Five mid-cap stocks I love

 

Some investors tend to shy away from mid-cap stocks. Mid-cap stocks are those stocks with a market cap of around $10 billion or less, which investors often use a cut-off point when screening for new holdings.

It is easy to understand why some investors avoid mid-cap stocks, but to leave them out of your stock screens all together is a big mistake in my mind.

However, the reasons why some investors shy away from this group are easy to understand. Mid-cap stocks tend to be younger companies, and in many cases are still going through some of the growing pains that large-cap stocks have already put behind them. They also tend to face stiffer competition versus large-cap stocks because they tend to be smaller players in their respective sectors.

Having said that, there is a lot of upside potential in investing in smaller companies. The growth potential is often much greater, since the companies tend to still be growing, often at a faster pace than more mature companies that have already saturated the market with their goods and services.

I believe there is a lot of potential in mid-cap stocks. Not all mid-cap stocks are new to the market, and if you do your homework you can limit your risk just the same as you can with large-cap stocks.

You still want to look for the same things in mid-cap stocks. You want to make sure that recent trends are upbeat; that analysts expect to see decent earnings growth, and that their valuation remains attractive. If you can find stocks with all of the above attributes, they become attractive buy candidates regardless of their size.

The following stocks are all mid-cap stocks that I love and believe are excellent buy candidates for investors that wish to increase their mid-cap exposure.

Martin Marietta Materials, Inc.

Martin Marietta (MLM) manufactures heavy building supplies. The stock has a market cap of $12.7 billion, which is pushing the limits of being considered a mid-cap stock, but not too high to exclude from our list. Improvements in the overall economy have helped the company in recent years, and the stock has trended steadily higher as a result. MLM currently trades just shy of its all-time high, with a forward P/E of 20.7. The company reported weaker than expected earnings at the start of August, but the earnings miss barely impacted the stock, and shares remain well above the short and long-term moving averages. Looking ahead, analysts forecast massive earnings growth of 61.3% this year, and 33.7% next year. The growth estimates are the primary reason the stock was not fazed by the latest earnings miss, and why shares should continue to build on recent gains through next year. The stock has a dividend of 0.8%, which is not huge, but at least provides a little income for shareholders to reinvest.

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Chart courtesy of www.stockcharts.com

Spectrum Brands

Spectrum Brands (SPB) manufactures consumer goods. Its products include batteries, pet supplies, home and garden goods, and auto care products to name a few. The stock has a market cap of $11.6 billion. The company has reported back-to-back better-than-expected quarterly reports, which have helped drive shares to all-time highs. Despite trading just shy of its all-time high, the valuation remains OK, with a P/E of 26.8, and earnings forecast to rise by 20.0% this year, and an additional 11.0% next year. SPB is now trading at $131.96, with analysts setting an average price target of $142.43, suggesting the stock has 7.9% upside potential. SPB has increased its dividend the last two years, and currently offers a 1.15% yield.

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Chart courtesy of www.stockcharts.com

Thor Industries

Recreational vehicle maker Thor Industries (THO) is enjoying solid earnings growth. For its most recent quarter, the company reported year over year earnings growth of 25.2%, and for the full year analysts expect to see earnings climb by 31.1%. The good times are expected to continue into next year, with earnings estimated to rise an additional 21.4% next year. The stock now trades just pennies below its all-time high, but with a P/E of just 17.0, there is plenty of upside potential as long as earnings grow as much as forecast. THO is now trading just 1.7% lower than analysts’ average price target, so investors should not expect any huge jumps in the stock, but should the company post another set of solid quarterly numbers when it next reports on September 19, its valuation is low enough to drive shares higher and will likely result in analysts lifting their average price target. The stock has a 1.5% dividend yield, and a six-year streak of increases. The stock has a market cap of $4.1 billion.

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Chart courtesy of www.stockcharts.com

Pinnacle Foods

Pinnacle Foods (PF) is a mid-cap stock with a current market cap of around $5.8 billion. The company has an impressive stable of brands in its portfolio, which include Duncan Hines, Log Cabin, Wish-Bone, Vlasic, and Smart Balance to name a few. With such a strong lineup of consumer staples, it is not surprising that the stock is pretty stable, and shares are now trading near an all-time high. Last quarter, the company reported earnings that were in-line with the consensus, while revenue easily outpaced the consensus. The stock has a slightly high P/E of 29.5, but with earnings forecast to rise by 11.5% this year, and 13.1% next year, there is no reason why the stock should not build on recent gains as long as actual results fall in-line with the consensus. The stock is 4.4% below its average price target, so Wall Street does expect to see the stock move higher, which it should barring any future earnings misses. PF has a 2.0% dividend yield, and has boosted its dividend the last two years.

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Chart courtesy of www.stockcharts.com

Toro Co.

Toro Company (TTC) manufactures small tools and equipment for use in yards and gardens. Strength in the overall housing market has helped Toro’s consumer-goods business, which in turn has pushed the stock to a new all-time high. With the stock now sitting at an all-time high, valuation could be a concern, but the stock has a P/E of just 23.9, which suggests there is additional upside potential should earnings continue to move higher. For the full year, analysts forecast earnings to rise 13.0%, and next year to climb 12.7%, which should keep strength under the stock moving forward. The stock is trading above analysts’ average price target, but I would expect to see those targets move higher should the company continue to grow earnings as expected. In the short-term, I do not see a huge amount of upside potential, but from a long-term buy and hold stance, TTC is a great stock to own. The housing market remains strong, and as such current homeowners are more likely to spend money on lawn upkeep, and as more people buy homes that also boosts demand for the company’s products. TTC offers a 1.3% dividend yield, and the company has boosted its dividend each of the last six years.

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Chart courtesy of www.stockcharts.com

Symbols: MLM PF SPB THO TTC
Michael Fowlkes

Michael Fowlkes

Michael Fowlkes is a financial writer who has been with the Fresh Brewed Media family since 2004. Over the course of his tenure with Fresh Brewed Media, he has worn many hats, including portfolio manager, options analyst, and writer. Michael received his undergraduate degree from Virginia Tech in Accounting and got his start in finance working as a stock trader for six years at Chase Investment Counsel in Charlottesville, Va.

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