That helps explain Heico’s top quantitative scores for earnings and fundamentals. The company also makes income investors a priority. In mid-June, it declared its 82nd consecutive semi-annual cash dividend.
HEI also gets a perfect 10 for price momentum, aided partly by a nearly 70% year-to-date gain. (The Standard & Poor’s 500-stock index is up roughly 17% in the same time frame.)
The run-up in shares – Heico returned nearly 400% over the past five years – has made them pricey. With shares changing hands at more than 56 times expected earnings, HEI trades 68% above its own five-year average, according to StockReports+. But you’re at least buying some growth – analysts broadly expect the company to deliver average annual earnings growth of almost 18% over the next five years. Their average recommendation on HEI is “Buy.” SunTrust recently weighed in, rating shares a “Buy” thanks in part to market-share gains and ample capacity for mergers and acquisitions.
Market value: $12.3 billion
Dividend yield: N/A
StockReports+ scores: Earnings (10), Fundamental (9), Relative Valuation (4), Risk (4), Price Momentum (10), Insider Trading (N/A)
PagSeguro Digital (PAGS, $37.64) – an international entry to this list of mid-cap stocks – is a Brazilian digital-payments platform. And it is set to deliver red-hot profit growth. Analysts expect PAGS to generate average annual earnings growth of nearly 29% over the next five years, according to Refinitiv data. Revenue is projected to increase 34% this year and 27% in 2020.
Of the 15 analysts tracking the stock for Refinitiv, three call PAGS a “Strong Buy” and seven have it at “Buy.” For example, Guggenheim analysts recently upgraded PagSeguro Digital to “Buy” from “Neutral,” citing its expansion into financial services, which should boost its long-term revenue and earnings outlooks. Indeed, PagSeguro gets a perfect score on earnings and near-perfect marks for fundamentals.
The stock is on fire, too, doubling in 2019. Yet shares are trading at 25 times expected earnings – pricier than the S&P 500, sure, but actually a small discount to their own long-term average. PAGS gets neutral marks for relative valuation, but the strong returns and various technical factors mean it also gets a perfect score for price momentum.
Market value: $5.0 billion
Dividend yield: 6.0%
StockReports+ scores: Earnings (6), Fundamental (10), Relative Valuation (8), Risk (4), Price Momentum (9), Insider Trading (N/A)
CVR Energy (CVI, $49.65) is a holding company with subsidiaries engaged in petroleum refining and nitrogen fertilizer manufacturing. More than 70% of CVI’s shares are held by Icahn Capital LP, which is hedge-fund billionaire Carl Icahn’s privately owned family office. In late May, CVR Energy said it’s considering putting itself up for sale, further fueling a 46% year-to-date rally.
CVI gets a neutral score for earnings. Although analysts’ average price target has increased “notably” to $44.50 from $40 (up 11.3%) over the past 90 days, that’s offset by the company’s profits missing analysts’ estimates in two of the past four quarters.
Fundamentals are another matter. The company’s net margin has been higher than its industry average for each of the past five years, StockReports+ notes. A generous dividend yield – and the payout’s 37.5% year-over-year growth as of March 31 – also contribute to CVI’s perfect fundamental rating.
CVI Energy gets a neutral rating on risk but high marks for relative valuation. (At just 14 times forward earnings, CVI is trading at less than half its own five-year average.)
The analyst community needs convincing, though; all five analysts covering the stock tracked by Refinitiv call it a “Hold.”
Market value: $17.9 billion
StockReports+ scores: Earnings (6), Fundamental (5), Relative Valuation (7), Risk (6), Price Momentum (9), Insider Trading (9)
Quantitative analysis gives shares in Dish Network (DISH, $38.17) a perfect optimized score, but some analysts are bullish on the satellite TV company because of its chance to become a player in wireless communications.
The company is reportedly in talks to pay at least $6 billion for assets that T-Mobile US (TMUS) and Sprint (S) will have to unload to win regulatory approval for their merger. The assets would include wireless spectrum and Sprint’s Boost Mobile brand. Should the deal come to pass, it could transform Dish from a mere holder of spectrum to a wireless operator just as the industry begins to roll out super-fast 5G networks, note Citigroup analysts, who rate Dish at “Buy.”
Dish gets neutral scores for earnings, fundamentals, risk and relative valuation. However, by some metrics, shares looks like a big bargain. Dish goes for 16.6 times forward earnings estimates, according to Refinitiv data. That’s 33% below the stock’s own five-year average, StockReports+ says. Shares also trade at a 5% discount to the S&P 500 on a forward earnings basis.
