Small and mid-sized companies are often overlooked by many or even most investors. That’s unfortunate, because there are many excellent investment opportunities that can be found in these equity classes. However, an argument could be made that between the small and mid-cap equity classes, the best and perhaps less risky investment opportunities are found in mid-caps.
Additionally, just as it is with every other equity class, there are many different types of mid-size companies with each possessing different features and characteristics. For example, the mid-cap universe contains many intriguing growth opportunities. On the other hand, the mid-cap universe also contains dividend paying companies of all categories. Investors can find high yielding mid-caps, moderate yielding above-average growing mid-caps, and everything in between. Simply stated, not all mid-caps are the same.
With this article I will be presenting interesting and attractively valued mid-sized companies for growth or total return. In part 2, I will be presenting mid-size companies for dividend income and dividend growth.
In preparation for this article I started by screening the S&P 400 mid-cap index looking for mid-cap growth stocks trading at fair, or better yet, attractive value. In addition to growth and value, I was also looking for quality and operating consistency. Although mid-size companies are technically more risky than blue-chip large-caps, they are not as risky as most small-caps. Nevertheless, I also put special emphasis and consideration on debt. However, there are two research candidates on the list that I consider too debt laden.
Utilizing my premium subscription to F.A.S.T. Graphs™ I literally conducted an earnings and price correlated review of all 400 constituents in the index. Much to my surprise, and just as it was with the small-cap index I covered in my previous article, I found very few mid-size companies that I was willing to present as attractive looking candidates for further research.
However, I was able to come up with 10 rather intriguing looking mid-size companies that were also attractive from a valuation perspective. On the other hand, the fact that I was only able to find a few mid-size companies that even appeared attractive should be carefully noted. In other words, I didn’t find a lot of value in quality mid-cap growth stocks today, just as I did not find a lot of value in small-caps.
Nevertheless, I offer the following 10 mid-cap research candidates listed in alphabetical order. The following portfolio review lists them by ticker, name, sector, credit rating, long-term debt to capital, market cap and the exchange they are traded on.
Since many readers may not be familiar with some of these mid-cap selections, I offer the following overview of each of the 10 research candidates. Courtesy of S&P Capital IQ I included a short business description on each, followed by a slide excerpt from each company’s corporate presentations and a link to the full presentation, if available. Additionally, I have provided earnings and price correlated historical F.A.S.T. Graphs™ on each with a calculated return forecast out to 2017 based on what I considered the most appropriate valuation reference line. Note: I have moved the estimated return calculation pop-up to the left corner of the graph so that it did not cover up important data listed in the FAST FACTS.
Finally, I offer a brief investment thesis based solely on what each F.A.S.T. Graphs™ reveals about valuation and earnings growth. I also want to be clear that I have not thoroughly researched each of these candidates. Therefore, they are offered as interesting mid-cap companies that readers might be desirous of looking deeper into.
AMC Networks Inc. (AMCX)
“AMC Networks Inc. engages in the ownership and operation of various cable television’s brands delivering content to audiences, and a platform to distributors and advertisers in the United States and internationally. The company operates in two segments, National Networks, and International and Other.
The National Networks segment operates five distributed entertainment programming networks under the AMC, WE tv, BBC AMERICA, IFC, and SundanceTV names in high definition and standard definition formats. This segment distributes its networks in the United States through cable and other multichannel video programming distribution platforms, including direct broadcast satellite and platforms operated by telecommunications providers.
The International and Other segment delivers entertaining and acclaimed programming services for subscribers in approximately 140 countries and territories, including Europe, Latin America, the Middle East, and the parts of Asia and Africa. This segment also operates in independent film distribution business that distributes films across various media platforms, including theaters, cable/satellite video-on-demand, DVDs and cable network television, and streaming/downloading to computers and other electronic devices.
The company offers movies and entertainment networks to approximately 390 million subscribers in 130 countries. AMC Networks Inc. was founded in 1980 and is headquartered in New York, New York.”
Investment Thesis: AMC Networks Inc.
