Midcaps — securities with market caps between $2 billion and $10 billion — get too little attention for the returns they churn out. Large caps — think Apple (AAPL) — are in the news everyday. And even a hot small-cap doubling or tripling returns eventually breaks out of obscurity too, becoming one of the more popular stocks to buy.
Indeed, during the past 20 years, the Russell Midcap generated an annualized return of more than 10%, according to Fidelity Investments. Large-caps managed annualized returns of only about 7%, while small-caps put up 8%. Perhaps most importantly, that same absolute outperformance still stands even after adjusting for risk, making midcaps excellent stocks to buy.
Maybe it’s because midcaps combine some of the best attributes of both their small-cap and large-cap peers. Like small-caps, they have outsized growth prospects. But small-caps have greater risk and volatility, greater dependance on debt and a general paucity of dividends.
Large-caps, meanwhile, have proven themselves, tend to have stronger balance sheets and are more likely to pay dividends. The days of outsized growth, however, are behind them.
Mid-caps sit in the happy middle, promising in some ways the best of both worlds.
With that in mind, we screened the S&P 500 for winners and came up with these five midcap stocks to buy:
Midcap Stocks — First Solar (FSLR)
Solar stocks like First Solar (FSLR) bounce around a lot, but the long-term outlook burns bright. For the most recent quarter, First Solar earnings rose 66% on a 26% gain in revenue growth. Both figures exceeded Wall Street’s estimates. Even better, FLSR raised its outlook.
The best thing FSLR has going is its strategy of relying less on producing solar panels and more on the operation of grid-scale solar farms for utilities. That’s where the growth — and higher margins — are, and the market is still in its early stages.
Most importantly, FSLR stock is more than reasonably priced. It trades at just 12 times forward earnings, even though earnings per share are forecast to grow 80% next year. That’s why FSLR is one of the best solar stocks to buy.
Quest Diagnostics (DGX)
Like pretty much all healthcare stocks, Quest Diagnostics (DGX) is getting a huge benefit from a rapidly aging America. After all, older people tend to need more lab tests and other diagnostic services. And it’s not just baby boomers who provide a tailwind. The Affordable Care Act extends health insurance to millions of Americans, all of whom are potential customers.
In a revenue and margin-boosting move, DGX is focusing on growth areas such as gene-based esoteric testing for cancer, cardiovascular disease, infectious disease and neurological disorders.
At the same time, DGX has a forward price-to-earnings multiple of 13. That’s significantly cheaper than the S&P 500 despite having the same growth prospects. The 2.3% yield on the dividend isn’t too bad either. Add it all up and DGX easily makes our list of stocks to buy.
Tenet Healthcare (THC)
Tenet Healthcare (THC) is another stock getting help from both baby boomers and the expansion of health insurance to millions of Americans. That makes it a pretty easy pick for our list of midcap stocks to buy.
The company is in the midst of a turnaround, which appears to be on track. For the most recent quarter, THC greatly narrowed its loss vs. the year-ago period, beating Wall Street’s estimates in the process. Furthermore, total admissions increased 54%, while higher-margin surgeries increased 60% and emergency department visits grew 63.3%.
Admittedly, though, THC needs some help. It needs to make more progress on cutting costs, but that should happen once it finishes its acquisition of Vanguard Health. With a P/E of 17, shares aren’t particularly cheap, but they’re not overpriced either.
McCormick (MKC) puts the spice in life — literally. MKC is a major supplier of spices, seasonings and condiments, gives McCormick a very stable business that has been around since 1889. Furthermore, MKC has hiked its dividend every year for 28 straight years. (It currently yields 2.1%)
MKC easily beat analysts’ top- and bottom-line estimates last quarter, helped by cost cuts, sales increases, higher prices and higher volume. Essentially, everything went right, so why not add it to your list of stocks to buy?
MKC stock does look a bit pricey with a forward P/E of almost 20, but then it always trades at large premiums to its food industry peers. It might pay to wait on a pullback, but for the longer term, MKC still looks solid.
Snap-on (SNA) makes tools and equipment for professionals in a wide range of industries, from autos to aviation to construction. SNA is focusing on increasing sales to repair shop owners and managers, strategic acquisitions and expansion in emerging markets, and it seems to be working.
For the most recent quarter, SNA beat Street estimates on the top and bottom lines. A resurgent construction industry in the U.S. and better times in Europe are helping to fuel sales, with more upside to come.
With a forward P/E of 15, SNA stock is cheaper than the broader market even though it has slightly better growth prospects. A dividend yield of 1.5% is nice, too. So if you’re looking for midcap stocks to buy, SNA is a great selection.
As of this writing, Dan Burrows did not hold a position in any of the aforementioned securities.