The best mid-cap stocks – typically, companies between $2 billion to $10 billion, though some indexes view them differently – are too often overlooked.
Large-cap stocks are valued for their stability and dividends, while small-cap stocks are favored for their growth prospects.
But avoid the happy medium at your own peril. In 2022, mid-cap stocks had a total return of -13.3%, 280 and 490 basis points better than small and large caps, respectively. (A basis point = 0.01%.) So many of the best mid-cap stocks might just be among the best stocks to buy, period.
Several years ago, Canadian mutual fund and exchange-traded fund (ETF) provider Mackenzie Financial (opens in new tab) made a convincing universal case for U.S. mid-cap stocks. It had four arguments. Namely, mid-caps …
Give you the stability of large-cap stocks combined with the growth of small-cap stocks.Have historically provided better risk/return characteristics.Enjoy far less analyst coverage than large caps, which offers active managers an edge.Make great takeover targets. Mackenzie pointed to 10 years of data through October 2018 showing that, of 11,270 mergers and acquisitions, 91% involved sums between $500 million and $5 billion. So even though large deals get a lot of press, small- and mid-cap takeovers happen far more often.Through October 2018, it looked at 11,270 M&A deals over 10 years. It found that 91% of the deals were for companies valued between $500 million and $5 billion. So, even though large deals get all the press, it’s the smaller acquisitions that happen more often.
Mid-cap stocks – which Mackenzie refers to as the “sweet spot” of investing – can best be described as consistent performers. Using a baseball analogy, they might not hit you a bunch of home runs, but they’re sure to knock in a lot of runners, ultimately producing when it counts.
Read on as we evaluate nine of the best mid-cap stocks to buy now.
Data is as of March 7. Analyst opinions from S&P Global Market Intelligence. Stocks are listed in reverse order of analysts’ consensus rating.
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Valvoline Market value: $6.1 billionAnalysts’ opinions: 3 Strong Buy, 2 Buy, 2 Hold, 0 Sell, 0 Strong SellAnalysts’ consensus rating: 1.86 (Buy)Median price target: $40.00 (11.9% implied upside)Valvoline’s (VVV (opens in new tab), $35.76) sale of its global products business to Saudi Aramco closed in early March. Upon completion, the Kentucky-based company became a retail services pure-play operating more than 1,746 company-owned and franchised Valvoline Instant Oil Change and Great Canadian Oil Change locations in the U.S. and Canada.
The company first announced the sale of its global products business in August 2022, which Saudi Aramco paid $2.65 billion in cash to acquire. In addition, Saudi Aramco has entered into a long-term agreement to supply its retail locations with Valvoline motor oil.
VVV intends to return three-quarters of the $2.2 billion in net proceeds to shareholders through dividends and share repurchases. The remainder of the proceeds will repay the debt.
The New Valvoline will be an asset-light operation with fast growth, high margins and return on invested capital. Its plans for the future include a compound annual growth rate (CAGR) of 15% for revenue and 17% for adjusted EBITDA (earnings before interest, taxes, depreciation and amortization).
In the first quarter, Valvoline’s system-wide same-store sales grew by 11.9% – 13% for company-owned and 11% for franchises – with a 6.8% increase in locations over Q1 2022. Over the past five years, its CAGR for system-wide store sales increased by 18%.
The company has plans to have more than 3,500 locations open over the next few years, ensuring future growth in revenues and earnings for one of Wall Street’s best mid-cap stocks. In the first quarter alone, VVV opened 31 new locations. It expects to open as many as 160 in fiscal 2023.
“Over 220 sites have been approved by our new unit review committee and are in various stages of the deal process. Our new build sites continue to accelerate system-wide and the Quick Lube market remains highly fragmented, providing ample opportunity for acquisition,” said Lori Flees, Valvoline’s president of Retail Services, during the company’s Q1 2023 earnings call.
Valvoline’s 2023 earnings per share estimate is 96 cents at the midpoint. Jefferies analysts expect the company to earn $1.10 per share in 2023, $1.65 in 2024, and $2.05 in 2025. The group has a Buy rating and a $42 price target on the energy stock.