My primary motivation for including this mid-cap was low valuation. Future long-term earnings growth is expected to average approximately 9% per annum. Consequently, I believe potential P/E ratio expansion could provide substantial returns over the next few years. My caveat would be the high debt to capital ratio.
ARRIS International plc (ARRS)
“ARRIS International plc provides media entertainment and data communications solutions in the United States and internationally. It operates through two segments, Customer Premises Equipment and Network & Cloud.
The Customer Premises Equipment segment offers various product solutions, including set-top boxes, gateways, digital subscriber lines and cable modems, and embedded multimedia terminal adapters and voice/data modems that enable service providers to offer voice, video, and high-speed data services to residential and business subscribers.
The Network & Cloud segment provides cable modem termination system, converged cable access platform, multichannel video programming distributors, programmer equipment, Ad insertion technologies, and equipment in the ground or on transmission poles, as well as equipment used to initiate the distribution of content-carrying signals.
This segment also offers technical support, professional services, and systems integration capabilities; software products that enable providers to deliver user experiences; multiscreen recommendations, offer management, and advertising services; network management products that collect information from the broadband network; and workforce management solutions enabling service providers to efficiently manage and dispatch field technicians, as well as network surveillance and issue correlation software and services.
The company was formerly known as ARRIS Group, Inc. and changed its name to ARRIS International plc in January 2016. ARRIS International plc was founded in 1969 and is headquartered in Suwanee, Georgia.”
Click here for full presentation, then click “ARRIS Investor Day 2016”
Investment Thesis: ARRIS International plc
I chose this mid-cap as a low valuation accelerating growth opportunity. The recent weakness in the stock price is attributed to what some analysts call as light 1st fiscal quarter guidance. However, according to S&P Capital IQ, company guidance for full year 2015 is for earnings of $2.45 - $2.60. If true, this augurs well for eventual P/E ratio expansion.
Centene Corporation (CNC)
“Centene Corporation operates as a diversified and multi-national healthcare enterprise that provides programs and services to under-insured and uninsured individuals in the United States. It operates through two segments, Managed Care and Specialty Services.
The Managed Care segment offers Medicaid and Medicaid-related health plan coverage to individuals through government subsidized programs, including Medicaid, the State children’s health insurance program, long-term care, foster care, and dual-eligible individual, as well as aged, blind, or disabled programs. Its health plans include primary and specialty physician care, inpatient and outpatient hospital care, emergency and urgent care, prenatal care, laboratory and x-ray services, home health and durable medical equipment, behavioral health and substance abuse, 24-hour nurse advice line, transportation assistance, vision care, dental care, immunizations, prescriptions and limited over-the-counter drugs, specialty pharmacy, therapies, social work services, and care coordination.
The Specialty Services segment provides pharmacy benefits management services; health, triage, wellness, and disease management services; vision services; dental services; correctional healthcare services; in-home health services; and integrated long-term care services, as well as care management software that automate the clinical, administrative, and technical components of care management programs. This segment offers its services and products to state programs, healthcare organizations, employer groups, and other commercial organizations.
The company provides its services through primary and specialty care physicians, hospitals, and ancillary providers. Centene Corporation was founded in 1984 and is headquartered in St. Louis, Missouri.”
Click here for full presentation.
Investment Thesis: Centene Corporation
I offer this mid-cap as a fairly valued above-average future growth story. Many analysts believe this company stands to benefit from the demographics associated with managed care.
Microsemi Corporation (MSCC)
“Microsemi Corporation designs, manufactures, and markets analog and mixed-signal semiconductor solutions in the United States, Europe, and Asia. The company offers analog mixed-signal integrated circuits; field programmable gate arrays; system on chip solutions and application-specific integrated circuits; power management products; and timing and synchronization devices, and precise time solutions.
It also provides voice processing devices, radio frequency solutions, discrete components, enterprise storage and communication solutions, security technologies and scalable anti-tamper products, Ethernet solutions, and power-over-Ethernet integrated circuits and midspans, as well as offers custom design capabilities and services.
