Mar 10, 2023 13:54
While many investors are intrigued by the prospect of holding shares in small, fast-growing companies, others prefer the stability and security provided by the stocks of well-established household names. Mid-cap stocks are a significant component of the stock market that even the most successful investors tend to overlook.
To qualify as a mid-cap stock, a company's total shares multiplied by its current market price per share must be between $2 million and $10 million. This is the company's market cap. Mid-cap firms are smaller than their blue-chip counterparts, but if chosen correctly, they may be excellent growth stocks and generate significant profits. The inclusion of mid-cap stocks in a properly diversified portfolio is crucial. Businesses respond more quickly to market changes and advances because they tend to be more specialized and niche-focused.
Investing in smaller companies includes greater risk, but due to their tremendous development potential, it may be lucrative. If you can invest in a great firm before it becomes a household name, you stand to earn an excellent return on your money. With so many start-ups available today, it can be challenging to anticipate success. A happy medium exists for some in the middle range, as moderately sized enterprises are often more established but have smaller growth opportunities. These businesses have been and have a lengthier track record for at least several years. It is easier to forecast whether or not these companies will achieve long-term success. Therefore the risk is lower, and the return is lower. When it comes down to it, smaller competitors who can adapt nimbly to market demands can outperform larger firms.
Ambarella is a relatively modest company in a market category dominated by giants — semiconductors or computer chips. Ambarella is not a chip manufacturer but designs components for its chip fabrication partners to build. Ambarella specializes in computer vision (CV) semiconductors, which use artificial intelligence (AI) to enable a computer system to "see," understand what's in its field of vision, and make judgments based on this data. Applications include surveillance cameras and driverless vehicles, which are anticipated to be an enormous growth market over the next two decades.
The American specialty shop Williams-Sonoma sells upscale home items. According to analyst Jaime Katz, the market is pricing in an unduly negative outlook for post-pandemic home furnishings demand. Williams-Sonoma, according to Katz, is better positioned than many of its competitors to endure an economic downturn due to its varied client base, which includes customers of various ages and income levels. Williams-Sonoma is on target to reach $10 billion in annual sales by 2024, assuming a 5% yearly repair and renovation sales increase over the next decade. Morningstar has a "buy" recommendation and an estimated fair value of $227 for WSM stock, which closed on May 20 at $108.15.
West Fraser Timber, a Canadian forestry firm headquartered in Vancouver, British Columbia, manufactures timber and other specialty wood-based goods such as pulp and plywood. West Fraser has a market capitalization of CAD 7.86 billion (USD 5.81 billion). The year-to-date (YTD) decline for WFG is about 24%.
Fundamentally, WFG's overall financial strength justifies its inclusion among the finest mid-cap stocks to purchase. For example, the company has a solid balance sheet, and its cash-to-debt ratio of 2.65 outperforms more than 80% of its competitors. In addition, its Altman Z-Score is 4.53, indicating a minimal chance of insolvency.
West Fraser has a three-year revenue growth rate of 15.2%, higher than 87.0% of the industry. Additionally, the corporation enjoys exceptional profit margins across the board, and its gross margin of about 50 percent suggests the possibility of substantial economies of scale, hence boosting adaptability.
With four buy ratings and two holds, analysts recommend WFG as a moderate buy. The average price objective is $98.96, representing an upside of roughly 38%.
Clover Health Investments is a rapidly developing healthcare insurance firm. It went public in January 2021 via a merger with a particular purpose acquisition company (SPAC) headed by Chamath Palihapitiya, a former Facebook executive turned venture capitalist. Clover is now a Medicare Advantage insurance provider with a twist. Its software is directly integrated with the operations of healthcare providers, removing the layers of bureaucracy that have historically plagued healthcare plans. Although the company is not profitable, it is on a clear road to breakeven and could significantly upset the vast healthcare market.
Polaris manufactures off-road vehicles, snowmobiles, and motorbikes, among other sports vehicles. Katz asserts that Polaris's substantial brand value renders it impervious to inflation's detrimental effects. However, supply chain breakdowns may cause short-term supply instability. Katz anticipates a 12% increase in organic sales in 2022 and believes Polaris' competitive advantage will help the firm gain market share over time. International expansion and acquisition prospects could add to Polaris' value in the following years, particularly in the marine and parts/accessories markets. Morningstar has a "buy" recommendation and an estimated fair value of $184 for PII stock, which closed on May 20 at $98.57.
Louisiana-Pacific (NYSE: LPX) is a Nashville, Tennessee, American building materials producer. As such, the company's perspective on the housing market is contrary. LPX could be your ticket to wealth if you anticipate a future construction boom. Currently, the market capitalization of Louisiana-Pacific is $4.32 billion. The stock price is down approximately 23% year-to-date.
Indeed, the S&P 500 is down 20% for the year, indicating that LPX is an apparent underperformer. Nevertheless, shares gained about 18% in the trailing six months. LPX is included on this list of the finest mid-cap stocks to purchase because of the absence of noticeable weaknesses. The company has only two yellow flags and no red flags, according to GuruFocus.
This leaves investors with several positives to consider. For example, the company's balance sheet is solid, with an Altman Z-Score of nearly eight. In addition, Louisiana-Pacific maintains outstanding revenue and profit margins. In addition, the market values LPX at four times trailing twelve-month earnings, which is a gross undervaluation.
According to analysts at TOP1 Markets, LPX is a mild buy. Wall Street analysts' average price objective forecast is $73, representing a 21% upside.
