In this article, we will take a look at the 11 undervalued mid-cap stocks to buy.
Mid-cap companies are some of the most attractive investment vehicles that have proven their mettle over the past few years. According to a report by S&P Global, the S&P MidCap 400 index has outperformed the S&P 500 and the S&P SmallCap 600 index for most of the past 20 years through 2015. The report says that mid-cap companies sit at a sweet spot between small caps and large caps. These companies are out of the volatility faced by small caps but have the growth potential that large caps lack. The report said that small-cap stocks have consistently outperformed large-cap stocks for most of the time frames discussed in the study, except July 1991 to March 2000, when the performance spread was negligible.
Another important report by Wespath discussed the outperformance of mid-cap stocks. The report quotes a research paper by Nobel economics laureate Eugene Fama and co-author Ken French. These experts studied equities for a period starting from 1926 through 1992. The results of this research showed that over long term, small- and mid-cap stocks “consistently” outperform large-cap stocks.
The Wespath report also talks about the reasons of the outperformance of small- and mid-cap stocks. Why these stocks outperform large-cap stocks over a long-term time window? Part of the reason could be the type of industries these companies operate in. Most of the mid- and small-cap companies operate in high-growth areas like software, biotech and robotics.
The report also quoted an important paper published by AQR Capital Management in the Journal of Financial Economics in 2018. This paper analyzed stock returns posted in 1926 through 2012. The research found the outperformance of mid- and small-cap stocks exists especially when controlling for quality. Quality here is defined by financial data such as earnings stability, profitability, profit growth and low debt levels. That’s why in this article we will talk about some quality mid-cap stocks that are undervalued and have long-term growth potential.
Other key advantage investors enjoy while investing in mid-cap stocks is their affordable price. Since mid-cap companies have market caps between $2 billion to $10 billion, these companies don’t have exorbitantly high stock prices, as you will see in this article. These companies, if chosen wisely, offer higher upside and growth potential when compared to large-cap stocks which have, in many cases, already rewarded their early investors.
Our Methodology
For this article, we first screened for stocks that have a market cap between $2 billion and $10 billion, PE ratio under 15 and PEG ratio under 1 as of January 12. We then picked 11 of these stocks that are popular among the elite hedge funds tracked by Insider Monkey. The list is ranked in descending order of PE ratios.
Undervalued Mid-Cap Stocks To Buy
11. Darling Ingredients Inc. (NYSE:DAR)
PE Ratio: 14.95
Number of Hedge Funds Having Stakes in the Company: 35
Darling Ingredients is a Texas-based company that makes edible and inedible bio-nutrients. This mid-cap undervalued stock is popular among the hedge funds tracked by Insider Monkey. As of the end of the September quarter, 35 elite hedge funds reported having stakes in Darling Ingredients Inc. (NYSE:DAR), compared to 33 funds in the previous quarter. The total value of the stakes at the end of September was $699 million.
Last month, Darling Ingredients Inc. (NYSE:DAR) said the U.S. Patent and Trademark Office (USPTO) granted patent to Darling Ingredients Inc. (NYSE:DAR)’s health brand Rousselot. The patent gives intellectual property to SiMoGel, Darling Ingredients Inc. (NYSE:DAR)’s gelatin technology that eliminates the need for starch-based gummy production.
In November, Darling Ingredients Inc. (NYSE:DAR) announced its third quarter results, according to which its revenue jumped a whopping 48% in the period to total $1.75 billion, beating analyst estimates by $110 million.
10. Tapestry, Inc. (NYSE:TPR)
PE Ratio: 13.69
Number of Hedge Funds Having Stakes in the Company: 40
Another luxury fashion brands company in our list, Tapestry, Inc. (NYSE:TPR) is behind famous names like Coach New York, Kate Spade New York and Stuart Weitzman.
Earlier this month, Bank of America called Tapestry, Inc. (NYSE:TPR) one of its top US picks. BofA analyst Lorraine Hutchinson said that there is little markdown risk to inventory for Tapestry, Inc. (NYSE:TPR)’s products that often “transcend” seasons. The analyst is hopeful about the opportunities with AUR gains through smarter discounting and higher ticket. BofA set a $45 price target on the stock.
As of the end of the third quarter, 40 hedge funds tracked by Insider Monkey reported having stakes in Tapestry, Inc. (NYSE:TPR), compared to 36 funds in the previous quarter.
9. BorgWarner Inc. (NYSE:BWA)
PE Ratio: 12.97
Number of Hedge Funds Having Stakes in the Company: 29
BorgWarner Inc. (NYSE:BWA) is an automotive parts company that makes propulsion systems for vehicles. Over the past six months the stock has gained about 26% in value.
As of the end of the third quarter, 29 hedge funds tracked by Insider Monkey reported having stakes in BorgWarner Inc. (NYSE:BWA), compared to 32 funds in the previous quarter. The total value of these stakes was $194 million.
BorgWarner Inc. (NYSE:BWA) stock is in the limelight these days after it shared its plans for a tax-free spin-off of its Fuel Systems and Aftermarket segments into a separate, publicly traded company with a target date of late 2023.
