Senator's Newest Mid-Cap Picks

Marshall is a member of The Motley Fool Blog Network -- entries represent the personal opinion of the blogger and are not formally edited.

Senator Investment Group, with some $4.5 billion of assets under management, happens to be a big time bull on the paper industry, recently increasing his position in International Paper five-fold. In looking over his other holdings, I found that Senator added a number of interesting mid-cap stocks to its portfolio at the end of 2012 (check out Senator's other top picks).
 
A few of his notable picks are five mid-cap (between $2 billion and $10 billion market cap) stocks operating across a variety of industries. Senator was founded in 2008 by Douglas Silverman and Alexander Klabin, previous employees at York Capital Management. Klabin's expertise is value investing and special situations, with Silverman being a pro in event driven investing. Let' check out five of their largest mid-cap additions to their portfolio during the fourth quarter. 
 
Hertz Global Holdings (NYSE: HTZ) is a $9.2 billion market value car rental company. The company "one-upped" chief rival Avis when it outbid the company for Dollar Thrifty last year, helping Hertz increase its lead as the largest car rental brand in the world, operating approximately 8,100 locations in 147 countries worldwide. 
 
Jim Cramer recently spoke of the oligopolies in the car rental business, noting that ten years ago there were nine major rental car companies, but now the big three -- Avis, Hertz and Enterprise -- own 94% of the industry market share. 
 
Economic recovery should help Hertz and the industry going forward, as higher employment and consumer spending promote travel. Investors should use some caution when embarking on either Hertz or Avis, as both do have high betas at 2.8. 
 
SBA Communications (NASDAQ: SBAC) is a $9.6 billion wireless communication tower company. The company's towers are located throughout the U.S. and its two revenue generating segments are site leasing and site development services. Analysts expect revenue growth of 31% in 2013 and 10% in 2014 thanks to tower acquisitions and new tenants. 
 
Tower leasing makes up a big part of SBA revenues, 89% of 4Q revenues, and remains the company's primary focus. The nice thing about SBA's lease contracts is their long-term nature, generally terms of five years or more with multiple-term tenant renewal options. One of SBA's key growth drivers will be site leasing to support LTE networks and the company's recent acquisitions in Brazil. 
 
Lear Corporation (NYSE: LEA) is one of the top suppliers of auto seat systems to the auto industry. The company has a $5.3 billion market cap. Lear is also one of the great derivative plays on the auto industry.
 
On the valuation side, the stock is currently trading around 65% of the S&P 500 price to earnings ratio, whereas its five-year average relative S&P P/E is closer to 100%. The stock also has a robust net profit margin and return on equity; its net profit margin is close to 9% with an industry average of 4%, and it sports a return on equity of 19% compared to the industry's 14%.  
 
Industry headwinds include the positive outlook for auto sales in the U.S. S&P expects that U.S. light vehicle sales will rise to 15.4 million units in 2013, from 14.4 million in 2012. Lear has also caught the interest of notable hedge funds, including billionaire Ken Griffin's Citadel Investment Group and Adage Capital (check out Griffin's newest picks).

TW Telecom (NASDAQ: TWTC) is the $3.8 billion market cap company that provides managed network services, specializing in business Ethernet, data networking, Internet access, voice over Internet Protocol (VoIP) and network security services. 

The company's key services include providing data and Internet services for enterprise customers, which continues to be the key revenue driver. Analysts expect the company to grow revenue from $1.47 billion in 2012 to $1.58 billion in 2013. During the fourth quarter, data and Internet services revenue was strong thanks to adoption of Ethernet and enterprise customer focus on metro fiber investments.
 
Sally Beauty Holdings (NYSE: SBH), a $5.1 billion market cap company, is a specialty retailer and distributor of beauty supplies. The retailer has operations in North America, South America and Europe, with two major segments, a retail and a beauty systems group. Retail makes up 74% of storefronts, and professional stores, under the name Beauty Systems Group, account for 26%. Despite its international presence, the company still has plenty of room to expand; North America hosts 90% of the stores while 10% are operated in the United Kingdom, Belgium, Chile, France, Ireland, Spain, Germany and the Netherlands. 
 
Sally also looks compelling from a valuation standpoint, trading well below major competitor Ultra Salon. Sally trades at 21 times earnings and 1.4 times sales, while Ultra Salon is upwards of 31 times earnings and 1.8 times sales; suggesting the stock might well be undervalued. Notable hedge funds have also been betting big on the company (see which hedge funds have been buying in).

Don't Be Fooled 

Senator's under the radar picks are great places to find mispriced stocks. Each of these stocks offers investors access to a unique industry, with Hertz operating in the car rental business and being one of the leaders in market share, while SBA is involved in the wireless tower leasing business, which should see tailwinds from increased smartphone adoption. 
 
Lear and TW Telecom are less exciting, operating in the auto components and communications industries, but nonetheless, both have industry tailwinds that should help boost the stock in the future. Sally Beauty is one of the more unique picks in my opinion, being a retailer of beauty products. Still, its valuation is compelling. 


Marshall Hargrave has no position in any stocks mentioned. The Motley Fool owns shares of Hertz Global Holdings. 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!

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