The company’s products are used in various applications, such as communications infrastructure systems comprising wireless and wired LAN systems; Internet of Things (IoT); implantable pacemakers and defibrillators; missile systems; military and commercial satellites and aircraft; oil field equipment; automotive; and airport security systems.
It serves aerospace, communications, defense and security, and industrial markets. The company was formerly known as Microsemiconductor Corp and changed its name to Microsemi Corporation in March 1983. Microsemi Corporation was founded in 1960 and is headquartered in Aliso Viejo, California.”
Investment Thesis: Microsemi Corporation
I consider this mid-cap a low-valuation high-potential future-growth investment opportunity. However, the company is currently divesting what they consider noncore businesses. Consequently, further due diligence is indicated.
Panera Bread Company (PNRA)
“Panera Bread Company, together with its subsidiaries, owns, operates, and franchises retail bakery-cafes. The company operates through three segments: Company Bakery-Cafe Operations, Franchise Operations, and Fresh Dough and Other Product Operations.
It operates bakery-cafes under the Panera Bread, Saint Louis Bread Co., and Paradise Bakery & Café names that offer daily baked goods, including freshly baked bagels, breads, muffins, scones, rolls, and sweet goods; made-to-order sandwiches on freshly baked breads; soups; freshly prepared and hand-tossed salads; pasta dishes; and custom roasted coffees and cafe beverages, such as hot or cold espresso and cappuccino drinks and smoothies through on-premise sales, as well as provides catering services.
The company also supplies fresh dough, produce, tuna, cream cheese, and proprietary sweet goods items. As of December 29, 2015, it operated 901 company-owned bakery-cafes and 1,071 franchise-operated bakery-cafes in 46 states of the United States, the District of Columbia, and Ontario.
The company was formerly known as Au Bon Pain Co., Inc. and changed its name to Panera Bread Company in August 1998. Panera Bread Company was founded in 1981 and is based in St. Louis, Missouri.”
Click here for full presentation.
Investment Thesis: Panera Bread Company
I included this mid-cap with much consternation. From an earnings perspective (not shown below) I believe this company is significantly overvalued. On the other hand, the company’s stock price has closely aligned with cash flows over the years, as indicated below. On the basis of price to cash flow, Panera Bread looks reasonably valued but not necessarily undervalued.
PAREXEL International Corporation (PRXL)
“PAREXEL International Corporation, a biopharmaceutical services company, provides clinical research, clinical logistics, medical communications, consulting, commercialization, and advanced technology products and services for pharmaceutical, biotechnology, and medical device industries worldwide. The company operates in three segments: Clinical Research Services (CRS), PAREXEL Consulting Services (PC), and PAREXEL Informatics (PI).
The CRS segment offers clinical trials management, observational studies, patient/disease registries and post-marketing surveillance, data management and biostatistics, epidemiology and health economics/outcomes research, clinical logistics, pharmacovigilance, and clinical pharmacology, as well as related medical affairs, patient recruitment, and investigator site services.
The PC segment provides technical expertise and advice in various areas, such as drug development, regulatory affairs, product pricing and reimbursement, commercialization and strategic compliance, and good manufacturing practice compliance consulting; and market development, product development, commercialization, and targeted communications services in support of product launch.
The PI segment offers information technology solutions comprising ClinPhone randomization and trial supply management solutions, medical imaging services, LIQUENT InSight RIM solutions, IMPACT clinical trial management systems, DataLabs electronic data capture systems, Web-based portals, systems integration, electronic patient reported outcomes, and patient diary applications. PAREXEL International Corporation has a strategic alliance with Optum.
The company was founded in 1983 and is headquartered in Waltham, Massachusetts.”
Click here for full presentation, then scroll down to “2015 Annual Report PDF”
Investment Thesis: PAREXEL International Corporation
I consider this mid-cap reasonably valued with above-average future growth potential. The company has produced consistent earnings growth over the years with only an occasional weak year in between. Consequently, I consider this an attractive long-term growth opportunity.
SVB Financial Group (SIVB)
“SVB Financial Group, a diversified financial services company, provides various banking and financial products and services.
