There are small- and mid-cap stocks to buy, and then there are stocks that are a hybrid of the two. These are called SMID caps.
But in actuality, we know there are many small-cap mutual funds and exchange-traded funds (ETFs) out there that are small-cap in name only. As a result, their actual median and average market caps drift much higher.
MGMT is an actively managed ETF that invests in companies with strong management teams and market caps between $100 million and $15 billion. These SMID cap stocks to buy stand out from the pack:
- Teradata (NYSE:TDC)
- Avid Technology (NASDAQ:AVID)
- Cracker Barrel (NASDAQ:CBRL)
- J&J Snack Foods (NASDAQ:JJSF)
- Essent Group (NYSE:ESNT)
- PotlatchDeltic (NASDAQ:PCH)
- Landstar System (NASDAQ:LSTR)
- Frontdoor (NASDAQ:FTDR)
- Stag Industrial (NYSE:STAG)
- Eagle Materials (NYSE:EXP)
To stay true to the SMID theme, these 10 stocks’ market caps will be as close to $5.2 billion (the average of $300 million and $10 billion) as possible while maintaining a diverse list.
Stocks to Buy: Teradata (TDC)
Market Cap: $5.3 billion
If you follow any of the professionals from Ritholtz Wealth Management in New York, you’re probably aware they’re all prolific bloggers. CEO Josh Brown is no exception. His Reformed Broker blog and podcast are well-followed.
Brown recently picked Teradata as one of three stocks he likes for the second half of the year.
“Teradata has transformed itself from a transactional business to an annual recurring revenue business and Wall Street isn’t very aware,” Brown said according to Benzinga.
“The company was an ‘old school traditional data housing business’ that decided to stop letting all of the cloud computing companies ‘eat their lunch,’ [Brown] said.”
In the data analytics company’s first-quarter 2021 earnings, recurring revenue increased 20% to $372 million. Additionally, its public cloud annual recurring revenue (ARR) increased 176% to $79 million over the previous year. Finally, Teradata had a non-GAAP net income of $78 million, more than double the amount from Q1 2020.
Most importantly, it had free cash flow (FCF) of $105 million, considerably higher than a loss of $2 million a year earlier. For all of 2021, Teradata expects FCF of at least $275 million.
I’m with Brown. Teradata is a diamond in the rough.
Avid Technology (AVID)
Market Cap: $1.7 billion
Sector: Communication Services
Like a lot of software companies, Avid Technology has been transitioning to a subscription model. So far, the transition has gone well. As a result, its stock is up more than 400% over the past year.
As The Motley Fool’s Brett Schafer said in late May, AVID stock is not cheap at 29x FCF. But if it can continue to grow its subscription revenue, it can do the same with FCF, lowering its valuation to a more palatable level. So far, that looks more than possible — subscription revenue grew 78.2% in Q1 2021 to $24.9 million.
The company’s media and entertainment content creation software will not go out of demand. In fact, with a market cap of just $1.8 billion and projected 2021 revenue of $382 million, it’s probably only scratching the surface.
AVID stock might not be cheap at almost 5x sales, but it’s likely to grow into its valuation after a few years of continued subscriptions. Patient investors will be rewarded.
Stocks to Buy: Cracker Barrel (CBRL)
Market Cap: $3.5 billion
Sector: Consumer Cyclical
Living in Canada, I had never heard of the Tennessee-based full-service restaurant chain until 2013. At the time, the company was in a big fight with Biglari Holdings (NYSE:BH), its largest shareholder.
The holding company, led by Sardar Biglari, was angling for a $20-per-share special dividend. Despite its heavy-handed tactics, I felt as though CBRL was a good investment. Since my article, CBRL stock is up 40% compared to a 58% decline for BH stock.
It’s hard to believe, but after a decade of trying to get a seat on Cracker Barrel’s board, Biglari is still is on the outside looking in. I was never a fan of the Texas investor, but his results since 2013 show that he’s the ultimate destroyer of value.