Where Dish stands out on a quantitative basis is price momentum and insider trading. Shares are up more than 53% for the year-to-date and have a head of steam, according to technical measures. The mid-cap stock is less than 8% below its 52-week high, and has notched its highest price momentum value for the past year. Note: June and July also are historically favorable periods for Dish.
As for insider activity, top executives have purchased a net of 845,743 shares of this mid-cap stock over the past six months vs. a sector average of just 220,849.
Market value: $15.6 billion
StockReports+ scores: Earnings (3), Fundamental (6), Relative Valuation (9), Risk (8), Price Momentum (9), Insider Trading (9)
Discovery (DISCA, $29.74) – which operates well-known cable channels such as HGTV, Food Network and, of course, Discovery – has been among several disappointing mid-cap stocks over the past year. Yes, DISCA has climbed 22% since Jan. 1, but that has only helped it close a wide gap between it and the S&P 500 over the past 52 weeks. (The index has Discovery beat by roughly a percentage point.)
The upside? Discovery’s valuation has been tamped down – it trades at a mere 8 times expected earnings, which is 38% below its own five-year average. It’s also 55% cheaper than the S&P 500. Analysts expect the company to deliver average annual earnings growth of more than 19% over the next five years, according to Refinitiv.
JPMorgan Chase analysts have an “Overweight” (equivalent of “Buy”) rating on DISCA. They cite the “compelling” valuation, management’s “upbeat outlook” and a new $1 billion stock buyback program as reasons to buy now.
Discovery does have one glaring weakness: poor expectations management. The company has missed Wall Street’s profit estimates in nine of the past 12 quarters, weighing on its earnings score. Fundamentals are neutral. Risk, price momentum and insider trading, however, all score near the top of the StockReports+ scale. Per that insider trading: Insiders bought $1,001,969 in DISCA stock in the most recent quarter – the highest level of Q2 buying over the past five years, StockReports+ says. The average buy total for Q2 is $200,394.
Market value: $6.1 billion
Dividend yield: 3.5%
StockReports+ scores: Earnings (8), Fundamental (3), Relative Valuation (5), Risk (6), Price Momentum (9), Insider Trading (9)
Shares in HanesBrands (HBI, $16.99) – the apparel company whose brands include Hanes, Champion, Maidenform and Playtex – are putting up big gains in 2019 after a long period of underperformance. HBI shares have surged 37% year-to-date, but over the past five years, the stock has lost investors 21% … and that’s with dividends factored in!
Quantitative analysis suggests this year’s run isn’t done, however. The high earnings score is predicated in part by analysts’ average price target of $19.20, which gives HBI implied upside of 13.5% over the next 12 months or so. The company also beat Street profit estimates for two consecutive quarters.
On the other side of the ledger, a long-term growth profit growth forecast of just 2.6%, projected revenue gains in the low-single-digits for this year and next, and 10 straight quarters without a dividend increase all hurt HBI’s fundamentals score.
Hanes does have price momentum at its back, however. Shares have gained an average of 6.9% in July over the past 10 years, according to StockReports+. That, as well as favorable seasonal trends, gives HBI a price momentum rating of 9 – roughly 50% better than the average apparel & accessories retailer.
Market value: $7.6 billion
Dividend yield: 9.0%
StockReports+ scores: Earnings (9), Fundamental (10), Relative Valuation (9), Risk (10), Price Momentum (8), Insider Trading (10)
Ares Capital (ARCC, $17.73) is an interesting play among these highly rated mid-cap stocks. That’s because it’s a business development company (BDC) – a special type of corporate structure that provides debt or equity financing to private, medium-sized businesses. These investments can be risky, but they’re beloved by income investors because BDCs are required to distribute most of their profits to shareholders in the form of dividends.
Investors who are comfortable with the hit-or-miss nature of BDCs (which are sort of like venture capital for regular old retail investors) can reap highly rewarding dividends – sometimes. ARCC’s payout currently sits at a whopping 9%.
Of the 13 analysts tracked by Refinitiv who cover ARCC, seven say it’s a “Strong Buy” and six call it a “Buy.” Three rate shares at “Hold.” Oppenheimer analysts, who rate shares at “Buy,” say ARCC remains a top pick in business development companies.
Their average price target of $19 isn’t terribly high – it gives the stock implied upside of a little more than 7% over the next year. But add in the hefty dividend yield, and ARCC should continue its market-beating ways. Over the past five years, Ares has delivered an annualized total return of 11.4%. The S&P 500, including dividends, generated an annualized return of 9.2% over the same span.