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Axos Financial Market value: $2.7 billionAnalysts’ opinions: 2 Strong Buy, 3 Buy, 1 Hold, 0 Sell, 0 Strong SellAnalysts’ consensus rating: 1.83 (Buy)Median price target: $53.00 (16.5% implied upside)Las Vegas-based bank Axos Financial (AX (opens in new tab), $45.48) is the holding company for Axos Bank, its digital bank subsidiary. The digital bank launched in July 2000 under the name Bank of Internet USA. It went public in March 2005 as BofI Holding. It changed its name to Axos Bank on Oct. 1, 2018, after merging its various brands under one name. The rest is history.
If you care about consistent growth, AX certainly delivers. Its fiscal second-quarter earnings report included a 37.3% year-over-year increase in net interest income. Overall, its adjusted net earnings were up 32.5% in the three months ended Dec. 31, 2022, to $83.4 million. In addition, its tangible book value per share rose 18.6% to $26.74.
Additionally, Axos Financial had $18.7 billion in total assets at the end of the second quarter, 20.5% higher than a year earlier. Total deposits arrived at $15.7 billion, with loans of $15.5 billion.
The company’s biggest revenue generators are single-family and multifamily mortgages and commercial real estate loans. Together, these three revenue streams accounted for 82% of its loan portfolio at the end of December. Moreover, the allowance for credit losses on all three loan products remains low, at just 0.7% of the $12.9 billion in loans.
AX stock is delivering for its shareholders in 2023. The financial stock is up 19% year-to-date. But considering shares are still in the red on a year-over-year basis, investors have the opportunity to pick up one of the best mid-cap stocks at a discount.
Raymond James recently published a report about the banking industry that included some positive comments about Axos.
“[T]he fundamental outlook for AX remains strong, where it continues to drive mid-teens organic loan growth and has funded this growth with core deposits, which we believe is a structural shift in light of the expansion of its securities business,” Raymond James stated in its Feb. 21 research report. “In turn, this has supported NIM expansion above its prior targeted range, as well as fee income growth given the ~$800 million of off-balance sheet deposits.”
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Crestwood Equity Partners Market value: $2.7 billionAnalysts’ opinions: 5 Strong Buy, 4 Buy, 1 Hold, 0 Sell, 0 Strong SellAnalysts’ consensus rating: 1.60 (Buy)Median price target: $31.00 (21.9% implied upside)Crestwood Equity Partners (CEQP (opens in new tab), $25.42) is a publicly traded master limited partnership (MLP) that owns and operates midstream assets in several areas, including the Williston Basin, Delaware Basin and Powder River Basin.
CEQP is one of the best dividend stocks on this list. Because of the MLP structure, Crestwood’s annualized distribution of $2.62 per share yields a healthy 10.6%. However, the distributions are treated as a return on capital, which reduces your cost basis. In other words, you’re deferring income today for higher capital gains taxes tomorrow. Always consult a tax expert if unsure about your personal situation.
In fiscal 2023, the MLP expects distributable cash flow between $430 million and $510 million, free cash flow – the money a company generates after covering the capital expenditures needed to grow its business – after distributions of at least $50 million at the midpoint of its guidance, and adjusted EBITDA of $780 million and $860 million.
Approximately 73% of CEQP’s 2023 EBITDA will be generated by its Gathering & Processing North segment, which comprises Williston Basin assets in North Dakota and Eastern Montana.
One reason Crestwood is on this list of the best mid-cap stocks is that the MLP generates 85% of its cash flow from fixed-fee or take-or-pay contracts that are backed by more than 1.3 million dedicated acres. So if a producer drills a new well within this acreage, they must use Crestwood’s assets.
Further, most of these contracts have inflation escalators for times like we’re currently experiencing. Equally important, the customers signing these contracts and utilizing its gathering and processing assets are some of the biggest producers in the energy industry. As a result, its diversification of customers is second to none.
