Three Mid-Cap Stocks To Keep An Eye On
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Though the S&P 500 is up nearly 12% year-to-date, keeping investors in high spirits, it's the S&P Mid-cap 400 that's really on fire. The index – which serves as a performance barometer for companies with a market capitalization in the range of $1 billion to roughly $13 billion- has been scoring eye-whopping returns for over 15 years now, bringing out the green-eyed monster in Wall Street's behemoths.
While verging toward the prime of their life cycle, mid-cap companies are done being the new kinds on the enterprise block, but still have plenty of room to gallop. So, what's there not to like about them? Here is a handful of intriguing picks.
Skyworks Solutions (NASDAQ: SWKS), a leading provider of high performance analog and mixed signals semiconductors, thrives on a diversified customer base sprawled across multiple end-markets. For the most recent quarter, the company delivered hunky-dory results that beat analyst's average estimates by a hairbreadth. Revenue came in at $425.2 million, carried by a 17% year-over-year jump in GAAP reported sales. The company earned $0.48 per share, marking a 14% improvement over the prior-year quarter's earnings.
Overall, over the past five years, profits as well as the stock's price went through the roof. Moreover, so far the company has done a pretty good job of unlocking value from its assets:
Yet, lately, Skyworks has been flirting with 52-week lows. The stock is up 8% year-to-date, but during 2012 it experienced a steep downtrend of around 20%. Last year, Qualcomm did a number on Skyworks by announcing plans to introduce a breakthrough chipset; and, looking ahead, some analysts fret over Skyworks not having an ace up its sleeve to survive the cut-throat competition.
Nevertheless, recently, the company struck another sweet deal with Korean smartphone giant Samsung, enabling it to jockey for position in an overcrowded market. Not only that, but Skyworks has enough cash piled up in its coffers to pursue an aggressive growth strategy. Its working capital – the lifeblood of every business – is flourishing, while its liabilities look meager compared to its assets:
Next, given the fact that, over the past three years, the Healthcare sector within the S&P Mid-cap 400 has posted an annualized return of nearly 19%, I thought I'd take a closer look at two healthcare players: United Therapeutics (NASDAQ: UTHR) and Herbalife (NYSE: HLF):
United Therapeutics recently got a slap on the wrist from the FDA. The company's treprostinil pill for treating high blood pressure in the arteries that supply the lungs failed to get the thumbs up for the second time in a row. After that, United decided to take the plunge and initiate Phase I trials of Pluristem Therapeutic's placental expanded cells in patients diagnosed with the same disease.
For the first three months of 2013, the company reported mixed financial results. Diluted EPS dropped nearly 8% on year-over-year basis to $1.19 a share. However, sales climbed as much as 20% to slightly above $245 million beating analysts' expectations.
Overall, fundamentally, the company looks pretty strong. Its current ratio of 3.8, as well as its eye-catching gross margin of around 85%, handily crush the industry's same variables. But, still, now might not be the right time to start a position in this stock. Over the past year, United performed outstandingly and returned 45% of its value. At the moment it is trading with a tiny distance from its 52-week range of around $65, with the majority of analysts tracked by Wall Street Journal giving it a “hold” rating.
On the other hand, the Wall Street Journal's analysts give investors the “green light” to buy Herbalife. Their average target price of $60.83 points to upside potential of at least 50%. Not only that, but the global nutrition company delivered killer profits for the first calendar quarter. Revenue rolled in at $1.12 billion, up by 17% compared to the same period in 2012. Diluted EPS came in at $1.10, marking a thumping 25% year-over-year increase.
The company just froze a plan for a large stock buyback. It was supposed to initiate a debt offering and then use the money to fund the buyback, but the resignation of auditor KMG threw a wrench into its plans. Nonetheless, during the first quarter of 2013 Herbalife repurchased more than $162 million in common shares outstanding. Moreover, it paid nearly $31 million in dividends ($0.30 per share), indicating a yield of 3.20%.
Considering its low payout ratio of roughly 30% and its fruitful cash flows, there's ample room for dividend hikes in the future. Finally, if you tally the returns from price appreciation and dividends received over the past five years, this is what you get:
The Foolish bottom line
Like it or not, there is always a cautionary tale to be told when investing is involved, and in this case it's the Sharpe ratio. In other words, is your investment worth the risk? According to Standard & Poor, since 1991, the mid-cap segment has been delivering consistent returns that put some of the strongest players within the S&P 500 to shame.
The Motley Fool's chief investment officer has selected his No. 1 stock for the next year. Find out which stock it is in the brand-new free report: "The Motley Fool's Top Stock for 2013." Just click here to access the report and find out the name of this under-the-radar company.
What's more impressive is the fact that, over the same period, risk-adjusted returns from investments tied-up in mid-cap stocks were approximately 50% higher compared to the respective returns delivered by investments in large-cap stocks. So, I ask again: What's there not to like about mid-caps?
Fani Kelesidou has no position in any stocks mentioned. The Motley Fool has the following options: Long Jan 2014 $50 Calls on Herbalife Ltd.. Try any of our Foolish newsletter services free for 30 days. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy. Is this post wrong? Click here. Think you can do better? Join us and write your own!