10 Mid-Size Stocks for Large-Size Gains: Part 1 · 10 Mid-Size Stocks for Large-Size Gains: Part 1...

10 Mid-Size Stocks for Large-Size Gains: Part 1April 7, 2016

by Chuck Carnevaleof F.A.S.T. Graphs

Introduction

Small and mid-sized companies are often overlooked by many or even most investors. That’sunfortunate, because there are many excellent investment opportunities that can be found in theseequity classes. However, an argument could be made that between the small and mid-cap equityclasses, the best and perhaps less risky investment opportunities are found in mid-caps.

Additionally, just as it is with every other equity class, there are many different types of mid-sizecompanies with each possessing different features and characteristics. For example, the mid-capuniverse contains many intriguing growth opportunities. On the other hand, the mid-cap universe alsocontains dividend paying companies of all categories. Investors can find high yielding mid-caps,moderate yielding above-average growing mid-caps, and everything in between. Simply stated, not allmid-caps are the same.

With this article I will be presenting interesting and attractively valued mid-sized companies for growthor total return. In part 2, I will be presenting mid-size companies for dividend income and dividendgrowth.

10 Mid-Caps

In preparation for this article I started by screening the S&P 400 mid-cap index looking for mid-capgrowth stocks trading at fair, or better yet, attractive value. In addition to growth and value, I was alsolooking for quality and operating consistency. Although mid-size companies are technically more riskythan blue-chip large-caps, they are not as risky as most small-caps. Nevertheless, I also put specialemphasis and consideration on debt. However, there are two research candidates on the list that Iconsider too debt laden.

Utilizing my premium subscription to F.A.S.T. Graphs™ I literally conducted an earnings and pricecorrelated review of all 400 constituents in the index. Much to my surprise, and just as it was with thesmall-cap index I covered in my previous article, I found very few mid-size companies that I was willingto present as attractive looking candidates for further research.

However, I was able to come up with 10 rather intriguing looking mid-size companies that were also

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attractive from a valuation perspective. On the other hand, the fact that I was only able to find a fewmid-size companies that even appeared attractive should be carefully noted. In other words, I didn’tfind a lot of value in quality mid-cap growth stocks today, just as I did not find a lot of value in small-caps.

Nevertheless, I offer the following 10 mid-cap research candidates listed in alphabetical order. Thefollowing portfolio review lists them by ticker, name, sector, credit rating, long-term debt to capital,market cap and the exchange they are traded on.

Since many readers may not be familiar with some of these mid-cap selections, I offer the followingoverview of each of the 10 research candidates. Courtesy of S&P Capital IQ I included a shortbusiness description on each, followed by a slide excerpt from each company’s corporate presentationsand a link to the full presentation, if available. Additionally, I have provided earnings and pricecorrelated historical F.A.S.T. Graphs™ on each with a calculated return forecast out to 2017 based onwhat I considered the most appropriate valuation reference line. Note: I have moved the estimatedreturn calculation pop-up to the left corner of the graph so that it did not cover up important data listedin the FAST FACTS.

Finally, I offer a brief investment thesis based solely on what each F.A.S.T. Graphs™ reveals aboutvaluation and earnings growth. I also want to be clear that I have not thoroughly researched each ofthese candidates. Therefore, they are offered as interesting mid-cap companies that readers might bedesirous of looking deeper into.

AMC Networks Inc. (AMCX)

“AMC Networks Inc. engages in the ownership and operation of various cable television’s brandsdelivering content to audiences, and a platform to distributors and advertisers in the United States and


internationally. The company operates in two segments, National Networks, and International andOther.

The National Networks segment operates five distributed entertainment programming networks underthe AMC, WE tv, BBC AMERICA, IFC, and SundanceTV names in high definition and standarddefinition formats. This segment distributes its networks in the United States through cable and othermultichannel video programming distribution platforms, including direct broadcast satellite andplatforms operated by telecommunications providers.

The International and Other segment delivers entertaining and acclaimed programming services forsubscribers in approximately 140 countries and territories, including Europe, Latin America, the MiddleEast, and the parts of Asia and Africa. This segment also operates in independent film distributionbusiness that distributes films across various media platforms, including theaters, cable/satellite video-on-demand, DVDs and cable network television, and streaming/downloading to computers and otherelectronic devices.

The company offers movies and entertainment networks to approximately 390 million subscribers in130 countries. AMC Networks Inc. was founded in 1980 and is headquartered in New York, NewYork.”