ARCC trades at a deep discount to the S&P 500 on a forward earnings basis, which helps boost its relative valuation score. It’s less volatile compared to the S&P 500, which contributes to a perfect risk score. And during the second quarter, insiders set a five-year high for Q2 buying.
Market value: $2.6 billion
Dividend yield: 3.4%
StockReports+ scores: Earnings (7), Fundamental (10), Relative Valuation (10), Risk (8), Price Momentum (6), Insider Trading (9)
Cadence Bancorp (CADE, $20.54), a regional bank with 98 branches across six southern states, has a neutral earnings score – but with a big asterisk. CADE missed a quarterly profit estimate over the past year, which set it back, but it has beaten expectations the other three times, and in April, it topped analysts’ average estimate by a solid 15.9%.
Wall Street is mostly on CADE’s side, too. Of the 10 analysts tracking CADE, two rate it “Strong Buy,” while another five have it a “Buy” – and the remaining three are just on the sidelines at “Hold.” Stephens analysts, who rate shares at “Overweight,” say the stock trades at a “discount valuation due to investor uncertainty around its credit outlook.”
The bank looks like a bargain by relative valuation, at just 8.4 times expected earnings. That’s a 36% discount to CADE’s own five-year average and 52% cheaper than the S&P 500. That value proposition is part of why analysts have a nice $25.30 price target on Cadence, which implies another 23% of potential upside.
One small knock on the stock? Summer has historically been an unfavorable period for CADE, logging an average price loss of 0.6% in July and 2.5% in August over the past 10 years.
Market value: $3.2 billion
Dividend yield: 2.1%
StockReports+ scores: Earnings (6), Fundamental (10), Relative Valuation (5), Risk (7), Price Momentum (8), Insider Trading (7)
Louisiana-Pacific Corp (LPX, $25.97) makes siding, oriented strand board (a cousin of particle board), laminated veneer lumber and other new home construction products. It’s a boring business – but one that supports a fantastic quantitative score.
Fundamentals are aces. One highlight: Louisiana-Pacific’s net profit margin of 12.2% is the highest within its Forest & Wood Products industry, says StockReports+. Relative valuation measures are neutral, but only because it’s more expensive than its industry peers. That said, LPX trades at a deep discount to its own five-year average on an expected earnings basis.
Price momentum gives a big lift to LPX’s quantitative score, too. Shares are heading into a historically hot period for performance. Over the past decade, LPX has delivered an average gain of 3.4% in July and 10.3% in August.
Louisiana-Pacific gets a neutral rating on earnings, partly because analysts’ current-quarter average profit estimate dropped by more than half over the past 90 days. But that doesn’t mean the analysts have gone bearish – on the contrary, the average price target of $30.40 implies another 17% upside from current levels.
Among the bulls? BMO Capital, whose analysts upgraded LPX to “Outperform” (equivalent of “Buy”) from “Market Perform” (equivalent of “Hold”) in mid-June. They cited, among other things, Louisiana-Pacific’s progress in making itself a more diversified building products company.
Market value: $4.0 billion
Dividend yield: 2.2%
StockReports+ scores: Earnings (7), Fundamental (8), Relative Valuation (6), Risk (8), Price Momentum (9), Insider Trading (8)
Tops among these mid-cap stocks is Graphic Packaging Holding (GPK, $13.71), which makes it all – from cereal boxes to frozen-food packaging to paper cups and plastic lids for hot coffee and more.
GPK gets its highest quantitative marks for fundamentals, risk, price momentum and insider trading, but earnings aren’t shabby, either. Most recently, on April 23, the company beat Street profit estimates by almost 15%. Analysts also have updated their current-quarter earnings estimates by 8.1% over the past four weeks. Graphic Packaging Holding’s competitors might harbor a bit of jealousy, given that their average earnings forecasts have dropped 6% during the same time frame.
Robert W. Baird analysts, who rate shares at “Outperform,” say GPK stock has frustrated investors for more than two years but are about to break higher. They’re one of the 11 analysts who rate the stock a “Strong Buy” or “Buy” equivalent. The other three analysts rate GPK at “Hold.” As a group, their average price target of $15.70 gives GPK implied upside of about 15% during the next 12 months or so.
Fundamental highlights include year-over-year revenue growth of 25.6% for the 12 months ended March 31, the highest in its industry. Valuation is a mixed bag, because it trades at a steep discount to its own five-year average (based on future earnings estimates), but it trades at a “significant premium” to its peers in the paper packaging industry, according to StockReports+.
Lastly, insiders bought a net 220,783 shares over the past six months – well more than triple the sector average of net buying.