Its Global Commercial Bank segment offers deposit products, such as business and analysis checking accounts, money market accounts, and multi-currency and sweep accounts, as well as lockbox, electronic deposit capture, and merchant services; credit products and services, including term loans, equipment loans, asset-based loans, revolving lines of credit, accounts-receivable-based lines of credit, capital call lines of credit, and credit cards; and payment and cash management products and services comprising wire transfer and automated clearing house payment, bill pay, account analysis, and disbursement, as well as online and mobile banking services.
This segment also provides foreign exchange services; various loan and credit facilities; letters of credit, including export, import, and standby letters of credit; investment services and solutions; investment advisory services; third party money market mutual funds and fixed-income securities; vineyard development loans and community development loans to clients in the wine industry; and equity valuation services to companies and venture capital/private equity firms, as well as invests in debt funds.
The company’s SVB Private Bank segment offers private banking services, including mortgages, home equity lines of credit, restricted stock purchase loans, capital call lines of credit, and other secured and unsecured lending services.
Its SVB Capital segment provides venture capital investment services that manage funds on behalf of third party limited partners. The company also offers asset and private wealth management, brokerage, private equity investment, and business valuation services. It operates through 29 offices in the United States; and offices in China, Hong Kong, India, Israel, and the United Kingdom.
The company was founded in 1982 and is headquartered in Santa Clara, California.”
Click here for full presentation, then choose “Financial Presentation”
Investment Thesis: SVB Financial Group
This mid-cap company represents another example where it has gone from excessive overvaluation down into reasonable valuation. One caution is that it is a financial, and as such, the 0% debt to capital can be misleading.
Synaptics Incorporated (SYNA)
“Synaptics Incorporated develops, markets, and sells intuitive human interface solutions for electronic devices and products worldwide.
The company offers its human interface products solutions for mobile product applications, including smartphones, tablets, and touchscreen applications, as well as mobile, handheld, wireless, and entertainment devices; notebook applications; and other personal computer (PC) product applications, such as peripherals comprising keyboards, mice, and monitors, as well as remote control devices for desktops, PCs, and digital home applications.
Its products include ClearPad, which enables the user to interact directly with the display on smartphones and tablets; display driver products that provide advanced image processing technology for entry-level smartphones through high-resolution tablets; and Natural ID, a fingerprint ID for use in smartphones, tablets, notebook PCs, PC peripherals, and other applications.
The company’s products also comprise TouchPad, a touch-sensitive pad that senses the position and movement of one or more fingers on its surface; SecurePad that integrates fingerprint sensor directly into the TouchPad area; ClickPad, a clickable mechanical design to the TouchPad application that eliminates the need for physical buttons; and ForcePad, a thinner version of its ClickPad.
Further, its other product solutions include dual pointing solutions, which offer TouchPad with a pointing stick in a single notebook computer enabling users to select their interface of choice; TouchStyk, a self-contained pointing stick module; and TouchButtons, which provide capacitive buttons and scrolling controls.
The company sells its products through direct sales, outside sales representatives, and distributors. It serves smartphone, tablet, and PC original equipment manufacturers, as well as a various consumer electronics manufacturers. Synaptics Incorporated was founded in 1986 and is headquartered in San Jose, California.”
Click here for full presentation.
Investment Thesis: Synaptics Incorporated
I consider this mid-cap undervalued with above-average long-term growth potential. I also like the company’s balance sheet and moderate debt to capital ratio.
Triumph Group, Inc. (TGI)
“Triumph Group, Inc. designs, engineers, manufactures, repairs, overhauls, and distributes aero structures, aircraft components, accessories, subassemblies, and systems worldwide.
Its Aerostructures Group segment designs, manufactures, builds, and repairs acoustic and thermal insulation systems, aircraft wings, composite and metal bonding, composite ducts and floor panels, empennages, engine nacelles, flight control surfaces, helicopter cabins, precision machined parts, stretch-formed leading edges and fuselage skins, and wing spars and stringers.
