It’s a mess out there. Investors started off the month of October by dumping their stocks. Last week brought heavy selling as investors contemplated weak manufacturing data, the possibility of impeachment, the trade war, and more. All in all, folks are starting to price in the possibility of another ruinous Q4, such as what we suffered to end last year.
With the panic comes opportunity, however. In particular, there are some great growth names in the mid-cap stocks space to look at now. As so many IPOs have crashed and burned recently, everything is getting tossed aside. This has given investors the best chance this year to get into high growth stocks at solid prices. And if those sorts of names aren’t your cup of tea, we’ve got some mid-cap stocks focused on dividends and income to consider as well.
Here are seven mid-cap stocks you need to have on your radar today.
Mid-Cap Stocks to Buy: Alteryx (AYX)
If you want to go hunting for mid-cap stocks that can turn into dominant giants over the next decade, you need to be looking in cloud software right now. With the crash of Uber (NYSE:UBER), WeWork, and other so-called unicorn stocks, investors are dumping anything that is heavily focused on growth and which doesn’t generate many profits yet. As such, there has been no better time this year to load up on cloud and SaaS stocks as people take the whole sector out to the woodshed.
Enter our first stock to buy, Alteryx (NYSE:AYX). Weighing in at a $7 billion market cap, Alteryx is arguably the most successful pureplay data analytics company out there. The company’s products make advanced data analysis techniques available to the lay worker. Alteryx started out of a company that turned complex map data into useful information, and has expanded dramatically from there.
Why buy AYX stock now? For one thing, the company is significantly profitable on an EPS basis; it’s set to earn about 50 cents per share this year. That’s not much for a $1o5 stock, but it’s far ahead of the average loss-making SaaS company. Second, AYX stock is down nearly 30% over the past few weeks as part of the general cloud bloodbath. Finally, Alteryx is one of the fastest-growing firms in its field, with year-over-year revenues up an astonishing 55%.
If you haven’t heard of Datadog (NASDAQ:DDOG) yet, you’re not alone. The company provides analysis and monitoring services for cloud applications. By using Datadog, a customer can track various tools, services, databases, and applications and detect problems and outages more quickly. Datadog puts an IT department’s full infrastructure in one place, reducing friction and improving efficiency.
Not surprisingly, as the cloud continues to expand, companies have rushed to sign up for Datadog’s services. In fact, the company is approaching the 10,000 client mark now. Revenues have topped $300 million annualized and are growing at 85% year over year. This makes Datadog one of the fastest growing IPOs of recent years. And with a TAM of $35 billion, Datadog has plenty of room to run.
The thing that makes Datadog most fascinating is that there is a solid floor under its valuation. That’s because, Bloomberg reported, Cisco (NASDAQ:CSCO) attempted to acquire Datadog before the IPO. Bloomberg said that Cisco was willing to pay “significantly” more than the $7 billion valuation that Datadog IPOed at. Datadog dropped 20% last week along with other falling unicorn stocks, bringing its market cap down to less than $10 billion. Thus, we can now buy Datadog for seemingly near the same price that Cisco was willing to acquire it at.
PacWest Bancorp (PACW)
Want a mid-cap stock with a serious dividend yield? Check out PacWest Bancorp (NASDAQ:PACW). The $4.1 billion bank is currently paying a 6.7% yield, making it one of my preferred stocks to buy for a growth and income investor.
As you can guess from the name, PacWest is based out of California. It has generated a far more profitable-than-average lending model there. PACW has done so by taking advantage of the robust tech environment, offering niche products such as financial offerings for venture capital firms. More broadly, PacWest has established a high margin line of lending focused on smaller businesses.
Not surprisingly, given the current worries around the economy in general and Silicon Valley in particular, investors have dumped PACW stock. However, the company’s earnings results have shown no reason for panic. Profits remain high, while the bank’s loans are performing well. If you think the economy is heading for a recession, PACW stock would be a poor choice. But if you see the economy picking up some steam in coming months, PacWest is way too cheap here. Shares could rally from $35 now back up to $55, where they traded last year, while paying that huge dividend along the way.
First American Financial (FAF)
Our next mid-cap stock to buy may be literally set to join the big leagues. What do I mean? Right now, the threshold for being large enough to make the S&P 500 index is around a $6 billion market cap. First American Financial’s (NYSE:FAF) market cap is now up to $6.7 billion. That makes it larger than roughly three dozen of the firms that are currently in the index.