As for Cracker Barrel, I think you’ll see it return to historical FCF levels by the end of 2021. For example, in 2019, it had a trailing 12-month (TTM) FCF of $220 million. Based on its current market cap, it’s trading at a forward FCF yield of 6.3%.
That’s growth at a reasonable price.
J&J Snack Foods (JJSF)
Market Cap: $3.3 billion
Sector: Consumer Defensive
I never miss a chance to talk up J&J Snack Foods. It’s one of my all-time favorite stocks. At a $3.3 billion market cap, it’s a reasonably large company. But compared to larger competitors such as Hormel Foods (NYSE:HRL) and Conagra Brands (NYSE:CAG), it’s a minnow.
As I stated in early June, the company has come a long way since CEO Gerald Shreiber bought it out of bankruptcy in 1971 for $72,100. Since then, revenues have grown from $400,000 to nearly $1 billion. We’re not talking massive sales growth, but enough to keep moving the needle.
I definitely wouldn’t call the maker of ICEE and SLUSH PUPPIE cheap at the moment — it trades at 3.4x sales, well above its five-year average of 2.6x — but heading into the summer heat, this is its time to shine. As defensive stocks go, JJSF stock is a good one.
Stocks to Buy: Essent Group (ESNT)
Market Cap: $5 billion
Sector: Financial Services
I must admit that before writing this, I had never heard of Essent Group, which provides mortgage insurance to mortgage lenders. However, it piqued my interest amidst the busy housing market. ESNT stock made MGMT’s list of holdings with a weighting of 1%.
In the insurer’s Q1 2021 results, it increased its quarterly dividend by a penny to 17 cents. At the same time, the company implemented a $250 million share repurchase program that’s good through the end of 2022.
As for its financials, they have returned to pre-Covid profitability with a net income of $135.6 million, 9.7% higher than in Q4 2020. However, on the top line, revenues were basically flat compared to the previous quarter.
Of the 12 analysts covering its stock, nine rate it a buy while three believe it’s a hold. None recommend selling ESNT stock. Its 12-month median target price is $58, providing 32% upside over the next year based on current prices.
Market Cap: $3.7 billion
Sector: Real Estate
Another stock I’d never heard of, PotlatchDeltic is a real estate investment trust (REIT) that owns timberland and manufactures lumber.
PotlatchDeltic currently has more than 1.8 million acres of timberland in six states, including Alabama, Arkansas, Idaho, Louisiana, Minnesota and Mississippi.
Its history dates back to 1903, when the Potlatch Lumber Company was founded in North Central Idaho. It became PotlatchDeltic in February 2018 when it merged with Deltic Timber Corporation in an all-stock transaction. Potlatch shareholders ended up with 65% of the combined entity and Deltic shareholders own the rest.
I’ve always been interested in this business model because it’s set up to obtain the best use for the land it owns. Thus, some of its 1.8 million acres will be sold off, some will be developed into real estate, and some go toward lumber production.
That makes PotlatchDeltic a triple threat. But its stock is only for patient investors. A lot of those acres will likely see little action over the next few years.
In Q1 2021, PotlatchDeltic had revenue of $354.2 million and net income of $131.1 million. That’s up 5% and 31% respectively from Q4 2020.
PCH stock gained 46% over the past 12 months due to record high lumber prices, but don’t expect that every year. If you’re patient, though, the stock ought to generate decent risk-adjusted returns over the long haul.
Stocks to Buy: Landstar System (LSTR)
Market Cap: $6.1 billion
Morningstar.com’s director of investor education Karen Wallace recently discussed 10 stocks that Warren Buffett might buy if they were smaller, more nimble holding companies. Landstar made the list.
While the article doesn’t get into Wallace’s reasoning, I suspect it has a lot to do with the transportation provider’s asset-light business model.
In the first quarter ended March 27, Landstar delivered net income of $77.2 million, up 89% over Q1 2020. It also set a record on the top line with revenues of $1.29 billion, up 39% from a year earlier.
As a result of its asset-light business model, its returns on equity and invested capital over the trailing 12 months were 33% and 29%, respectively. Put another way, for every dollar invested by shareholders, Landstar generates 33 cents in annual profits.