Stifel analysts maintained a Buy rating on CEQP in a January research report, but lowered the price target by $4 to $31. That’s still more than 20% higher than its current share price.
“We believe the successful acquisition of Oasis Midstream positions CEQP for sustained growth by expanding its footprint in the Bakken and Permian,” the Stifel analysts stated in their research report. “Given higher commodity prices and increased production, CEQP is positioned for higher asset utilization that, we believe, will ultimately lead to the need for additional infrastructure in the Delaware [Basin].”
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Performance Food Group Market value: $9.0 billionAnalysts’ opinions: 8 Strong Buy, 5 Buy, 2 Hold, 0 Sell, 0 Strong SellAnalysts’ consensus rating: 1.60 (Buy)Median price target: $73.00 (27.0% implied upside)Performance Food Group (PFGC (opens in new tab), $57.48) is a Virginia-based food service distribution company. It is one of the largest in North America, delivering more than 250,000 products from 150 locations across the U.S. and Canada. The company distributes products through three operating segments: Foodservice, Convenience and Vistar.
Foodservice sells brand name products and Performance Brands items to independent and multi-unit restaurant chains and institutional settings like healthcare facilities and schools. It generated 50% of the company’s sales in the trailing 12 months ended Dec. 31, 2022.
PFGC’s Convenience business distributes snacks, candy, beverages and cigarettes to convenience stores in the U.S. and Canada. It’s responsible for 42% of Performance’s overall revenue. And Vistar distributes these same products to movie theaters, retail, etc. It made up the remaining 8% of sales.
Regarding EBITDA margins, PFGC’s two largest segments make a little from many customers. Vistar, while small, has margins double those of the two larger operating segments. In the trailing 12 months ended Dec. 31, 2022, Vistar accounted for 19% of the company’s adjusted EBITDA, but only 8% of the sales. This will help continue to build out the Vistar division.
In the second quarter of fiscal 2023, all three operating segments saw revenue increases, with Foodservice leading the way, up 11% to $6.9 billion. Its adjusted EBITDA increased 28% in the quarter to $214.2 million.
The segment’s inflation growth slowed to 9.6% in the quarter, indicating that food costs are normalizing.
“We continue to believe that inflation normalization is healthy for the market, our customers and their consumers and we are pleased to see the year-over-year inflation declining,” said George Holm, CEO of Performance Food Group, during the company’s earnings call.
Performance is building a trifecta of growth, making it one of the best mid-cap stocks to buy and hold.
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Jazz Pharmaceuticals Market value: $8.8 billionAnalysts’ opinions: 9 Strong Buy, 9 Buy, 1 Hold, 0 Sell, 0 Strong SellAnalysts’ consensus rating: 1.58 (Buy)Median price target: $200.00 (43.9% implied upside)Jazz Pharmaceuticals (JAZZ (opens in new tab), $139.03) has come a long way since it was founded in 2003, and it’s now one of the best healthcare stocks on Wall Street. Acquisitions have played a big part in its growth over the past two decades, with the most recent being its $7.2 billion purchase of GW Pharmaceuticals in May 2021.
The cash-and-stock transaction broadened the company’s product offerings for its neuroscience business. GW’s Epidiolex was approved for treating seizures related to severe forms of epilepsy in the U.S. in June 2018. The European Commission approved it in September 2019. The drug gained interest from investors because it is made with highly purified plant-derived cannabidiol (CBD).
In the fourth quarter of 2022, Epidiolox had sales of $207.0 million, 7% higher than a year earlier. For all of 2022, the drug’s product sales were 12% higher at $736.4 million. The company launched Epidyolex (its name in Europe) in France during the fourth quarter, bringing its key European markets to five countries, including the U.K. and Germany.
Jazz’s biggest-selling drug is Xywav, an oral treatment for narcolepsy and idiopathic hypersomnia. In the fourth quarter and 2022, Xywav had sales of $281.4 million and $958.4 million, respectively.
