Top 3 Best Mid-Cap Stocks to Own (2019 Review)
Until recently, owning large-cap stocks was the best way to make money in the stock market. A large-cap stock is a publicly traded company with a stock market capitalization (the total value of all its shares outstanding) of more than $10 billion.
The outperformance of large-cap stocks over the past ten years should come as no surprise. The Fed poured trillions of dollars into the economy in the wake of the Great Recession. Big companies benefited the most since they were able to borrow large sums of money cheaply and use it to invest in the growth of their businesses. They also used it to repurchased millions of shares of their own stock to improve earnings on a per-share basis.
However, the days of cheap money are over and the Fed is now aggressively raising interest rates to keep inflation at bay. That means big companies will have less money to invest in the growth of their businesses and fewer dollars with which to buy back their own stock.
For that reason, mid-cap stocks are poised to perform well in 2019. They are cheaper than large-caps stocks as measured by their forward P/E (price to earnings) ratios. They are also less susceptible to trade war collateral damage since most of them do business primarily in the United States.
Want to know what mid-cap stock we believe will perform best heading into 2019?
Here they are!
Our Top 3 Mid-Cap Stocks
If you’re in a hurry, below are our top mid-cap stock picks for 2019 as of this writing.
- BJ’s Wholesale Club: Undervalued retailer with expanding profit margins.
- Steelcase: Furniture manufacturer gaining market share.
- Chemours: Global demand for eco-friendly specialty chemicals is rising.
Keep on reading to learn about these companies and my thoughts on each.
What Are Mid-Cap Stocks?
A mid-cap stock has a stock market capitalization of $2 – 10 billion. These companies are sometimes referred to as “Goldilocks stocks” because they are not too big and not too small, but just the right size to grow earnings at a sustainable pace.
To give you a sense of scale, at an average market cap of $5 billion it would take about 200 mid-cap stocks to equal the size of Apple (NSDQ: AAPL), the most valuable publicly traded company in the world!
Apple has been a great stock to own over the past ten years, increasing more than 10 times in value since 2009. However, it is unlikely to repeat that same rate of growth over the next ten years. It is much easier for a $10 billion company to grow to $100 billion than it is for a $100 billion to grow to $1 trillion.
How Do You Determine What Qualifies As a Top Mid-Cap Stock?
A top Mid-Cap stock is one that:
- Can grow its sales revenue and profits at a faster rate than the overall stock market.
- Is able to reinvest its excess cash flow at a high ROE (return on equity).
- Has a market-leading product in a high-growth industry or sector.
Unlike many large-cap stocks which share their financial largesse with shareholders in the form of regular cash dividends, most mid-cap stocks reinvest their profits back into the growth of their businesses. So, dividend yield is not an important consideration when evaluating mid-cap stocks.
Instead, we look at operating metrics such as ROE (return on equity) to determine if a company’s management team is allocating financial resources effectively. In effect, your “dividend” as a shareholder of a mid-cap stock is the increasing value of your equity based on how that excess cash flow is being reinvested back into the growth of the business.
To do so, the company must have one or more market-leading products for which there is growing demand. That does not mean that the product must be a cutting-edge technology. In fact, some of the most successful mid-cap companies sell mundane products that most consumers use on a daily basis.
Here are three mid-cap stocks that we believe will reward their shareholders with strong market performance in 2019.
Read Also: Top 3 Best Dividend Stocks to Own
BJ’s Wholesale Club Holdings
What is it?
BJ’s Wholesale Club Holdings (NYSE: BJ) originally went public in 1997 as a spin-off from Waban. It was taken private in 2011 and returned as a publicly traded company in 2018 via an IPO (initial public offering) at a share price of $17. At a recent share price of $22, BJ has a market cap of $2 billion.
BJ’s is a “big box” retailer similar to Costco (NSDQ: COST) and Walmart (NYSE: WMT) Sam’s Club. BJ’s operates more than 200 stores and gas stations along the east coast of the United States. BJ’s has more than $5 million members that spend over $12 billion annually.
Why is it a good mid-cap stock?
The company increased membership fees by 10% last year. Despite the higher annual fee, membership renewal remains at all-time high levels. BJ’s upper-income customer demographic exposes it the healthiest segment of consumers.
Profit margins are increasing dramatically. BJ’s narrowed the number of store-brand labels from 10 to 2 over the past few years. This streamlining has helped store-brand label products, which produce higher profits, grow from 10% of sales to 19%.
BJ’s recently added “express scan” as a convenience to its members to make checking out quicker and easier, as explained in this video:
BJ’s scale allows it to gain pricing leverage with suppliers, which in turn boosts gross profit margins. Disciplined management has kept operating expenses steady.
Expanding product margins, flat expenses plus mid-single digit revenue growth is a fabulous formula for double-digit earnings growth in 2019.
What is it?
Steelcase (NYSE: SCS) was founded in 1912 and is based in Grand Rapids, Michigan and has over 12,000 employees. At a recent share price of $17, SCS has a market cap of $2 billion.
The company manufactures office furniture that is sold through over 700 dealers around the world including online e-commerce giants Amazon.com (NSDQ: AMZN) and Wayfair (NYSE: W). During its most recent fiscal year, Steelcase generated more than $3 billion of sales.
Why is it a good mid-cap stock?
Steelcase is morphing its corporate furniture to fit into today’s office and hospitality lifestyle. Profits struggled in 2018 as the company revamped its product lines to entice customers.
Recently, management called out a moderate but notably positive shift in customer ordering patterns and is on track for mid-twenty percent earnings gains in fiscal year 2019.
While lower profits on products are often seen as a negative sign, Steelcase’s recent drop in gross margins (revenue less product costs) is a welcome harbinger of more competitive pricing to win over office and hospitality accounts eager to create mobile, creative workspaces.
The Chemours Company
What is it?
The Chemours Company (NYSE: CC) is a specialty chemicals manufacturer that was spun off from DuPont in 2015. The company is divided into three operating divisions: Titanium Technologies, Fluoroproducts, and Chemical Solutions. At a recent share price of $36, Chemours has a market capitalization of $6 billion.
Last year, Chemours generated $6.2 billion in net sales with 37% of it coming from North America, 13% in Latin American, 26% in Asia, and 24% in Europe, the Middle East and Africa. Nearly half of all sales came from its titanium technologies, and the other hold was split between its fluorproducts and chemical solutions.
Why is it a good mid-cap stock?
Management recently noted a new channel of demand opening up for its environmentally sustainable Opteon refrigerant. Opteon is a refrigerant designed to meet strict global warming requirements for air conditioning units in automobiles.
Although the company might see less demand from European car manufacturers due to the passing of mandate deadlines, a new wave of demand is emerging from U.S. automakers and European commercial refrigerator customers.
Management specifically called out 20,000 European supermarkets that they expect to be using Opteon by 2020.
In addition, revenue and profits from its Titanium coatings chemical are skyrocketing. Revenue from this product line now makes up almost half of Chemours’ revenue and grew 26% last quarter. Higher volumes and pricing are driving profits up even faster for this segment.
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