Investment Thesis: AMC Networks Inc.


My primary motivation for including this mid-cap was low valuation. Future long-term earnings growthis expected to average approximately 9% per annum. Consequently, I believe potential P/E ratioexpansion could provide substantial returns over the next few years. My caveat would be the high debtto capital ratio.

ARRIS International plc (ARRS)

“ARRIS International plc provides media entertainment and data communications solutions in theUnited States and internationally. It operates through two segments, Customer Premises Equipmentand Network & Cloud.

The Customer Premises Equipment segment offers various product solutions, including set-top boxes,gateways, digital subscriber lines and cable modems, and embedded multimedia terminal adapters and


voice/data modems that enable service providers to offer voice, video, and high-speed data services toresidential and business subscribers.

The Network & Cloud segment provides cable modem termination system, converged cable accessplatform, multichannel video programming distributors, programmer equipment, Ad insertiontechnologies, and equipment in the ground or on transmission poles, as well as equipment used toinitiate the distribution of content-carrying signals.

This segment also offers technical support, professional services, and systems integration capabilities;software products that enable providers to deliver user experiences; multiscreen recommendations,offer management, and advertising services; network management products that collect informationfrom the broadband network; and workforce management solutions enabling service providers toefficiently manage and dispatch field technicians, as well as network surveillance and issue correlationsoftware and services.

The company was formerly known as ARRIS Group, Inc. and changed its name to ARRIS Internationalplc in January 2016. ARRIS International plc was founded in 1969 and is headquartered in Suwanee,Georgia.”

Click here for full presentation, then click “ARRIS Investor Day 2016”

Investment Thesis: ARRIS International plc


http://ir.arris.com/phoenix.zhtml?c=87823&p=irol-presentations

I chose this mid-cap as a low valuation accelerating growth opportunity. The recent weakness in thestock price is attributed to what some analysts call as light 1 fiscal quarter guidance. However,according to S&P Capital IQ, company guidance for full year 2015 is for earnings of $2.45 - $2.60. Iftrue, this augurs well for eventual P/E ratio expansion.

Centene Corporation (CNC)

“Centene Corporation operates as a diversified and multi-national healthcare enterprise that providesprograms and services to under-insured and uninsured individuals in the United States. It operatesthrough two segments, Managed Care and Specialty Services.

The Managed Care segment offers Medicaid and Medicaid-related health plan coverage to individualsthrough government subsidized programs, including Medicaid, the State children’s health insurance

st


program, long-term care, foster care, and dual-eligible individual, as well as aged, blind, or disabledprograms. Its health plans include primary and specialty physician care, inpatient and outpatienthospital care, emergency and urgent care, prenatal care, laboratory and x-ray services, home healthand durable medical equipment, behavioral health and substance abuse, 24-hour nurse advice line,transportation assistance, vision care, dental care, immunizations, prescriptions and limited over-the-counter drugs, specialty pharmacy, therapies, social work services, and care coordination.

The Specialty Services segment provides pharmacy benefits management services; health, triage,wellness, and disease management services; vision services; dental services; correctional healthcareservices; in-home health services; and integrated long-term care services, as well as caremanagement software that automate the clinical, administrative, and technical components of caremanagement programs. This segment offers its services and products to state programs, healthcareorganizations, employer groups, and other commercial organizations.

The company provides its services through primary and specialty care physicians, hospitals, andancillary providers. Centene Corporation was founded in 1984 and is headquartered in St. Louis,Missouri.”

Click here for full presentation.


http://www.centene.com/wp-content/uploads/2016/01/JPMorgan_SlideDeck01112016.pdf

Investment Thesis: Centene Corporation

I offer this mid-cap as a fairly valued above-average future growth story. Many analysts believe thiscompany stands to benefit from the demographics associated with managed care.


Microsemi Corporation (MSCC)

“Microsemi Corporation designs, manufactures, and markets analog and mixed-signal semiconductorsolutions in the United States, Europe, and Asia. The company offers analog mixed-signal integratedcircuits; field programmable gate arrays; system on chip solutions and application-specific integratedcircuits; power management products; and timing and synchronization devices, and precise timesolutions.

It also provides voice processing devices, radio frequency solutions, discrete components, enterprisestorage and communication solutions, security technologies and scalable anti-tamper products,Ethernet solutions, and power-over-Ethernet integrated circuits and midspans, as well as offers customdesign capabilities and services.