When the S&P 500 index’s managers recalibrate the index, they will kick out the firms that have sunk below the market cap threshold, and bring in new replacements such as First American. This, in turn, should cause FAF stock to surge as index funds are forced to purchase the stock.
That’s all well and good, but what does First American do? They offer title insurance, which you need to get a home mortgage. Almost no bank will lend money against a house unless you have title insurance. There are three major national players in title insurance, of which First American is second in market share.
FAF stock has surged this year, as investors have realized that lower interest rates will lead to a hotter housing market. First American makes money both off outright home sales and also with mortgage refinancings. Refis are getting more popular again as interest rates decline. Even with the company’s run so far this year, FAF stock is trading at less than 12x forward earnings while paying a 3% dividend yield. That’s cheap in this market.
If and when FAF stock is added to the S&P 500, it could shoot up to at least a 16x P/E ratio, causing the stock to jump 30% over the next year.
Grupo Aeroportuario del Pacifico (PAC)
You don’t have to stop your search for mid-cap stocks to buy at America’s borders. Why not hop on a southbound flight and land at one of Grupo Aeroportuario del Pacifico’s (NYSE:PAC) 12 Mexican airports? The company operates numerous leading Mexican airports including the tourist hotspots of Puerto Vallarta and Cabos along with the airport for Mexico’s second-largest city, Guadalajara.
Pacifico has been highly successful. Since its 2006 IPO, PAC stock is up almost 300%, along with paying huge dividends along the way. The stock yields nearly 5% at the moment, as the company pays out most of its operating cash flow to shareholders every year.
Why has the airport operator been so successful? Fundamentally, it’s a great business. There is no competition, as each city it serves has just one airport. The company doesn’t have to spend much cash, once an airport is built, profit margins rise as more and more passengers use it. Additionally, the company is able to raise the fees it charges per passenger every year.
PAC stock has underperformed over the past couple of years thanks to political drama between the U.S. and Mexico. But the company’s underlying business continues to grow at a double-digit rate and shares have 50% upside over the next couple of years as political worries fade.
A.O. Smith (AOS)
Unlike PAC, A.O. Smith (NYSE:AOS) is a U.S.-based company. However, like our previous mid-cap stock to buy, A.O. Smith also has a major exposure to international politics and trade. In fact, it’s one of the most affected stocks by the ongoing trade war. Why’s that?
Because A.O. Smith is a global leader in hot water heaters. This is a mature, slow-growing market in the U.S. and other developed countries. However, the hot water space has been booming in emerging markets such as China. Not surprisingly, AOS stock has lost a ton of momentum since the trade war heated up; shares are down 30% from their 2018 highs.
AOS stock could easily recover and rejoin its bigger-cap brethren in coming months. Once the trade war is settled, A.O. Smith’s earnings should surge again. At 17x earnings, investors aren’t paying too steep a price for AOS stock in the meantime. Meanwhile, they get one of the country’s Dividend Aristocrats. That’s right, A.O. Smith has grown its annual dividend for more than 25 years in a row and is currently on a hot streak; they’ve grown the dividend from 19 cents annually to 88 cents over the past decade.
Eastman Chemical (EMN)
At a $9.9 billion market cap, Eastman Chemical (NYSE:EMN) is right on the threshold between being a mid-cap and a large-cap stock. And given its deeply discounted valuation — it’s currently at just 8x forward earnings — arguably it should have a market cap way north of $10 billion. But that leaves you the opportunity to grab this mid-cap stock on sale before it ascends to the highest tier in coming months.
Eastman Chemical was a spin-off from Eastman Kodak; in this case, the former subsidiary ended up being much more successful than its corporate parent. While analog photography is no longer a big business, Eastman Chemical has evolved to provide dozens of specialty chemicals, fibers, adhesives and so on for a wide range of industries.
As you might expect, the combination of the trade war and economic worries has not been kind to EMN stock. Shares are trading down at $70 — that’s back to 2013 levels and a far cry from the $110 peak it hit a couple years ago. That said, actual profits have remained robust, and EMN stock is now selling for 11x trailing and 8x forward earnings.
Analysts see a path to solid earnings growth despite the economic conditions. Throw in any improvement in the economic outlook or a trade deal and Eastman could surge. If Eastman trades up to 12x next year’s earnings, instead of the current 8x price, that’d result in a 50% gain on the share price. While you wait, EMN stock currently offers a 3.5% dividend yield as well.
At the time of this writing, Ian Bezek owned AYX, DDOG, PACW, FAF, PAC, AOS, and EMN stock. You can reach him on Twitter at @irbezek.