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All Contents © 2018The Kiplinger Washington Editors
By Dan Burrows, Contributing Writer
| September 29, 2017
Stocks continue setting new all-time highs, so it’s understandable if some investors are getting nervous about holding on to their gains. It doesn't help that it's almost October – a month that has hosted some of the worst market crashes in history. If it's all too much for your nerves, there's nothing wrong with adding some protection to your holdings.
And you can find that protection in an unlikely place: mid-cap stocks.
Typically, when investors consider "safe" stocks, they think about big, blue-chip companies in defensive sectors, such as AT&T (T). That's fine, and AT&T's dividend yield of 5% is indeed attractive. But AT&T is unlikely to wow you with price appreciation if the markets remain in bull mode. Conversely, stocks with small market capitalizations – share price times total shares outstanding – have a greater chance of putting up big gains, but they are riskier by their very nature.
That’s why you should consider looking in the comfortable middle ground. Mid-caps are firms with market capitalizations of about $2 billion to $10 billion. They tend to be more stable than small-cap stocks, but have better growth prospects than your average blue-chip large-cap.
We have searched the S&P MidCap 400 index – which includes companies between $1.6 billion and $6.8 billion in market cap – for mid-cap stocks to buy in good times and bad. We also looked for low beta scores; when a stock has a beta of less than 1, it tends to be less volatile and hold up better in a down market. Lastly, we also considered prices and analysts' recommendations, among other criteria.
Here are five of the best mid-cap stocks to buy to survive a market crash.
Data is as of Sept. 28, 2017. Companies are listed in order of market capitalization, starting with the highest. Analysts’ ratings provided by Zacks Investment Research. Click on symbol links in each slide for current share prices and more.
Market value: $3.8 billion
Share price: $15.57
Dividend yield: 1.8%
Analyst recommendations: 7 strong buy, 0 buy, 6 hold, 0 sell, 0 strong sell
The business of slinging hamburgers is brutally competitive, especially now that consumers are clamoring for more healthful fare. Fortunately for shareholders, the fast-food chain that serves up square burger patties is more than keeping up.
Wendy's stock is up more than 45% over the past 52 weeks. That's better the broader market – the Standard & Poor’s 500-stock index gained 16% – as well as McDonald's (MCD), which is up 37%. Credit Suisse analysts love the company's potential for growth, but worry about competition from McDonald’s, which is why they maintain a "Neutral" (equivalent of hold) rating on shares.
However, Wendy's has some defensive characteristics that are hard to ignore. It tends to do better than the average stock when the market takes a tumble, and it offers a decent dividend; income is always welcome in a declining market.
Shares trade at 27 times forward earnings estimates, which seems high, but earnings are forecast to grow an average of 17% a year for the next five years. Thus, Wendy's isn't the cheapest stock – even compared to an expensive market – but its price is reasonable given its potential.
Market value: $4.8 billion
Share price: $53.26
Dividend yield: 2.4%
Analyst recommendations: 4 strong buy, 1 buy, 12 hold, 1 sell, 0 strong sell
Shares of Dunkin’ Donuts parent Dunkin’ Brands have mostly treaded water over the past 52 weeks as the company transitions into a company that focuses on selling beverages to busy consumers. It's even testing the idea of dropping "Donuts" from its name as it aspires to be an "on-the-go" brand.
That's corporate speak for “trying to be a bit more like Starbucks (SBUX),” and it appears to be gaining traction. Credit Suisse analysts, who rate shares at "Outperform" (buy), note that Frozen Dunkin' Coffee and Energy Punch were hits during the summer and helped drive quarterly profits.
Dunkin' isn't actually giving up on donuts – great news for pastry lovers and shareholders alike. Coffee and donuts tend to do well even when the economy is in a funk because they give consumers a way to indulge in something pleasurable at an affordable price.
Also appealing is Dunkin's above-average dividend of 2.4%.
Market value: $5 billion
Share price: $106.93
Dividend yield: N/A
Analyst recommendations: 9 strong buy, 0 buy, 6 hold, 0 sell, 0 strong sell
The lengthy research process can make or break a pharmaceutical company, and that's where Charles River Laboratories comes in.
The company provides products and services to help researchers with their laboratory work. Research and development spending might ebb and flow, but it never dries up completely. That has helped Charles River's stock to hold up better than most in previous down markets – such as in 2015, when CRL gained 25% compared to a 2% loss for the S&P 500.
Analysts at William Blair rate shares at "Outperform," in part because of a “solid” environment for biopharma spending. More broadly, analysts expect Charles River to post revenue growth of 10% this year. Earnings per share should improve by 12%, which is in line with analysts' long-term average growth forecast. Operational performance like that should offer CRL some protection from a broader-based market selloff.
Shares trade at 19 times forward earnings estimates, which is in line with the broader market, and reasonable for such an upbeat growth forecast.
Market value: $5.7 billion
Share price: $97.37
Dividend yield: 2.2%
Analyst recommendations: 4 strong buy, 0 buy, 4 hold, 0 sell, 0 strong sell
Scotts Miracle-Gro recently underwent a dramatic change: The company sold its overseas business in August to focus on North America only. Analysts at William Blair applaud the move, noting that Scotts has many advantages on its home turf, including a strong brand and economies of scale. They expect the company to be immediately more profitable without international operations, and rate shares at "Outperform."
If the market does crash, no stock will be safe. But Scotts Miracle-Gro's low beta score should help shares fare better than other companies that have experienced more roller coaster-like price action.
Analysts are split on whether SMG is a buy or hold at this point. But low volatility and a decent dividend yield – and the fact that weeds grow regardless of whether the economy does – help the optimists’ case.
Market value: $6.5 billion
Share price: $173.38
Analyst recommendations: 9 strong buy, 0 buy, 1 hold, 0 sell, 0 strong sell
Tyler Technologies serves as sort of a Swiss Army knife for local government. It provides software and services to handle everything from accounting services for government agencies to billing for utilities to managing the river of information flowing through the court system. That gives Tyler some defensive advantages when the economy goes south and stocks cool off.
After all, government spending rises and falls, but the need for judicial case management, tax appraisal and business licenses is always there.
Analysts on average expect revenue to rise 10% this year and 11% next year. Earnings per share are forecast to increase at an even more robust annual pace of 16% for the next five years. And the stability of Tyler Technologies’ business helps justify paying 39 times forward earnings estimates for the stock.
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