The company’s products are used in various applications, such as communications infrastructuresystems comprising wireless and wired LAN systems; Internet of Things (IoT); implantablepacemakers and defibrillators; missile systems; military and commercial satellites and aircraft; oil fieldequipment; automotive; and airport security systems.

It serves aerospace, communications, defense and security, and industrial markets. The company wasformerly known as Microsemiconductor Corp and changed its name to Microsemi Corporation inMarch 1983. Microsemi Corporation was founded in 1960 and is headquartered in Aliso Viejo,California.”

Investment Thesis: Microsemi Corporation

I consider this mid-cap a low-valuation high-potential future-growth investment opportunity. However,the company is currently divesting what they consider noncore businesses. Consequently, further duediligence is indicated.


Panera Bread Company (PNRA)

“Panera Bread Company, together with its subsidiaries, owns, operates, and franchises retail bakery-cafes. The company operates through three segments: Company Bakery-Cafe Operations, FranchiseOperations, and Fresh Dough and Other Product Operations.

It operates bakery-cafes under the Panera Bread, Saint Louis Bread Co., and Paradise Bakery & Cafénames that offer daily baked goods, including freshly baked bagels, breads, muffins, scones, rolls, andsweet goods; made-to-order sandwiches on freshly baked breads; soups; freshly prepared and hand-tossed salads; pasta dishes; and custom roasted coffees and cafe beverages, such as hot or coldespresso and cappuccino drinks and smoothies through on-premise sales, as well as provides cateringservices.


The company also supplies fresh dough, produce, tuna, cream cheese, and proprietary sweet goodsitems. As of December 29, 2015, it operated 901 company-owned bakery-cafes and 1,071 franchise-operated bakery-cafes in 46 states of the United States, the District of Columbia, and Ontario.

The company was formerly known as Au Bon Pain Co., Inc. and changed its name to Panera BreadCompany in August 1998. Panera Bread Company was founded in 1981 and is based in St. Louis,Missouri.”


Investment Thesis: Panera Bread Company

I included this mid-cap with much consternation. From an earnings perspective (not shown below) Ibelieve this company is significantly overvalued. On the other hand, the company’s stock price hasclosely aligned with cash flows over the years, as indicated below. On the basis of price to cash flow,Panera Bread looks reasonably valued but not necessarily undervalued.


https://www.panerabread.com/panerabread/documents/press/2015/2015-annual-shareholder-meeting-presentation.pdf

PAREXEL International Corporation (PRXL)

“PAREXEL International Corporation, a biopharmaceutical services company, provides clinicalresearch, clinical logistics, medical communications, consulting, commercialization, and advancedtechnology products and services for pharmaceutical, biotechnology, and medical device industriesworldwide. The company operates in three segments: Clinical Research Services (CRS), PAREXELConsulting Services (PC), and PAREXEL Informatics (PI).

The CRS segment offers clinical trials management, observational studies, patient/disease registriesand post-marketing surveillance, data management and biostatistics, epidemiology and healtheconomics/outcomes research, clinical logistics, pharmacovigilance, and clinical pharmacology, as wellas related medical affairs, patient recruitment, and investigator site services.


The PC segment provides technical expertise and advice in various areas, such as drug development,regulatory affairs, product pricing and reimbursement, commercialization and strategic compliance, andgood manufacturing practice compliance consulting; and market development, product development,commercialization, and targeted communications services in support of product launch.

The PI segment offers information technology solutions comprising ClinPhone randomization and trialsupply management solutions, medical imaging services, LIQUENT InSight RIM solutions, IMPACTclinical trial management systems, DataLabs electronic data capture systems, Web-based portals,systems integration, electronic patient reported outcomes, and patient diary applications. PAREXELInternational Corporation has a strategic alliance with Optum.

The company was founded in 1983 and is headquartered in Waltham, Massachusetts.”

Click here for full presentation, then scroll down to “2015 Annual Report PDF”


http://investor.parexel.com/phoenix.zhtml?c=94569&p=irol-reportsannual

Investment Thesis: PAREXEL International Corporation

I consider this mid-cap reasonably valued with above-average future growth potential. The companyhas produced consistent earnings growth over the years with only an occasional weak year in between.Consequently, I consider this an attractive long-term growth opportunity.


SVB Financial Group (SIVB)

“SVB Financial Group, a diversified financial services company, provides various banking and financialproducts and services.

