The latest fact sheet for the MSCI USA Mid Cap Index provides a stunningly clear illustration why investors shouldn’t forget about these wonderfully stable companies often overshadowed by their large-cap brethren.
Over the past 15 years, the best stocks to buy for investment success have been mid-cap stocks, which outperformed large-cap stocks by a wide margin — posting a 10-year annualized return of 10%, compared to 7.6% for large caps — despite large caps getting all the attention. In 10 of the past 15 years, mid caps were clearly the better stocks to own, delivering double-digit annual returns in eight of those years compared to six for the MSCI USA Large Cap Index.
Mid-cap stocks continue to be the sweet spot for investors, providing almost the same risk profile of large caps but with much greater upside potential. Mid-cap stocks need to be in your portfolio.
With that in mind, here are five mid-cap stocks to buy for the long term.
Mid-Cap Stocks to Buy – Copa Holdings (CPA)
Copa Holdings (CPA) got whacked in early August after announcing second-quarter results. CPA reduced operating margins expectations for the entire year — a revised 18-20% versus 19-21% previously — thanks to lower capacity in Venezuela and a move away from bolivar-related sales.
The weak guidance prompted some analysts to downgrade CPA stock, knocking it for an 18% decline in the month of August. I like Copa because it’s ideally situated between North and South America, making it an excellent jumping-off point for travelers headed north or south.
While it does see lower operating margins in the second half of 2014, CPA stock still manages to deliver some of the healthiest returns in the airline industry. It’s one of the best stocks to buy for the next 20 years. With CPA trading within 2% of its 52-week low, now is an ideal time to jump into the airline industry fray.
Mid-Cap Stocks to Buy — Trinity Industries (TRN)
Trinity Industries (TRN) is quite possibly my favorite stock regardless of size. A manufacturer of all kinds of different industrial products, it recently acquired Meyer Steel Structures for $600 million, giving it a leadership position in the building of electric transmission towers.
With the addition of Meyer’s $325 million in annual revenue, TRN will have total revenues of $5.6 billion and more than $1.35 billion EBITDA. Trinity’s five different business segments provide a diversified stream of revenues and earnings. In the company’s second quarter, all five segments generated at least $100 million in revenue and $20 million in operating profit.
Most importantly, all but $383 million of its $3.2 billion in debt is non-recourse in nature, protecting the company from any downturn in the railcar business, something that isn’t likely to happen given the shortage in railcars that exists at the moment.
While railcars are the bread and butter for TRN, its other segments, including the energy equipment group and its most recent acquisition, provide future growth for the company — and that’s good news for shareholders.
Mid-Cap Stocks to Buy — Brunswick (BC)
The number that jumps out at me from Brunswick’s (BC) Q2 earnings release from late July is the operating margin of its boat business. Delivering a 140 basis point improvement in Q2 to 6.1%, the boat business is starting to show real signs of life.
Not too long ago, I would have recommended that BC management toss the boats aside to focus on its Mercury engines, but there has been enough economic improvement to put some real wind in its sails. Look back and you’ll see that BC’s best performance both in terms of revenue and operating profits was in 2005, slightly less than a decade ago. Back then, its boat division did $742 million in revenue in the second quarter with $75 million in operating profits for a 10.1% operating margin.
Clearly, it’s not back to those heady days just yet, but with business getting stronger by the quarter and the company selling its bowling-related assets to focus on fitness, billiards and boating, the future looks almost as bright as it did a decade ago.
Mid-Cap Stocks to Buy — Wabco Holdings (WBC)
While Wabco Holdings (WBC) isn’t exactly lighting the world on fire in 2014 — up 9% year-to-date — it continues to take market share from its peers in the auto parts industry.
Despite a volatile parts market for commercial vehicles, WBC continues to deliver exceptional results. In the second quarter, its gross profit margin set a record at 31.6%, 110 basis points higher than a year ago. Although its operating margin was 10 basis points lower year-over-year, operating profits in dollars were up 7% to $98.2 million.
Considering its industry is taking it on the chin right now, Wabco’s delivering a first-rate performance. In April, I suggested to readers that Wabco and two others were the stocks to buy in the auto parts industry. Today, I stand by this midcap despite it being down 3.2% since my recommendation. WBC has performed supremely over the long term; I have no doubt it will continue to do so for many years to come.
Mid-Cap Stocks to Buy – Boston Beer (SAM)
Boston Beer (SAM), the maker of Samuel Adams Lager and Angry Orchard Cider has done squat in 2014, down 9% year-to-date, its first decline since 2008. The cause? Competition is getting tougher by the day, and as a result SAM has been forced to increase its annual ad spend to as much as $45 million in order to keep the dogs from the door.
If you’re a SAM shareholder, don’t you worry about the craft beer industry getting larger. That’s a good thing, not a bad thing for Boston Beer because it brings more attention to all its great products — one of which (Angry Orchard Hard Cider) is taking the country by storm. Introduced in 2012, the brand has captured more than 50% of the hard cider market in less than two years. Now available in Canada, it’s become my favorite cider refreshment.
At the end of the day, SAM is one of my five mid-cap stocks to buy because eventually Anheuser-Busch InBev (BUD) or someone else (Warren Buffett, perhaps) is going to pay a bucket of money to acquire the brand. When that day comes, you can be sure it will be for more than $300.
As of this writing, Will Ashworth did not hold a position in any of the aforementioned securities.