Over the past 10 years, LSTR stock has had an annualized total return of 13.3%. You won’t get rich owning it, but you won’t be left behind, either.
Market Cap: $4.2 billion
Sector: Consumer Cyclical
It’s been 33 months since ServiceMaster Global Holdings spun off Frontdoor. ServiceMaster was renamed Terminix Global Holdings (NYSE:TMX) in September 2020, with the ServiceMaster brands sold to Atlanta-based private equity firm Roark Capital.
For every two shares held in ServiceMaster, shareholders got one share in Frontdoor. The company owns four home service plan brands — including American Home Shield — and has a network of 15,000 contractors and 45,000 technicians that serve two million customers.
FTDR stock opened its first day of trading on Oct. 1, 2018 at $41.50. In the 33 months since, it’s generated a 17% return. That’s not a blowout performance, but Frontdoor is solidly profitable and growing its top line.
In Q1 2021, it had a 12% increase in sales over last year to $329 million, with the number of home service plans increasing 4% to 2.25 million. On the bottom line, Frontdoor had an adjusted earnings before interest, taxes, depreciation and amortization (EBITDA) of $36 million during the quarter. That’s down 24% over Q1 2020, but with an EBITDA margin over 10%.
In June, Frontdoor hired former Amazon (NASDAQ:AMZN) tech executive Tony Bacos as its first senior vice president and Chief Digital Officer. I would continue to watch for progress on this front, as it could be what accelerates Frontdoor’s growth over the next few years.
Stocks to Buy: Stag Industrial (STAG)
Market Cap: $6.0 billion
Sector: Real Estate
The second of two real estate stocks, Stag Industrial is a REIT that buys single-tenant industrial properties in the U.S. It currently owns 494 buildings in 39 states with 99.1 million square feet of leasable space.
STAG stock went public in April 2011 at $13 a share. At the time, it owned 93 properties in 26 states with 14.2 million square feet of space. Its leasable square footage has grown by nearly 600% over the past decade. However, its debt to total capitalization has nearly halved to 25.2% from 46.8% at the time of its IPO.
The REIT has a large target market. Stag estimates that the U.S. industrial market is over $1 trillion, with its share less than 1%. Amazon is its largest tenant, accounting for 4% of its annual base rent (ABR). Diversification is one of Stag Industrial’s strengths — its top 10 tenants account for just 12.5% of ABR. It operates in more than 60 markets, and none account for more than 8% of ABR.
STAG stock dividends currently yield 3.8%.
Eagle Materials (EXP)
Market Cap: $6.0 billion
Sector: Basic Materials
In 2019, Eagle Materials underwent major scrutiny by an activist investor who wanted the business split into two companies. One company would specialize in Light Materials such as wallboard and paperboard; the other would focus on Heavy Materials such as cement, aggregates and concrete.
At the time, Eagle Materials was suffering from its exposure to a fracking sand production play. As a result, the board approved the split. However, before the company could complete the split, the housing market took off and its problems went away.
Today, Eagle Materials is performing at the top of its game.
“Eagle is performing as well as at any time in its history. Both major business segments continue to post industry leading results on just about every measure,” Chairman Mike Nicolais stated according to ConcreteProducts.com. “While the Board will continue to evaluate the merits of a separation, it has concluded, with external advisors, that the combined Company is in the best position to create long-term shareholder value.”
Long before their proposed split, Eagle Materials originated as a spin off from Centex Corp. in 1994.
At the time, it was known as Centex Construction Products. Centex remained the majority owner until 2004, when its shares were sold to the public. At that point, it was renamed Eagle Materials. Centex’s home building operation and mortgage business were subsequently sold to PulteGroup (NYSE:PHM) in 2009.
Construction materials are in demand at the moment and shareholders are benefiting. EXP stock is up 95% over the past 52 weeks and looks like it has the legs to carry on with its momentum.
On the date of publication, Will Ashworth did not have (either directly or indirectly) any positions in the securities mentioned in this article. The opinions expressed in this article are those of the writer, subject to the InvestorPlace.com Publishing Guidelines.
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.