Its Global Commercial Bank segment offers deposit products, such as business and analysis checkingaccounts, money market accounts, and multi-currency and sweep accounts, as well as lockbox,electronic deposit capture, and merchant services; credit products and services, including term loans,equipment loans, asset-based loans, revolving lines of credit, accounts-receivable-based lines of credit,capital call lines of credit, and credit cards; and payment and cash management products and servicescomprising wire transfer and automated clearing house payment, bill pay, account analysis, anddisbursement, as well as online and mobile banking services.


This segment also provides foreign exchange services; various loan and credit facilities; letters ofcredit, including export, import, and standby letters of credit; investment services and solutions;investment advisory services; third party money market mutual funds and fixed-income securities;vineyard development loans and community development loans to clients in the wine industry; andequity valuation services to companies and venture capital/private equity firms, as well as invests indebt funds.

The company’s SVB Private Bank segment offers private banking services, including mortgages, homeequity lines of credit, restricted stock purchase loans, capital call lines of credit, and other secured andunsecured lending services.

Its SVB Capital segment provides venture capital investment services that manage funds on behalf ofthird party limited partners. The company also offers asset and private wealth management, brokerage,private equity investment, and business valuation services. It operates through 29 offices in the UnitedStates; and offices in China, Hong Kong, India, Israel, and the United Kingdom.

The company was founded in 1982 and is headquartered in Santa Clara, California.”

Click here for full presentation, then choose “Financial Presentation”


http://ir.svb.com/

Investment Thesis: SVB Financial Group

This mid-cap company represents another example where it has gone from excessive overvaluationdown into reasonable valuation. One caution is that it is a financial, and as such, the 0% debt to capitalcan be misleading.


Synaptics Incorporated (SYNA)

“Synaptics Incorporated develops, markets, and sells intuitive human interface solutions for electronicdevices and products worldwide.

The company offers its human interface products solutions for mobile product applications, includingsmartphones, tablets, and touchscreen applications, as well as mobile, handheld, wireless, andentertainment devices; notebook applications; and other personal computer (PC) product applications,such as peripherals comprising keyboards, mice, and monitors, as well as remote control devices fordesktops, PCs, and digital home applications.

Its products include ClearPad, which enables the user to interact directly with the display onsmartphones and tablets; display driver products that provide advanced image processing technology


for entry-level smartphones through high-resolution tablets; and Natural ID, a fingerprint ID for use insmartphones, tablets, notebook PCs, PC peripherals, and other applications.

The company’s products also comprise TouchPad, a touch-sensitive pad that senses the position andmovement of one or more fingers on its surface; SecurePad that integrates fingerprint sensor directlyinto the TouchPad area; ClickPad, a clickable mechanical design to the TouchPad application thateliminates the need for physical buttons; and ForcePad, a thinner version of its ClickPad.

Further, its other product solutions include dual pointing solutions, which offer TouchPad with apointing stick in a single notebook computer enabling users to select their interface of choice;TouchStyk, a self-contained pointing stick module; and TouchButtons, which provide capacitive buttonsand scrolling controls.

The company sells its products through direct sales, outside sales representatives, and distributors. Itserves smartphone, tablet, and PC original equipment manufacturers, as well as a various consumerelectronics manufacturers. Synaptics Incorporated was founded in 1986 and is headquartered in SanJose, California.”


Investment Thesis: Synaptics Incorporated

I consider this mid-cap undervalued with above-average long-term growth potential. I also like the


http://files.shareholder.com/downloads/SYNA/1835467374x0x868011/F0BAE2DF-BFAA-4B75-90F5-C5516053FADF/Rick_CEO_Reception_Preso_FINAL.pdf

company’s balance sheet and moderate debt to capital ratio.

Triumph Group, Inc. (TGI)

“Triumph Group, Inc. designs, engineers, manufactures, repairs, overhauls, and distributes aerostructures, aircraft components, accessories, subassemblies, and systems worldwide.

Its Aerostructures Group segment designs, manufactures, builds, and repairs acoustic and thermalinsulation systems, aircraft wings, composite and metal bonding, composite ducts and floor panels,empennages, engine nacelles, flight control surfaces, helicopter cabins, precision machined parts,stretch-formed leading edges and fuselage skins, and wing spars and stringers.


