About a year ago, we brought you what turned out to be a very popular article entitled 11 Mighty U.S. Mid-Cap Stocks, courtesy of Kiplinger.
Now, Canadian investment writer Will Ashworth has come up with 15 Mighty Mid-Caps to Buy for the Rest of 2022.
See below for the full article and list.
As a taster, we’re featuring three of these stocks that have 12-month upside of between 24 and 48 per cent.
by Will Ashworth, Contributing Writer, Kiplinger
Mid-cap stocks – typically, companies between $2 billion to $10 billion, though some indexes view them differently – are too often overlooked.
Large-cap stocks are valued for their stability and dividends, while small-cap stocks are favored for their growth prospects.
But avoid the happy medium at your own peril.
Many of 2022’s best mid-cap stocks might just be among 2022’s best stocks period.
A couple years ago, Canadian mutual fund and exchange-traded fund (ETF) provider Mackenzie Financial made a convincing universal case for U.S. mid-cap stocks.
It had four arguments. Namely, mid-caps:
- Give you the stability of large-cap stocks combined with the growth of small-cap stocks.
- Have historically provided better risk/return characteristics.
- Enjoy far less analyst coverage than large caps, which offers active managers an edge.
- Make great takeover targets. Mackenzie pointed to 10 years of data through October 2018 showing that, of 11,270 mergers and acquisitions, 91% involved sums between $500 million and $5 billion.
- So even though large deals get a lot of press, small- and mid-cap takeovers happen far more often.
Through October 2018, it looked at 11,270 M&A deals over 10 years.
It found that 91% of the deals were for companies valued between $500 million and $5 billion.
So, even though large deals get all the press, it’s the smaller acquisitions that happen more often.
Mid-cap stocks – which Mackenzie refers to as the “sweet spot” of investing – can best be described as consistent performers.
Using a baseball analogy, they might not hit you a bunch of home runs, but they’re sure to knock in a lot of runners, ultimately producing when it counts.
Here are three mighty mid-caps:
Graphic Packaging Holding
- Market value: $6.5 billion
- Analysts’ opinion: 10 Strong Buy, 4 Buy, 1 Hold, 0 Sell, 1 Strong Sell
- Analysts’ consensus rating: 1.63 (Buy)
- Median target price: $26.00 (23.8% implied upside)
You might not be familiar with Graphic Packaging Holding (GPK, $21.00), but you’ve probably seen or used some of their products.
As its name suggests, GPK is in the packaging business.
Its products include folding cartons, solid bleached sulfate paperboard, coated unbleached kraft paperboard and coated-recycled paperboard.
One product GPK created in 2019 is the KeelClip.
It’s a paper-based sustainable packaging product that allows drink manufacturers to sell six-packs of beverages without those plastic rings that are both harmful to the environment and bird wildlife.
The demand for this kind of product is significant.
Most importantly, its customer list reads like a who’s who of the S&P 500 – including Coca-Cola (KO) and PepsiCo (PEP). That means stable, recurring revenue.
In Q1 2022, the company reported $2.25 billion in sales, 36.1% higher than a year earlier.
Excluding its acquisition of Americraft Carton and AR Packaging in Q3 2021 and Q4 2021, respectively, organic sales were 3% higher year-over-year.
And Graphic Packaging’s adjusted net income was $149 million, 96.1% higher than a year earlier.
Like most companies, GPK is dealing with high inflation.
In 2021, it had $330 million in added costs due to inflation. In the first quarter of 2022, inflation cost the company an additional $176 million in costs.
For the remainder of 2022, it expects inflation will contribute between $450 million and $650 million in added costs.
Fortunately, Graphic Packaging has been able to raise prices to cover these additional costs.
In 2021, it added $150 million in revenue from price increases, resulting in $180 million in net extra costs.
In 2022, it added $222 million in revenue via price increases through the first quarter.
It expects to be able to add $850 million through the end of this year, which could result in $200 million-$400 million in additional gross profits in 2022.
According to S&P Global Market Intelligence, Graphic Packagaing’s EBITDA margin is 14.9%, higher than it’s been since 2019.
