One unusual factor in the stock market in 2020 has been the rise of “Goldilocks” midcap stocks that are neither too big nor too small to succeed in an ever-changing environment. The Russell 2000 index (RUT) of midsize U.S. corporations tailed its sixth record close of 2020 right after Thanksgiving. Topping off a 15% surge since Election Day. But even more impressive is how the midcap index has diverged from the S&P 500 (SPX) over a slightly longer horizon; the Russell 2000 is up about 18% since Sept. 1 while large-cap S&P is only up about 4%.
The truth is, many large companies simply cannot respond fast enough in a challenging market environment. Change takes time when you command multinational operations with thousands of employees. Sending some big and well-capitalized firms shares lower.
On the other hand, without deep pockets to stay afloat, some smaller firms suffering the same downtrends, have been folding altogether. Global corporate defaults already are at their highest levels since 2009 — and according to Fitch Ratings, they’re on pace to top even the highs set during the worst of the financial crisis.
Mid-caps offer a 1-2 punch of financial stability you don’t get from small caps, but also greater growth potential than many large caps. And in 2021, as growth (hopefully) returns, mid-caps should offer a great deal of rebound potential.
In this article we examine 5 of the best mid-cap stocks to buy for 2021. Each of these midsized companies has garnered plenty of bullish commentary from the analyst community, and they look positioned to run as the American economy gets back on its feet.
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Navient (NAVI) is a leading provider of asset management and business processing solutions for education, healthcare, and government clients at the federal, state, and local levels. Managing nearly $300 billion in student loans for more than 12 million debtors, Navient services 25% of student loans in the United States.
NAVI, at less than $10, has a superlow valuation, trading at around three times projected 2021 earnings of nearly $3 a share and at a discount to book value. This reflects concerns about the credit outlook for its private student loan portfolio. An optimistic management believes the company can sustain annual earnings in the range of $3 a share.
KBW analyst Sanjay Sakhrani is bullish, carrying an outperform rating and a $14 price target on the stock. He recently wrote; “Shares are currently trading at a material discount to the company’s intrinsic value despite the strong cash flow generation, optionality from portfolio acquisitions and capital management, and the potential accretion from the expansion of the servicing and collections business.”
NAVI’s current earnings per share is $1.96. Zacks Investment Research reports NAVI’s forecasted earnings growth in 2020 as 22.98%, compared to an industry average of -4.7%. NAVI investors also benefit from a 6.5% dividend yield.
Plug Power (PLUG)
Plug Power (PLUG) shares have blown away almost every other midcap stock out there, with gains of more than 700% year-to-date in 2020 as the hydrogen fuel cell leader comes into its own.
Plug Power may not be profitable yet, but anyone who has written off high-growth startups because of that has been left in the dust many times over. What’s important to watch is the surging top line, with revenue set to jump more than 35% in fiscal 2020 and then expand another 35% in 2021 according to the consensus targets from analysts.
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This is in line with Plug Power’s tremendously ambitious five-year plan revealed in 2019 that would create a company with $1 billion in gross billings and $170 million in operating profit by the end of 2024. Considering next fiscal year’s forecast puts it about halfway there on the revenue side, investors who may have previously doubted this stock are increasingly coming around.
There’s little doubt that the world is hungry for alternative energy sources amid the fight against climate change, and this company is ramping up at the perfect time — particularly as the incoming Biden administration is reportedly set to make this issue a top priority in the U.S.
Mercury General (MCY)
Mercury General (MCY) is a multiple-line insurance organization offering personal automobile, homeowners, renters and business insurance. The company is known for its focus on costs and fraud prevention.
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MCY has had uneven results in recent years, but some analysts are focusing on the stock for its potential from this valuation. It also helps that longtime Chairman George Joseph takes the dividend so seriously. Mercury announced a tiny increase in its dividend in conjunction with its third-quarter results, signaling confidence in the payout. Its 5.7% dividend yield looks safe given a projected payout ratio of under 75% next year.
With a trailing twelve month P/E ratio of 10.18, MCY stock has an attractive valuation compared to its peers.
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Magellan Midstream Partners LP (MMP)
Magellan Midstream Partners LP (MMP) specializes in the transportation, storage and distribution of crude oil and petroleum products. While many investors might be leery of buying energy stocks right now given the volatility in oil prices or long-term concerns about carbon emissions and climate change, this mid-cap stock offers significant peace of mind as a “midstream” infrastructure play.
While oilfield service stocks are primarily concerned with drilling and extracting fossil fuels from the earth, MMP operates pipelines that transport gasoline, aviation fuels, and liquified gases to end users that include refiners, wholesalers, biofuel producers, and even railroads and airports that are transporting those commodities even further down the supply chain. Magellan’s assets include a 9,800-mile refined products pipeline system with 54 storage terminals, and another 2,200 miles of crude oil pipelines and storage facilities with a capacity of 37 million barrels.
With scale like this, it’s easy to see the appeal of this master limited partnership (MLP) as a key infrastructure provider. MMP sports a 9.88% dividend yield and currently trades with a trailing twelve month P/E ratio of 9.77. There are currently 4 Hold ratings and 15 Buy ratings for the stock, resulting in a consensus rating of Buy.
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Nordstrom (JWN) was crushed in early 2020 by coronavirus restrictions as well as the long-term trends of online competition. But after a stellar showing in the past several weeks, the stock has climbed out of that dark place, on its way back to pre-pandemic levels. Big corporate profits are projected in 2021 as conditions normalize and e-commerce investments pay off.
In fact, third-quarter earnings in late November showed the store was already back into the black with more than $150 million in operating cash flow. Even more impressive was that digital sales hit $1.6 billion to account for more than half of all Nordstrom’s business in the quarter.
This is a tremendous development, particularly because we’ve started to learn that even if the pandemic winds down in 2021, there will be big changes in how consumers and businesses act going forward. Though the virus outbreak has been difficult for all of us, the reality is that it forced Nordstrom to act quickly and connect with customers in a way that will help reshape the business. And with almost $900 million in cash on hand on top of its profitable outlook, you can understand why Wall Street was eager to sound the “all’s clear” and begin bidding up this stock in a big way.
Shares have more than doubled in the last month or so, and have shown no signs of slowing down as we enter the all-important holiday shopping season.
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