Are you looking for S&P 500 stocks to invest in?
If so, you’ll want to steer clear of Macy’s (NYSE:M). The department store was demoted to the S&P SmallCap 600 Index on April 3 due to a severe decline in the market value of its stock.
Replacing Macy’s were Raytheon Technologies (NYSE:RPX) spinoffs Otis Worldwide (NYSE:OTIS) and Carrier Global (NYSE:CARR).
While these are excellent choices, I believe there are other interesting possibilities for promotion to the S&P 500 that are currently part of the S&P MidCap 400 Index. These include:
- Domino’s Pizza (NYSE:DPZ)
- FactSet Research (NYSE:FDS)
- Toro (NYSE:TTC)
- Medical Properties Trust (NYSE:MPW)
- Tyler Technologies (NYSE:TYL)
- Fair Isaac (NYSE:FICO)
- Pool Corporation (NASDAQ:POOL)
The S&P MidCap 400 is a collection of 400 mid-sized companies that, together with the S&P 500 and S&P SmallCap 600, make up the S&P Composite 1500. To make the S&P MidCap 400, a company needs an unadjusted market capitalization between $2.4 billion and $8.2 billion, and a float-adjusted market cap of $1.2 billion. By comparison, to qualify for the S&P 500, a stock must have an unadjusted market cap of $8.2 billion and a minimum float-adjusted market cap of $4.1 billion.
Potential S&P 500 Stocks: Domino’s (DPZ)
Depending on whose list you browse, Domino’s was one of the best-performing stocks of the 2010s. InvestorPlace contributor Will Healy reminded readers of this fact on December 9. The pizza chain delivered a cumulative return of $3,889%, better than both Netflix (NASDAQ:NFLX) and Broadcom (NASDAQ:AVGO), two major growth companies from the past decade.
In 2017, a chart was making the rounds that showed how Domino’s had outperformed Google’s stock since they both went public in the summer of 2004. No one could believe that a pizza chain was beating a major tech player, but that’s what happened.
At the time, I suggested that investors stick with Domino’s rather than Google’s successor, Alphabet (NASDAQ:GOOG, NASDAQ:GOOGL). Over the past two years through April 6, Domino’s stock is up 84%, slightly more than double Google’s performance.
If performance is one of the criteria for the S&P 500, DPZ should have been on the index years ago. It’s that good.
FactSet Research (FDS)
The company’s stock has come on strong in the past two weeks. On March 23, it traded as low as $195.22, its 52-week low. As I write this, it’s trading around $275 in positive territory for the year. Of 895 mid-cap stocks covered by Finviz.com, FactSet is one of only 88 that are trading in positive territory for the year.
That’s some company.
On March 26, the financial data and analytics company delivered reasonable, if not spectacular Q2 2020 results, with adjusted earnings up 5.4% year over year to $2.42 a share, on revenues of $354.9 million, or 4.2% higher than a year earlier.
In 2020, FactSet expects earnings per share of at least $9.85 for the entire fiscal year with revenue of $1.49 billion. It continues to execute against its three-year investment plan. Like most companies, it has little guidance to provide due to the coronavirus at this point.
However, when it gets back to a typical business environment, you can be sure that it will continue to deliver for shareholders. Year to date, FDS stock is down 0.25%, a considerably better performance than the U.S. markets as a whole, which are down 18.4% in the same period.
In November, I picked FactSet as a good mid-cap dividend stock to buy, in large part, because of its steady performance over the long haul. Over the past 15 years, it’s got an annualized total return of 15.8%, more than double the return of the entire U.S. markets.
Long-term, you can’t go wrong with FactSet.
Toro was another mid-cap dividend stock on my November list. It’s not doing nearly as well in 2020. Its total return year to date is -17.5%, 97 basis points better than the U.S. markets as a whole. However, long-term, like FactSet, it’s got a healthy 15-year annualized total return of 13.1%.
Currently yielding 1.5%, it’s trading at just 2.2 times sales. Historically, that’s below its five-year average multiple of 2.5 times sales.
On March 30, Toro provided a business update for shareholders that addresses what it’s doing to deal with the adverse effects of the coronavirus. CEO Richard Olson assured shareholders that the manufacturer of turf maintenance equipment is in a strong financial position. As an essential infrastructure service, it will continue to operate, albeit on a scaled-back basis.
As a result of the coronavirus, it’s added a three-year term loan of $190 million. With that new loan, cash on the balance sheet, and its existing $600 million revolving credit facility, it currently has $810 million in liquidity to fight the coronavirus.
Like many companies, it has cut back its capital expenditures and curtailed its share repurchases.
In Toro’s Q1 2020 results, it increased sales and adjusted earnings per share by 27.3% and 20.8%, respectively. Once the economy is back to normal, which could take a while, Toro’s business ought to continue to deliver healthy double-digit gains.