The company’s Aerospace Systems Group segment designs, engineers, builds, and repairs aircraft and engine mounted accessory drives, cargo hooks, cockpit control levers, control system valve bodies, electronic engine controls, exhaust nozzles and ducting, geared transmissions and drive train components, fuel metering units, thermal control systems and components, high lift actuations, hydraulic systems and components, landing gear actuation systems, landing gear components and assemblies, main engine gear box assemblies, main fuel pumps, secondary flight control systems, and vibration absorbers.
Its Aftermarket Services Group segment provides maintenance, repair, and overhaul (MRO) services for aircraft components and accessories manufactured by third parties; and supplies spare parts for various types of cockpit instruments and gauges. This segment also designs, engineers, manufactures, repairs, and overhauls aftermarket aerospace gas turbine engine components; and offers MRO solutions, leasing packages, exchange programs, and parts and services to airline, air cargo, and third-party overhaul facilities.
The company serves the aviation industry, including original equipment manufacturers of commercial, regional, business, and military aircraft and aircraft components, as well as commercial and regional airlines and air cargo carriers.
Triumph Group, Inc. was founded in 1993 and is headquartered in Berwyn, Pennsylvania.”
Click here for full presentation.
Investment Thesis: Triumph Group, Inc.
This mid-cap caught my eye solely on its valuation. In other words, I see it as more of a turnaround story than I do a growth opportunity. Nevertheless, this extremely low P/E ratio opportunity is offered as a speculative turnaround opportunity. Comprehensive due diligence is definitely warranted here.
Zebra Technologies Corporation (ZBRA)
“Zebra Technologies Corporation, together with its subsidiaries, designs, manufactures, sells, and supports direct thermal and thermal transfer label printers, radio frequency identification (RFID) printer/encoders, dye sublimation card printers, real-time locating solutions, related accessories, and support software worldwide.
Its products are used principally in automatic identification (auto ID), data collection, and personal identification applications. The company also provides mobile computing and advanced data capture technologies and services, which include rugged and enterprise-grade mobile computers; laser, imaging, and radio frequency identification based data capture products; wireless LAN (WLAN) solutions and software; and applications that are associated with these products and services.
In addition, it offers barcode scanners; specialty printers for barcode labeling and personal identification; real-time location systems; and related accessories and supplies, such as self-adhesive labels and other consumables, utilities, and application software.
Further, the company provides maintenance, repair, product support, system installation and integration services, and other services. It serves retail, transportation and logistics, manufacturing, healthcare, and other end markets.
The company sells its products through a network of resellers, distributors, and end users representing industrial, service, and government organizations. Zebra Technologies Corporation was founded in 1969 and is headquartered in Lincolnshire, Illinois.”
Click here for full presentation.
Investment Thesis: Zebra Technologies Corporation
I like this mid-cap for its current low valuation and above-average future earnings growth potential. However, I don’t like the high debt to capital ratio.
Summary and Conclusions
A secondary objective of this article is to point out that there are many very interesting mid-size companies to invest in. The challenge for the individual investor is that it’s very difficult to find research coverage or even articles on the mid-cap equity asset class. I consider that a shame, because there are truly many good investments to be found with mid-cap companies.
From the total return perspective, it is easier for smaller companies to grow than it is for larger companies. One generally common attribute of mid-cap companies over small-cap companies, is that many of them have longer operating histories. As a result, many mid-caps are more established businesses, yet they still have plenty of room to provide growth.
The secrets to investing in mid-caps is to discover the good ones and then to find ways to research them effectively. Additionally, it’s also important to find them when they are at or below fair value. There are many times with both mid and small-cap stocks where the story entices investors to overpay.
Disclosure: Long SNYA
Disclaimer: The opinions in this document are for informational and educational purposes only and should not be construed as a recommendation to buy or sell the stocks mentioned or to solicit transactions or clients. Past performance of the companies discussed may not continue and the companies may not achieve the earnings growth as predicted. The information in this document is believed to be accurate, but under no circumstances should a person act upon the information contained within. We do not recommend that anyone act upon any investment information without first consulting an investment advisor as to the suitability of such investments for his specific situation.