Oppenheimer gave positive comments about the decision and said it is waiting for more details.
Recently, BorgWarner Inc. (NYSE:BWA) also announced its plans to reduce its absolute Scope 3 emissions by at least 25% by 2031 from a 2021 baseline.
8. H & R Block Inc. (NYSE:HRB)
PE Ratio: 11.74
Number of Hedge Funds Having Stakes in the Company: 24
H & R Block Inc (NYSE:HRB) is a Missouri-based tax preparation company that has posted a phenomenal performance over the past year, gaining about 67% in stock value. Despite this huge gain, the stock’s PE ratio is 11, as of January 12. H&R Block is also a dividend-paying stock. In November, H & R Block Inc (NYSE:HRB) announced a $0.29/share quarterly dividend, in line with previous. Forward dividend yield at the time came in at 2.97%. The dividend was payable on January 3 to shareholders of record December 6.
As of the end of the third quarter, 24 hedge funds tracked by Insider Monkey reported having stakes in H & R Block Inc (NYSE:HRB), compared to 27 funds in the previous quarter. Among the notable hedge funds having stakes in H & R Block Inc (NYSE:HRB) are Cliff Asness’ AQR Capital Management, Jim Simons’ Renaissance Technologies and Prem Watsa’s Fairfax Financial Holdings.
7. Harley Davidson (NYSE:HOG)
PE Ratio: 9.44
Number of Hedge Funds Having Stakes in the Company: 36
Wisconsin-based motorcycle company Harley Davidson (NYSE:HOG) ranks 7th in our list of mid-cap undervalued stocks to buy now. Harley Davidson (NYSE:HOG) is working on a new brand strategy that will see the company expand to other areas of the motorcycle ecosystem, including parts, accessories, apparel and lifestyle. Harley Davidson (NYSE:HOG) is also tapping in the electric motorcycle segment. Its LiveWire range of electric motorcycles is among the very few electric motorcycles sold in the market.
Harley Davidson (NYSE:HOG) is also a dividend-paying company. In November, Harley Davidson (NYSE:HOG) declared a $0.1575/share quarterly dividend, in line with previous. Forward dividend yield at the time came in at 1.33%. The dividend was payable on December 23 to shareholders of record December 9.
A total of 36 hedge funds in Insider Monkey’s database of 920 funds had stakes in Harley Davidson (NYSE:HOG), a sharp jump from 25 funds in the previous quarter.
6. Nordstrom, Inc. (NYSE:JWN)
PE Ratio: 9.10
Number of Hedge Funds Having Stakes in the Company: 31
Nordstrom, Inc (NYSE:JWN) is an American luxury department store chain company that sells shoes, apparel and jewelry. Nordstrom, Inc (NYSE:JWN) has a dividend yield of about 4% as of January 12. Despite posting decent Q3 results, Nordstrom, Inc (NYSE:JWN) is under pressure after its CEO last month talked about the macroeconomic problems and consumer spending strain. The stock was also downgraded by Piper Sandler. However, this has provided an attractive entry point for investors who can wait since the market will turn the corner sooner or later and overall environment for luxury brand companies like Nordstrom will turn positive.
As of the end of the third quarter, 31 hedge funds tracked by Insider Monkey reported having stakes in Nordstrom, Inc (NYSE: JWN). The total value of these stakes was $304 million.
5. Allison Transmission Holdings, Inc. (NYSE:ALSN)
PE Ratio: 8.34
Number of Hedge Funds Having Stakes in the Company: 26
Allison Transmission is an Indiana-based company that makes transmission and propulsion systems for vehicles. It ranks 5th in our list of 12 undervalued mid-cap stocks to buy now. Allison Transmission is also a dividend-paying stock. In November, Allison Transmission Holdings, Inc. (NYSE:ALSN) announced a $0.21/share quarterly dividend. Forward yield at the time came in at 1.95%. Allison Transmission Holdings, Inc. (NYSE:ALSN) on January 12 announced that it partnered with Nikola (NASDAQ:NKLA) to test its Class 8 battery-electric vehicle (or BEV) and hydrogen fuel cell electric vehicle (or FCEV).
As of the end of the third quarter, 26 hedge funds tracked by Insider Monkey reported having stakes in Allison Transmission Holdings, Inc. (NYSE:ALSN). The total value of these stakes was $361 million. The biggest stakeholder of Allison Transmission Holdings, Inc. (NYSE:ALSN) was Natixis Global Asset Management’s Harris Associates, which owns a $173 million stake in Allison Transmission Holdings, Inc. (NYSE:ALSN).
4. Murphy Oil Corporation (NYSE:MUR)
PE Ratio: 7.05
Number of Hedge Funds Having Stakes in the Company: 31
Murphy Oil is a Fortune 500 company that has a PE ratio of 7 and a dividend yield of 2.4%, as of January 12. The stock was upgraded in December by JPMorgan. The investment firm’s analysts led by Arun Jayaram said in a note to investors that oil companies with conventional assets could benefit in a macro environment with execution and inventory related concerns for U.S. shale operations. For 2023, JPMorgan’s model for Murphy Oil Corporation (NYSE:MUR) expects oil production growth of 14%, which would result in EBITDA growth of 3% and adjusted free cash flow growth of 15% Y/Y.
