4 Mid-Caps with Huge Potential

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

If I told you there are multiple companies selling for at least a 20% discount to their 52 week highs, have high yields, and have shown significant earnings growth, would you be interested? For many investors this would be exactly what they're looking for, because in theory you are getting good earnings growth, which could lead to capital gains, combined with a high-yield for current income. Using the Fool.com CAPS Screener, I found four mid-cap stocks that fit the above criteria. While this isn't necessarily a recommendation to buy each one, it certainly seems like a good starting point for further research.

Alliance Resource Partners (NASDAQ: ARLP):

For many investors, suggesting buying stock in a coal related company is somewhat akin to suggesting an Internet stock near the year 2000. While the situations are different, there is at least one company in this field that looks attractive based on both yield and consistent growth. Alliance Resource Partners is a company I've mentioned before as a potentially perfect stock. The company pays a current yield of over 6.8% that has been raised quarterly for quite a while. In addition, the stock sells for a forward P/E ratio of just over 9 and analysts expect 7% EPS growth over the next five years. Alliance also is consistent in beating earnings expectations with an average beat over the last four quarters of about 8%. Unlike some other cold related companies, Alliance is also free cash flow positive. When you add in the fact that the company already has contracts for almost as much production next year as all of this year, this should give investors some confidence that not only will the company grow, but the dividend should be protected as well.

Cliffs Natural Resources (NYSE: CLF):

Sticking with our coal related theme, Cliffs is engaged in the production of both iron ore and metallurgical coal. This company has a similar profile to Alliance, but the difference is, where Alliance has beaten expectations, Cliffs has generally fallen behind. In fact, in the last year the company has missed earnings estimates by an average of about 6.6%. Equally disturbing, is the fact that the company had huge free cash flow for the end of 2011, but is showing negative free cash flow in the two most recent quarters. However, the stock sells for a reasonably low 8.4 P/E ratio and with a 5.97% yield, investors might see this as a natural choice.

Telecom Argentina S.A. (NYSE: TEO):

Though investors might be shy of international telecoms after the dividend blowup at Telefonica, there are some clear opportunities still available. Telecom Argentina has a trailing dividend yield of 8.59% and that alone could be a reason for investors to give the company serious consideration. The big difference between this company and other telecoms is cash flow. Telecom Argentina has generated huge free cash flow over the last year. In fact, because of the company's cash flow, their dividend coverage is excellent with a free cash flow payout of just 28.48%. Though the company has missed analyst estimates twice in the last year, the stock sells for just over 3 times this year's estimates. For a company that is expected to grow earnings by over 8% in the next few years, this company should be near the top of any income investors' list.

Terra Nitrogen Company L.P. (NYSE: TNH):

Terra Nitrogen has to be a bit of a conundrum for investors. On the one hand, the company is in the fertilizer business and as the need for more efficient food production is always increasing, the company should benefit. On the other hand, the company's revenue growth has dramatically slowed over the last year. In fact, over the last several quarters revenue has been essentially unchanged and trending slightly lower. However, over the last four quarters, Terra Nitrogen produced at least $130 million in free cash flow. With the stock selling for a forward P/E of about 14, the challenge is getting an analyst to step forward with a growth estimate. Neither Yahoo Finance or Fool.com reports earnings estimates for this company. The only earnings figure I can find is to compare EPS over the last year or so, which is up 5.87%. While this doesn't represent huge growth, the company's trailing yield of 7.81% is impressive. For income seeking investors, this yield alone could be a good enough reason to do more research into the company.

Conclusion:

These four companies all offer significant past earnings growth and the promise for future growth. Investors looking for income could hardly go wrong starting their search with these stocks. If there is a defining difference between the four, I would suggest that Telecom Argentina's over 8% yield and over 8% expected growth rate offers the best combined value for investors. When you consider that this same company sells for just over 3 times forward earnings, it is also the cheapest stock among the choices. I would suggest adding each of these companies to your personalized Watchlist to keep up with developments.


MHenage owns shares of Alliance Resource Partners, L.P. The Motley Fool has no positions in the stocks mentioned above. Motley Fool newsletter services recommend Alliance Resource Partners, L.P.. 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.If you have questions about this post or the Fool’s blog network, click here for information.

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