The company’s Aerospace Systems Group segment designs, engineers, builds, and repairs aircraftand engine mounted accessory drives, cargo hooks, cockpit control levers, control system valvebodies, electronic engine controls, exhaust nozzles and ducting, geared transmissions and drive traincomponents, fuel metering units, thermal control systems and components, high lift actuations,hydraulic systems and components, landing gear actuation systems, landing gear components andassemblies, main engine gear box assemblies, main fuel pumps, secondary flight control systems, andvibration absorbers.

Its Aftermarket Services Group segment provides maintenance, repair, and overhaul (MRO) servicesfor aircraft components and accessories manufactured by third parties; and supplies spare parts forvarious types of cockpit instruments and gauges. This segment also designs, engineers,manufactures, repairs, and overhauls aftermarket aerospace gas turbine engine components; andoffers MRO solutions, leasing packages, exchange programs, and parts and services to airline, aircargo, and third-party overhaul facilities.

The company serves the aviation industry, including original equipment manufacturers of commercial,regional, business, and military aircraft and aircraft components, as well as commercial and regionalairlines and air cargo carriers.

Triumph Group, Inc. was founded in 1993 and is headquartered in Berwyn, Pennsylvania.”



http://ir.triumphgroup.com/phoenix.zhtml?c=61870&p=irol-presentations

Investment Thesis: Triumph Group, Inc.

This mid-cap caught my eye solely on its valuation. In other words, I see it as more of a turnaroundstory than I do a growth opportunity. Nevertheless, this extremely low P/E ratio opportunity is offered asa speculative turnaround opportunity. Comprehensive due diligence is definitely warranted here.


Zebra Technologies Corporation (ZBRA)

“Zebra Technologies Corporation, together with its subsidiaries, designs, manufactures, sells, andsupports direct thermal and thermal transfer label printers, radio frequency identification (RFID)printer/encoders, dye sublimation card printers, real-time locating solutions, related accessories, andsupport software worldwide.

Its products are used principally in automatic identification (auto ID), data collection, and personalidentification applications. The company also provides mobile computing and advanced data capturetechnologies and services, which include rugged and enterprise-grade mobile computers; laser,imaging, and radio frequency identification based data capture products; wireless LAN (WLAN)solutions and software; and applications that are associated with these products and services.


In addition, it offers barcode scanners; specialty printers for barcode labeling and personalidentification; real-time location systems; and related accessories and supplies, such as self-adhesivelabels and other consumables, utilities, and application software.

Further, the company provides maintenance, repair, product support, system installation andintegration services, and other services. It serves retail, transportation and logistics, manufacturing,healthcare, and other end markets.

The company sells its products through a network of resellers, distributors, and end users representingindustrial, service, and government organizations. Zebra Technologies Corporation was founded in1969 and is headquartered in Lincolnshire, Illinois.”


Investment Thesis: Zebra Technologies Corporation


http://investors.zebra.com/~/media/Files/Z/Zebra-IR/reports-and-presentations/4q15-zebra-earnings-presentation.pdf

I like this mid-cap for its current low valuation and above-average future earnings growth potential.However, I don’t like the high debt to capital ratio.

Summary and Conclusions

A secondary objective of this article is to point out that there are many very interesting mid-sizecompanies to invest in. The challenge for the individual investor is that it’s very difficult to find researchcoverage or even articles on the mid-cap equity asset class. I consider that a shame, because thereare truly many good investments to be found with mid-cap companies.

From the total return perspective, it is easier for smaller companies to grow than it is for largercompanies. One generally common attribute of mid-cap companies over small-cap companies, is that


many of them have longer operating histories. As a result, many mid-caps are more establishedbusinesses, yet they still have plenty of room to provide growth.

The secrets to investing in mid-caps is to discover the good ones and then to find ways to researchthem effectively. Additionally, it’s also important to find them when they are at or below fair value.There are many times with both mid and small-cap stocks where the story entices investors to overpay.

Disclosure: Long SNYA

Disclaimer: The opinions in this document are for informational and educational purposes only andshould not be construed as a recommendation to buy or sell the stocks mentioned or to solicittransactions or clients. Past performance of the companies discussed may not continue and thecompanies may not achieve the earnings growth as predicted. The information in this document isbelieved to be accurate, but under no circumstances should a person act upon the informationcontained within. We do not recommend that anyone act upon any investment information withoutfirst consulting an investment advisor as to the suitability of such investments for his specificsituation.

© F.A.S.T. Graphs


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