3 Midcap Stocks Hitting the ‘Sweet Spot’

by Alyssa Oursler | September 26, 2013 12:44 pm

hundred dollar bill in target 185x185 3 Midcap Stocks Hitting the 'Sweet Spot'Midcap stocks — usually defined as stocks that have a market capitalization between $2 billion and $10 billion — offer investors a sweet mix of stability and growth.

Sure, they’re underperforming small-cap stocks so far this year, as the Russell 2000 has gained 26% year-to-date vs. the 23% gains of the Russell Midcap Index. However, tossing your money into small-cap stocks comes with a lot more risk and volatility[1] thanks to their frequently untested businesses and small financial cushions. Midcap stocks tend to be more established businesses and thus are slightly safer bets.

On the other side, large-cap stocks might be safer in general, but these big, well-established companies also typically have less room to grow. Hence why the Russell Midcap has outperformed the S&P 500 in four of the past five years.

The bottom line is that midcap stocks are often a “sweet spot” investment for folks that want growth potential without big-time risk. So if you’re looking for a few plays hitting that sweet spot, check out this list of 3 attractive midcap stocks:

YY Inc.

YY185 3 Midcap Stocks Hitting the 'Sweet Spot'One glance at YY Inc’s (YY[2]) chart might lead you to believe that the stock’s 240% year-to-date climb has been too much, too fast. Heck, the Chinese Internet midcap went public late last year for $10.50 a share, and has already hit $45.

But I think this $2.5 billion company is just getting started.

YY provides a social platform to Internet users in China — a huge and growing pool of customers. China’s Internet penetration rate is currently estimated at 40%, meaning there’s plenty of room for growth. Not to mention, YY is working hard to diversify its offerings and audience with new partnerships and offerings.

And with YY trading above its 20-, 50- and 100-day moving averages, why not play the mega-trend by riding an uptrend?

If you want fundamentals to back up the pick, just consider that YY has beat earnings expectations every quarter since it went public. It also is slated to double its revenue during 2013, while full-year estimates for 2013 and 2014 have been marching steadily upward in the past few months.

When you factor in growth potential, this midcap stock looks like a bargain. YY is trading for 26 times forward earnings, but is forecast to grow earnings by 47% annually over the next half-decade.

Cubist Pharmaceuticals

cubist185 3 Midcap Stocks Hitting the 'Sweet Spot'Another company with a megatrend in its corner is Cubist Pharmaceuticals (CBST[3]) — the midcap stock that will replace Smithfield Foods in the S&P 400.

The bottom line is that healthcare costs and medication use are on the way up, and the pharma sector is set to cash in.

On top of that, Cubist won an important legal battle earlier this year against Hospira (HSP[4]), a company that was planning a generic-drug challenge against what is currently Cubist’s leading treatment. That’s a big win considering the generic market[5] has been eating countless name-brand drug-makers’ lunch.

And Cubist has been diversifying its portfolio, as it just made two big-time acquisitions that should help it over the long-term, snatching up antibiotics makers Trius Therapeutics and Optimer Pharmaceuticals.

CBST is expected to achieve 28% earnings growth annually during the next half-decade. So while you might wait for a pullback before jumping in considering CBST’s 60% year-to-date climb, keep this midcap stock on your radar.

Hasbro

Hasbro185 3 Midcap Stocks Hitting the 'Sweet Spot'This last pick falls in an extra-sweet spot, considering it’s a midcap stock that also pays a solid dividend.

The $6.2 billion toymaker Hasbro (HAS[6]) is one of the largest players in the game market — a business always evolving with new offerings and remixes on classics.

Sure, Hasbro missed on earnings in the most recent quarter, but that profit shortcoming was largely thanks to weakness in boy toys — a large segment that’s expected to improve next year. For instance, Hasbro has deals with Disney (DIS[7]) for merchandising rights to the popular Marvel series, which should help bolster the segment.

Meanwhile, Hasbro has grown its quarterly payout more than 1,000% since 2003, when it paid out 3 cents per share quarterly. At 40 cents per share, HAS now yields roughly 3.3%.

Even then, Hasbro’s dividend payout only accounts for half the company’s total earnings — profits that are forecast to grow solidly long-term. HAS also has more than $1 billion in cash and equivalents, while its annual operating cash flow has more than doubled since 2009.

As of this writing, Alyssa Oursler did not hold a position in any of the aforementioned securities.

Endnotes:
  1. comes with a lot more risk and volatility: http://investorplace.com/2012/12/go-medium-or-go-home-mid-cap-stocks/
  2. YY: http://studio-5.financialcontent.com/investplace/quote?Symbol=YY
  3. CBST: http://studio-5.financialcontent.com/investplace/quote?Symbol=CBST
  4. HSP: http://studio-5.financialcontent.com/investplace/quote?Symbol=HSP
  5. the generic market: http://investorplace.com/2013/09/the-generic-drug-industrys-top-5-stocks/
  6. HAS: http://studio-5.financialcontent.com/investplace/quote?Symbol=HAS
  7. DIS: http://studio-5.financialcontent.com/investplace/quote?Symbol=DIS

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