But JAZZ isn’t a one-trick pony. It’s also seeing tremendous growth on the oncology side of its business. For example, Rylaze, used in treating acute lymphoblastic leukemia (ALL), had $81.0 million in sales in the fourth quarter, 25% higher than a year earlier. The cancer medicine was launched in July 2021. It accounted for almost 8% of JAZZ’s total sales in Q1.
For all of 2023, Jazz expects adjusted net income between $1.24 billion and $1.31 billion, with revenue of $3.8 billion at the midpoint of its guidance.
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Nexstar Media Group Market value: $6.4 billionAnalysts’ opinions: 7 Strong Buy, 1 Buy, 2 Hold, 0 Sell, 0 Strong SellAnalysts’ consensus rating: 1.50 (Strong Buy)Median price target: $225.00 (28.9% implied upside)Nexstar Media Group (NXST (opens in new tab), $174.52) owns, operates, or provides services to 200 broadcast stations in 116 markets across the U.S. These stations access 68% of the country’s television households. It focuses on local markets with affiliated stations to all the major networks.
In January, the company took some heat when its CW Network, part of Nexstar’s Networks division, announced that it had signed a multi-year agreement with Saudi-backed LIV Golf that will see the network televise 14 of LIV Golf’s global events in 2023.
“We are left to wonder what if anything Nexstar stands for,” said Jen Judson, president of the National Press Club, as reported by The Hill (opens in new tab). “You cannot have a brand in news and act this way. Saudi Arabia murdered a Washington Post journalist and cut him up with a bone saw.”
Investors who can get past this issue should continue to do well with Nexstar.
In the fourth quarter, NXST’s core advertising revenue fell 3.3% year-over-year to $477.5 million. However, its other advertising revenue stream of political ads benefited greatly from November’s midterm elections. As a result, political advertising revenue surged more than 1,300% in Q4 to $265.9 million.
There’s plenty of growth opportunity on the horizon for Nexstar, including its digital revenue. For all of 2022, digital contributed just 16% of Nexstar’s overall sales.
That’s got to be better.
Another reason Nexstar is one of the best mid-cap stocks to buy now: It is a cash-generating machine, with free cash flow up 22.9% to $1.5 billion in 2022. NXST returned 68% of its free cash flow for dividends and share repurchases throughout the year. In addition, it paid down nearly $478 million of its debt during the fiscal year.
What’s more, on Jan. 27, the company increased its quarterly dividend by 50% to $1.35 per share. The annualized rate of $5.40 yields an attractive 3.1%.
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Denbury Market value: $4.2 billionAnalysts’ opinions: 8 Strong Buy, 2 Buy, 0 Hold, 1 Sell, 1 Strong SellAnalysts’ consensus rating: 1.45 (Strong Buy)Median price target: $115.00 (36.9% implied upside)Denbury (DEN (opens in new tab), $83.98) is one of several energy companies featured on this list of the best mid-cap stocks to buy now. DEN operates along the U.S.’s Gulf Coast and Rocky Mountain regions, with estimated proved oil and gas reserves of approximately 202 million barrels of oil equivalent (MMBOE). It operates in the Gulf Coast and Rocky Mountain regions of the U.S.
DEN gained an excellent reputation in the industry because of its world-leading carbon solutions, such as CO2 Enhanced Oil Recovery (EOR) and direct CO2 injection. The company considers its oil the most environmentally friendly on the planet. Approximately 28% of its production is considered Blue oil because it generates net negative carbon emissions.
Denbury injects more than 4 million tons of captured industrial-sourced CO2 annually. By 2030, it plans to fully offset its Scope 1, 2, and 3 CO2 emissions by increasing the amount of captured industrial-sourced CO2 used in its operations.
One of Denbury’s main priorities in 2022 was to generate substantial free cash flow. Despite spending $444.2 million in 2022 on the development of exploration and production projects – 65.9% more than in 2021 – its free cash flow was $135.6 million, almost three times what it generated in 2021.
In the fourth quarter of 2022, Denbury’s revenue was $381.2 million, 5.3% higher than a year earlier. On the bottom line, its adjusted net income was $80.0 million, compared to $41.7 million in Q4 2021.