The company’s intent is to grow this to 18%-20% by 2025.
- Market value: $6.9 billion
- Analysts’ opinion: 13 Strong Buy, 5 Buy, 2 Hold, 0 Sell, 0 Strong Sell
- Analysts’ consensus rating: 1.45 (Strong Buy)
- Median target price: $160.00 (27.8% implied upside)
In its 20-year history, Five Below (FIVE, $125.18) has grown to more than 1,200 stores in 40 states.
It sells items priced between $1 and $5, as well as some items costing more than five bucks.
Like a lot of retailers, inflation is wreaking havoc with its business.
On June 8, FIVE reported its first-quarter results.
While sales were up 7% year-over-year, they were softer than expected.
Additionally, same-store sales fell 3.6%.
However, Five Below managed to deliver net income of $32.7 million, which was in the ballpark of its guidance for the quarter.
However, the company’s guidance for fiscal 2022 wasn’t all that encouraging.
It cut its revenue for the year to $3.08 billion at the midpoint of guidance, down from $3.21 billion previously.
On the bottom line, it now expects $5.05 a share, compared to its prior outlook for earnings of $5.40 cents per share.
As a result of this guidance cut, BofA Global Research analyst Jason Haas lowered his price target by $50 to $200.
That still provides plenty of upside potential over the next 12 months.
Haas does feel another guidance cut could be in the cards before the end of December, but he remains bullish about the retailer’s long-term guidance.
FIVE’s “key growth driver” is new stores, said Joel Anderson, CEO of Five Below, in the company’s Q1 earnings call.
Over that three-month period, the company opened across 23 states.
It expects to open 160 new stores total in 2022 and 200 in 2023.
While pressure facing consumers “due to the reduction in stimulus in the current inflationary environment weigh on our near-term results, history has taught us that consumers will seek out value even more when times are tough, and nobody is better positioned to deliver fun at outstanding values than Five Below,” Anderson added.
Five Below went public a decade ago at $17 a share.
The retail stock has gained nearly 640% since.
The S&P 500 is up about 190% over the same period.
- Market value: $3.1 billion
- Analysts’ opinion: 5 Strong Buy, 1 Buy, 0 Hold, 0 Sell, 0 Strong Sell
- Analysts’ consensus rating: 1.17 (Strong Buy)
- Median target price: $37.50 (37.4% implied upside)
ACI Worldwide (ACIW, $27.29) provides software products and solutions for real-time digital payments to 6,000-plus global organizations, including more than 1,000 of the world’s largest financial institutions.
In Q1 2022, ACIW posted a 49% year-over-year jump in adjusted EBITDA to $67.6 million.
The company also had revenue of $323.1 million, 14% higher than Q1 2021.
Recurring revenue in the first quarter accounted for 76% of its overall sales.
Most of its recurring revenue was from software-as-a-service (SaaS) and platform-as-a-service (PaaS) fees.
The company’s SaaS and PaaS revenues accounted for 60.2% of its overall sales in Q1 2022.
For all of 2022, ACI Worldwide expects sales of $1.43 billion and adjusted EBITDA of $407.5 million at the midpoint.
Analysts expect sales to grow to $1.5 billion in 2023, with $229.9 million in free cash flow and $260.95 million in adjusted net income.
Helping boost ACI’s future financial results will be its new partnership with NORBr, a global fintech platform.
NORBr’s payment services marketplace connects digital merchants with payment providers in the countries where its customers are located, allowing these vendors to more easily complete order fulfillment from their websites.
Like so many other tech stocks, ACIW has been hit by broad-market headwinds, and is off roughly 21% for the year-to-date.
However, that allows investors to pick up one of the best mid-cap stocks at a discount.
Case in point: Shares are currently trading at 2.3 times sales, considerably less than the five-year average of 3.0x.
See Kiplinger’s full list of 15 Best Mid-Cap Stocks to Buy for the Rest of 2022
All images: Getty Images
Related stories: 11 Mighty U.S. Mid-Cap Stocks (August, 2021)