Defined as companies valued between $2 billion and $10 billion, mid-cap stocks occupy an often-overlooked sliver of the stock market. The definition is arbitrary, but mid caps are often not yet large enough to garner widespread name recognition but have plenty of growth left in the tank. It’s a sweet spot for investors who are looking for high-growth opportunities without the high risk that can come with smaller outfits.
Nevertheless, picking the best of the best is no easy task. Here are three mid caps worth a look…
A growing restaurant chain on sale
Nicholas Rossolillo (Texas Roadhouse): Who doesn’t love a good deal? That has been this casual steakhouse chain’s plan of attack, focusing on opening new stores in suburban America and offering generous portions at a fair price. After the recent rout in the stock market, the stock looks like a good deal, too.
Granted, there is one justifiable reason for the recent declines in Roadhouse’s valuation: wages. To be more specific, labor costs are growing in the double digits — driven primarily by minimum-wage hikes actively being enacted across the country. Those extra expenses have all but eliminated earnings growth for Texas Roadhouse so far this year.
Nevertheless, there’s hope that a corner will eventually be turned. That’s because this restaurant operator continues to open up new stores at a pace of about 5% a year, bringing its total location count to 591 at the end of Q2 2019. Existing restaurants are also some of the best performing in the whole industry, as same-store sales (a combination of foot traffic and guest ticket size) has been consistently increasing in the mid-single-digits for years. That’s a key factor in growing profitability for a restaurant over time.
Starting with the third quarter, Roadhouse will start lapping some of the initial wage increases it put in place last summer, so the negative drag on the bottom line should start to subside. With new restaurants opening doors and management forecasting continued same-store sales growth, now could be a good time to bet on the chain with shares over 30% off of all-time highs.
Act now, before this hot stock takes off again
Anders Bylund (Universal Display): This display and lighting technology researcher has been on a tear over the last year. The company absolutely crushed Wall Street’s earnings estimates in all three of the earnings reports it has posted in 2019. Revenues started out on the modest side, only to accelerate and exceed the analyst consensus by 49% in the recently reported second quarter.
Share prices have generally followed suit, rising 76% in the last 52 weeks and 120% from a year-to-date perspective. But the rocket ride hit a brick wall in recent weeks, and Universal Display’s shares rose just 1% over the last month. That includes the stellar second-quarter report mentioned above, where sales doubled and earnings quadrupled compared to the year-ago quarter.
In all fairness, some of that quarter’s excellent results rested on Chinese customers stocking up on organic light-emitting diode (OLED) materials before a proposed border-crossing tariff that was slated to take effect in the second half of 2019. So, some of the revenues and profits in the second quarter were really just accelerated orders that normally would have arrived in the third or fourth quarters. Even so, management raised its full-year revenue guidance by 7%.
I don’t see anything wrong with Universal Display’s business prospects right now, but market makers still decided to pump the brakes on the stock’s torrential gains. That gives us a chance to stock up on shares at an unusually stable price. Given the company’s fantastic long-term prospects and the stock’s solid market momentum, that’s a fairly rare event…
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