In 2023, Denbury expects daily production of 47,500 barrels at the midpoint of its guidance, with 97% oil and 3% natural gas.
Stifel analysts currently have a Buy rating on the stock with a $155 target price. “Denbury is best positioned to benefit from the rapidly growing CCUS (Carbon Capture, Utilization, and Storage) industry,” the analysts said in a Dec. 13 research report.
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Churchill Downs Market value: $9.1 billionAnalysts’ opinions: 5 Strong Buy, 1 Buy, 1 Hold, 0 Sell, 0 Strong SellAnalysts’ consensus rating: 1.43 (Buy)Median price target: $274.00 (12.1% implied upside)Churchill Downs (CHDN (opens in new tab), $244.33) is best known for hosting the Kentucky Derby horse race each year on the first Saturday in May. It is currently undertaking several projects at the racetrack that will add considerably to the Churchill Downs experience.
First, it’s spending $90 million to provide additional permanent seating at the first turn of the one-and-one-quarter-mile track. In addition, the project adds a new track-level hospitality club replacing temporary seating. Between indoor and outdoor seating, it doubles the capacity at the first turn to 7,100. That will be ready for this year’s Run for the Roses.
Secondly, CHDN is investing up to $200 million in enhancing the Paddock experience in time for the 2024 race, which, not coincidentally, will be the 150th running of the Derby.
In addition to the race track, Churchill Downs also operates brick-and-mortar casinos in 10 states, its Twin Spires online wagering platform for betting on horse races, and its Historical Racing Machines (HRMs), which are like slot machines, only they use historical race information, to determine winners.
It has “a unique and diverse collection of entertainment assets that generate high margins with significant adjusted EBITDA and free cash flow,” the company states in its February 2023 investor presentation.
This is evidenced in the company’s 2022 results, which included record revenue, income and adjusted EBITDA of $1.81 billion, $439.4 million and $763.6 million, respectively.
Susquehanna Financial analysts are targeting even more record financial results in fiscal 2023 for Churchill Downs, guiding for revenue and adjusted EBITDA of $2.5 billion and $1.1 billion, respectively.
This makes Churchill Downs one of the best mid-cap stocks to buy now.
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ACI Worldwide Market value: $2.7 billionAnalysts’ opinions: 4 Strong Buy, 0 Buy, 1 Hold, 0 Sell, 0 Strong SellAnalysts’ consensus rating: 1.40 (Strong Buy)Median price target: $33.50 (32.9% implied upside)ACI Worldwide (ACIW (opens in new tab), $25.20) provides software products and solutions for real-time digital payments to 6,000-plus global organizations, including over 1,000 of the world’s largest financial institutions.
In Q4 2022, ACIW posted a 5% year-over-year decrease in adjusted EBITDA to $194 million. The company also had revenue of $451.8 million, 3.2% lower than Q4 2021. Recurring revenue in the fourth quarter accounted for 56% of its overall sales. Most of its recurring revenue was from software-as-a-service (SaaS) and platform-as-a-service (PaaS) fees. The company’s SaaS and PaaS revenues accounted for 81% of its recurring revenue in Q4 2022.
For all of 2022, ACI Worldwide sales were up 4% to $1.42 billion, while adjusted EBITDA edged down 2.7% to $373.4 million. However, the company expects revenue to grow to $1.45 billion, while its adjusted EBITDA to land between $380 million and $395 million.
Analysts are also targeting modest growth for ACIW this fiscal year, expecting sales to hit $1.44 billion in 2023, with $249.1 million in free cash flow and $391.57 million in adjusted EBITDA.
Helping the company grow will be its expansion plans. In 2022, ACIW added Indonesia, Malaysia and Thailand to its global network. It now covers approximately 25 domestic and pan-regional markets on six continents. This represents about one-third of the countries that offer real-time payment services.
Like many other tech stocks, ACIW has been hit by broad-market headwinds and is off roughly 20% over the past year. However, that allows investors to pick up one of the best mid-cap stocks at a discount. Case in point: Shares are trading at 2.1 times sales, considerably less than the five-year average of 3.0.
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