We recently compiled a list of the 7 Most Profitable Mid-Cap Stocks To Invest In. In this article, we are going to take a look at where Encompass Health Corporation (NYSE:EHC) stands against the other profitable mid-cap stocks.

Inflation Data Raises Concerns

On October 10, the market faced a decline as economic data indicated persistent inflation, as reported by CNBC. The S&P 500 fell by 0.21%, closing at 5,780.05, while the Dow Jones Industrial Average decreased by 57.88 points, or 0.14%, to finish at 42,454.12. The Nasdaq Composite also dipped slightly, ending down 0.05% at 18,282.05.

The market reaction was largely influenced by the Consumer Price Index (CPI) report for September, which showed a monthly increase of 0.2%. This brought the annual inflation rate to 2.4%, slightly above analysts’ expectations of a 0.1% monthly gain and a year-over-year rate of 2.3%. Although this annual figure is the lowest since February 2021, some underlying data suggested stronger inflationary pressures than anticipated.

Luke O’Neill, a portfolio manager at CooksonPeirce, noted that the CPI report was as expected in most respects but highlighted that certain data points were “a little bit hotter than anyone would prefer.” He pointed out that investors were selling off small- and mid-cap stocks that are more sensitive to interest rates.

In response to the CPI report, Atlanta Fed President Raphael Bostic stated he was open to pausing interest rate cuts during the upcoming November meeting. He expressed that the current market fluctuations might warrant a more cautious approach rather than aggressive cuts. However, according to CME Group’s FedWatch Tool, fed funds futures trading data suggests an approximately 85% chance of a quarter-percentage-point cut.

Recent minutes from the Federal Reserve’s last meeting revealed some disagreement among officials regarding the size of September’s rate cut. While the majority supported the cut, some favored a smaller move.

On October 11, Northwestern Mutuals’ Brent Schutte appeared on CNBC’s “Power Lunch” to discuss the CPI report and the market reaction.

Brent Schutte, Chief Investment Officer at Northwestern Mutual, expressed concerns about a potential wage-price spiral, noting that significant wage increases at companies like Amazon and Walmart could contribute to ongoing inflation. He highlighted the Federal Reserve’s challenge in managing this situation, as they often react too late to labor market changes. Schutte pointed out that even with recent rate cuts, inflation remains a concern, particularly with the median CPI rising. He believes the Fed’s path forward will be more complex than investors anticipate, given the persistent inflationary pressures in the economy.

Schutte also expressed concern about the valuations of large-cap stocks, suggesting that the market is in a late-cycle phase. He noted that the economy is currently supported by a narrow segment, particularly manufacturing and lower-income consumers affected by rising interest rates. Schutte believes that small and mid-cap stocks could provide greater value for investors looking for returns over the next 3-5 years, as they are priced for a recession.

Methodology

To compile our list of the 7 most profitable mid-cap stocks to invest in, we used stock screeners from Finviz and Yahoo Finance. First, we defined mid-cap stocks as those with a market capitalization between $2 billion and $10 billion. Next, we focused on profitability by screening for stocks that had a 5-year EPS growth rate of over 10%. We sorted our results based on market capitalization and picked the top 20 stocks.

From this initial list of 20 profitable mid-cap stocks, we further narrowed our choices to stocks that had positive trailing twelve-month (TTM) net income and stocks that have grown their net income positively over the past 5 years. To ensure the reliability of our findings, we consulted reputable sources such as SeekingAlpha, which provided insights into the net income compound annual growth rate (CAGR) over the past five years, and YCharts, which offered information on TTM net income.

Finally, from this list of mid-cap stocks that met our criteria, we focused on the top 7 stocks most favored by institutional investors. Data for the hedge fund sentiment surrounding each stock was taken from Insider Monkey’s database of 912 elite hedge funds. The 7 most profitable mid-cap stocks to invest in are ranked below in ascending order based on the number of hedge funds holding stakes in them as of Q2 2024.

Why do we care about what hedge funds do? The reason is simple: our research has shown that we can outperform the market by imitating the top stock picks of the best hedge funds. Our quarterly newsletter’s strategy selects 14 small-cap and large-cap stocks every quarter and has returned 275% since May 2014, beating its benchmark by 150 percentage points (see more details here).

Encompass Health Corporation (NYSE:EHC)

TTM Net Income: $399.5 Million

5-Year Net Income CAGR: 5.19%

Market Capitalization: $9.41 Billion

Number of Hedge Fund Holders: 39

Encompass Health Corporation (NYSE:EHC) is the largest operator of rehabilitation hospitals in the United States, with over 160 facilities across 38 states and Puerto Rico. The company specializes in providing high-quality, compassionate rehabilitative care for patients recovering from serious injuries or illnesses. The corporation offers a comprehensive care model that includes 24/7 nursing support, independent physician oversight, multi-disciplinary therapy, and extensive clinical support services. Encompass Health Corporation (NYSE:EHC) utilizes advanced technology and innovative treatment methods to enhance recovery.

The corporation has implemented an aggressive growth strategy to expand its reach and enhance its service offerings. In the second quarter of 2024, Encompass Health Corporation (NYSE:EHC) added 194 beds across several new and existing facilities. In July, Encompass expanded into a new state as it opened a 50-bed hospital in Johnston, Rhode Island. By the end of the year, the company aims to open two new hospitals with a total of 100 beds and add around 30 more beds to its existing facilities.

Encompass Health Corporation (NYSE:EHC), the company is also enhancing its joint venture with Piedmont Healthcare in Georgia, which now includes six operational hospitals and plans for further development.

Additionally, the corporation is undertaking a significant upgrade to its enterprise resource planning (ERP) system by transitioning to Oracle Fusion. This move aims to create a more efficient, cloud-based infrastructure that supports future growth and operational improvements.

Encompass Health Corporation (NYSE:EHC) reported a strong financial performance in the second quarter, with revenue rising by 9.6% year-over-year. This increase was driven by a 6.7% growth in discharges, including a notable 4.8% growth in same-store discharges. This marks the eighth consecutive quarter where same-store discharge growth has exceeded 4%, highlighting the company’s consistent operational strength. Additionally, adjusted EBITDA grew by 8.9%, reflecting effective management and operational efficiency.

The company also saw a significant increase in adjusted free cash flow, which rose by 14.7% year-over-year to reach $142.5 million for Q2 2024. The year-to-date total for free cash flow reached $310.1 million, demonstrating the corporation’s ability to generate strong cash flow while supporting its growth initiatives.

Over the past 5 years, Encompass Health Corporation (NYSE:EHC) has grown its net income at a compound annual growth rate (CAGR) of 5.19%.

According to Insider Monkey’s database, 39 hedge funds held stakes in Encompass Health Corporation (NYSE:EHC) in the second quarter of 2024. EHC ranks among the top 3 on our list of the most profitable mid-cap stocks to invest in.

Overall EHC ranks 3rd on our list of the most profitable mid-cap stocks to invest in. While we acknowledge the potential of EHC as an investment, our conviction lies in the belief that AI stocks hold greater promise for delivering higher returns, and doing so within a shorter time frame. If you are looking for an AI stock that is more promising than EHC but that trades at less than 5 times its earnings, check out our report about the cheapest AI stock.

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Disclosure: None. This article is originally published at Insider Monkey.