Medical Properties Trust (MPW)
Although InvestorPlace contributors haven’t had much to say about this real estate investment trust in the past year, Louis Navellier’s portfolio grader gives Medical Properties Trust a “B” rating, which makes it a buy.
The REIT, which specializes in the ownership of acute care, community and rehabilitation hospitals, had a record-setting year in 2019, completing $4.5 billion in acquisitions, including $861 million in the fourth quarter alone.
Started in Birmingham, Alabama, it now owns 389 facilities operating 41,000 beds in eight countries and three continents. Of its 389 properties, 84% of them have leases maturing beyond 2030, providing the REIT with a stable group of triple net leases. Five healthcare operators account for 63% of its annual revenue.
Its international business accounted for just 18% of its 2019 revenue. However, their assets account for 34% of the REIT’s total. Of its $4.3 billion in acquisitions in 2019, $1.8 billion were outside the U.S. Expect MPW to continue to make more in both the U.S. and elsewhere.
At this challenging time, MPW’s 6.1% dividend yield is an attractive income stream to receive until the economy and markets recover.
MPW just might be the biggest diamond in the rough of the seven stocks on my list.
Tyler Technologies (TYL)
Tyler Technologies is another stock that doesn’t get much love from InvestorPlace. However, in February 2018, I wrote about the provider of integrated software and technology services for the public sector.
Tyler was one of seven stocks that I recommended that were owned by Lou Simpson, Warren Buffett’s former money guy at GEICO. Simpson retired from the insurance company in 2010, but quickly got tired of the golf course, and went back into the investment advisory business with SQ Advisors.
Started with $200 million in assets, SQ Advisors had grown to $3.1 billion by February 2018. Tyler was one of Simpon’s smaller holdings with a weighting of just 5.2%. In June 2019, Simpson converted the investment advisory to a family office, opting to focus exclusively on his family’s investments.
Simpson’s final form 13F holdings report was March 31, 2019. Tyler was one of just 10 holdings, accounting for 6% of the $1.3-billion portfolio. Other stocks in the portfolio include Berkshire Hathaway (NYSE:BRK.A, NYSE:BRK.B), Brookfield Asset Management (NYSE:BAM), and Apple (NASDAQ:AAPL), three of my favorite stocks.
On that basis alone, it ought to be in the S&P 500.
Fair Isaac (FICO)
Fair Isaac, the company behind the FICO score, has had a volatile 2020. And not just because of the coronavirus-led correction in the markets.
On March 13, Politico reported that the Justice Department was opening an antitrust investigation into the company. This was the result of complaints over the years from competitors claiming the credit score market was exclusionary, suggesting Fair Isaac’s FICO Score had an unfair advantage with banks and other financial institutions.
“FICO intends to fully cooperate with the Department of Justice and looks forward to a constructive dialogue about the state of competition in our industry,” the company said in a statement. “FICO is confident the Department will conclude that it has not engaged in any exclusionary conduct.”
Although FICO stock dropped 30% on the news, it has since regained all of those losses. FICO has a year to date total return of -19.5%. However, its annualized total return over the past 10 years is an impressive 27.8%, almost three times the performance of the U.S. markets as a whole.
While its stock isn’t cheap at 7.6 times sales, the fact that it grows it consistently grows its free cash flow — in 2017, it was $206 million; in 2019, it was $236 million — makes its long-term performance completely understandable.
Pool Corporation (POOL)
If there’s a stock I wished I’d bought after the recession, Pool would have to be at the top of the list. From the market bottom on March 9, 2009, POOL stock is up 1,517%, considerably better than the 249% return for the SPDR S&P 500 ETF Trust (NYSE:SPY).
Interestingly, I recommended that InvestorPlace readers sell POOL in May 2018, because I felt the valuation at 38 times cash flow was exceptionally rich. Today, despite moving 29% higher in the two years since, it trades at a more reasonable multiple of 27 times cash flow.
“POOL is one of those stocks I wish I’d owned long-term because it’s been one of the most consistent performers on NASDAQ,” I wrote on May 15, 2018. “
“If you look at its annual returns, you’d swear you were looking at a fast-growing tech stock, not the world’s leading distributor of swimming pool products.”
Year to date it’s down a reasonable 7.5% compared to 18.4% for the markets as a whole.
The beauty of its business: People will always spend the money to keep their pools looking clean in good times and bad. As a result, POOL has increased its revenues and operating income every year for the past decade.
POOL is a keeper.
Will Ashworth has written about investments full-time since 2008. Publications where he’s appeared include InvestorPlace, The Motley Fool Canada, Investopedia, Kiplinger, and several others in both the U.S. and Canada. He particularly enjoys creating model portfolios that stand the test of time. He lives in Halifax, Nova Scotia. At the time of this writing Will Ashworth did not hold a position in any of the aforementioned securities.