Stitch Fix is an excellent example of a young, expanding company that is no longer categorized as a small-cap but is still in the early stages of generating positive free cash flow. The internet company sells and sends handpicked apparel and accessories to its members, utilizing artificial intelligence to improve the sales process and match consumer tastes with the company's selections. Even though the clothes and garment sector suffered during the epidemic, Stitch Fix continued to expand. It is reinvesting extensively to maximize its expansion pace and is benefiting from an uptick in clothes consumer expenditure.
Gap is a casual clothing and accessories retailer and owns Old Navy, Gap, Banana Republic, and other well-known shop brands. As of May 20, Gap shares are down 37% year-to-date, making it the worst-performing mid-cap stock on our list. However, according to analyst David Swartz, Gap shares are "very undervalued," The firm is taking dramatic measures to remedy Old Navy's difficulties, including removing its CEO and heavily discounting products to clear its inventory. According to Swartz, Gap is not in danger of experiencing financial trouble in the interim. Morningstar has a "buy" recommendation and an estimated fair value of $28 for GPS stock, which closed on May 20 at $10.93.
Silicon Motion Technology, based in Taiwan, specializes in developing NAND flash controller integrated circuits for solid-state storage devices. Currently, Silicon Motion has a market capitalization of $2.1 billion. Since the start of the year, SIMO has decreased by 33%; however, shares rose by slightly more than 4% throughout the preceding month.
Silicon indeed received at least a double whammy (if not more). First, the semiconductor industry suffered from the disruption of the worldwide supply chain. Second, geopolitical conflicts between Taiwan and China obscure the narrative of SIMO. Nonetheless, Beijing's decision to loosen its border controls indicates its commitment to economic recovery programs. Long-term, this approach should stimulate normalization trends in the semiconductor industry.
SIMO's position as one of the top mid-cap stocks to buy is more than warranted. Initially, the company is debt-free, giving it enormous flexibility. In addition, it has significant revenue growth and profit margins. Lastly, the market values SIMO at less than ten times anticipated earnings, lower than the sector average of 16.9 times.
Hanesbrands is one of the significant manufacturers of intimate clothing and other forms of leisure wear worldwide. According to Swartz, Hanesbrands is the apparent innerwear market leader, accounting for almost 60% of the company's revenue in 2021. Swartz states that the company's substantial exposure to replenishing apparel categories keeps it well-positioned despite inflation and supply chain interruptions. According to him, the company's Hanes and Bonds brands create pricing leverage, and he anticipates that Hanes' U.S. innerwear operating margins will remain around 20%. Morningstar has a "buy" recommendation and an estimated fair value of $26 for HBI stock, which closed on May 20 at $11.66.
The Vanguard Mid-Cap ETF replicates the performance of the CRSP US Mid-Cap Index. This portfolio comprises 380 stocks and includes growth and value-oriented companies. The expense ratio - the fund's yearly management fee - is only 0.04%, making it inexpensive and yielding a tiny income.
IShares S&P Mid-Cap 400: This fund invests in mid-cap growth stocks exclusively. The ETF comprises 227 U.S. stocks with significant growth potential but relatively unpredictable share prices. This ETF is a low-cost investment option with an annual expense ratio of just 0.18%.
Midcap stocks have enormous growth potential, which can provide investors with attractive returns.
Small-cap stocks are more susceptible to market volatility than mid-cap stocks. However, compared to large-cap stocks, they are considered to be extremely risky.
When compared to small-cap stocks, a mid-cap stock is more liquid. The incredible popularity of mid-cap stocks compared to small-cap stocks makes it simpler for investors to buy or sell them.
Mid-cap enterprises lie across a broad spectrum. Some businesses may be in the development phase, which is stable but yields low returns. While some mid-cap companies may be in a growth period and offer substantial returns, others may be stagnant.
Mid-cap companies have a more significant opportunity to raise cash through credit than small-cap companies, which increases their growth and potential.
Mid-cap stocks have a more significant potential for price appreciation and the ability to pay out big dividends.
Mid-cap stocks are frequently less scrutinized than large-cap stocks, which enhances the likelihood of acquiring these stocks at a discount.
Compared to small-cap companies, mid-cap corporations supply their investors with sufficient information, making it easier to examine the company.
A value trap occurs when a company consistently generates poor earnings and has restricted cash flow, and the company's position could be more active. Mid-cap firms, particularly those with low rankings, are susceptible to value traps and may no longer be traded if they persist for an extended period.
Inadequate resources: Mid-cap corporations have a less efficient managerial and organizational infrastructure than Large-cap companies. Therefore, although they have substantial profits, they must be qualified to use them effectively.
Most mid-cap companies need more experience to endure an economic crisis or slump in market cycles due to the economic crisis. Therefore, we should examine the company's financial history when searching for the most excellent mid-cap stocks.
Even though mid-cap stocks offer a balance between risk and return compared to small-cap and large-cap stocks, they may not be suitable for all investors. The following investors might consider investing in mid-cap stocks:
Investors seeking long-term investment opportunities may investigate mid-cap stocks, as they provide favorable long-term returns.
Consider midcap stocks if you are searching for capital appreciation.
Consider investing in midcap stocks if you have a moderate risk tolerance.
Mid-cap stocks have a place in your portfolio if you can keep an investment for at least five years, are comfortable with periodic price volatility, and aim to balance growth and volatility.
Before making a purchase, conduct research to begin investing. Consider adding a mid-cap ETF or mutual fund to your diversified portfolio if you cannot complete the research required to analyze individual mid-cap stocks or lack time.
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