As of the end of the third quarter, 31 hedge funds tracked by Insider Monkey reported having stakes in Murphy Oil Corporation (NYSE:MUR). The total value of these stakes was $283 million. Ken Griffin’s Citadel Investment Group is the biggest stakeholder of Murphy Oil Corporation (NYSE:MUR) with a $57.2 million stake.
3. The Chemours Company (NYSE:CC)
PE Ratio: 5.93
Number of Hedge Funds Having Stakes in the Company: 36
Ranking 3rd in our list of undervalued mid-cap stocks to buy is Chemours, the Delaware-based chemicals company that is amongst the largest energy players in the world. Chemours has a 3% dividend yield as of January 12. Over the past six months the stock has gained about 4% in value. Bank of America earlier this month upgraded the stock to Buy from Neutral, citing optimism in the market following China’s decision to reopen its economy. Despite its solid business the stock remains undervalued amid risks related to the global macro environment, since chemical companies like Chemours are considered cyclical.
During the third quarter, The Chemours Company (NYSE:CC)’s adjusted earnings and revenue surpassed estimates. Its net income came in at $1.52 per share, compared to $0.25 per share compared to the comparable quarter last year.
2. Asbury Automotive Group, Inc. (NYSE:ABG)
PE Ratio: 5.51
Number of Hedge Funds Having Stakes in the Company: 34
Asbury is a George-based car dealership company that continues to post robust financial performance despite a challenging macro environment that is affecting the automotive industry. In the third quarter of 2022, Asbury Automotive Group, Inc. (NYSE:ABG)’s revenue came in at $3.87 billion, which showed a 61% growth when compared to the comparable quarter last year. Asbury Automotive Group, Inc. (NYSE:ABG) in the past made a series of acquisitions and expansion initiatives that are now showing their results.
For the third quarter, adjusted EPS came in at $9.23, beating the estimates by $0.01.
Hedge fund sentiment for the stock is positive. As of the end of the third quarter, 34 hedge funds tracked by Insider Monkey reported having stakes in Asbury Automotive Group, Inc. (NYSE:ABG), compared to 27 funds in the previous quarter. The biggest stakeholder of Asbury Automotive Group, Inc. (NYSE:ABG) was Lauren Taylor Wolfe’s Impactive Capital, which owns a $333 million stake in Asbury Automotive Group, Inc. (NYSE:ABG). Famous value investor David Abrams also has a $320 million stake in the firm.
Bonhoeffer Capital Management made the following comment about Asbury Automotive Group, Inc. (NYSE:ABG) in its Q3 2022 investor letter:
“One of our holdings in the distribution theme is Asbury Automotive Group, Inc. (NYSE:ABG), an automobile dealership firm. Asbury’s growth model is through same-store sales growth (4% per year), internet distribution (10% per year), and synergistic M&A (5% per year). These are enhanced by opportunistic operational leverage from scale and share repurchases (5% annual growth). Over the past 10 years, Asbury’s net income margins are up 120% with a 5x increase in revenues. These factors should lead to about a 20% EPS growth going forward. Ashtead has had 19% and 31% EPS growth over the past five and 10 years, respectively.
As can be seen below, a large portion of future growth is based upon the growth of internet sales. Both Asbury and Lithia have internet strategies which capture a younger demographic who do not visit dealerships with the same frequency as older folks. Asbury, through its online platform Clicklane, has found internet purchasers have very little overlap with existing customers; 95% are new customers. Asbury’s strategy is to target customers who are within 20 miles of an existing Asbury location vs. online only competitors (like Carvana) and Lithia. Asbury has had a per-store growth rate of 67% over the last year and only sells cars online in about 60% of its current footprint. This growth rate will decline going forward as the markets mature, but it will be bolstered as Clicklane is rolled out to the remaining 40% of Asbury’s footprint…” (Click here to read the full text)
1. XPO, Inc. (NYSE:XPO)
PE Ratio: 4.96
Number of Hedge Funds Having Stakes in the Company: 37
XPO is an American transportation and logistics company. The stock has gained about 30% in value over the past six months. Its PE ratio stands at 4.9 as of January 12. A total of 37 hedge funds tracked by Insider Monkey reported having stakes in XPO, Inc. (NYSE:XPO) as of the end of the third quarter.
In December, XPO said it does not plan to divest its European business in the near term.
Here is what Argosy Investors has to say about XPO Logistics, Inc. (NYSE:XPO) in its Q1 2022 investor letter:
“XPO experienced once-in-a-generation demand for its LTL and brokerage services during an extremely tight freight market, and we are already beginning to see weakness in the freight market. We sold in advance of what we expect to be some weakness in the LTL market.”
You can also take a peek at Top Stocks in Each Sector and Dow 30 Stocks List 2022.
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Disclosure: None. 11 Undervalued Mid Cap Stocks To Buy is originally published on Insider Monkey.
