Between high inflation, a labor shortage and supply bottlenecks, is the post-Covid “recovery” that gave mid-cap stocks a boost ending not too long after it started? Not so fast.
Yes, Rising prices, particularly rising energy prices, could limit economic growth in the coming year. But it may not mean a recession is around the corner. Better yet, fears of stagflation (little economic growth, high inflation) may be overblown as well. Many may roll their eyes at statements like “inflation is transitory.”
However, in hindsight, this thesis could prove true. With this, it may be premature to say the “recovery” is over. In the coming year, the inching back to the “old normal” could carry on. If this happens, and the “transitory” thesis also plays out? Many stocks, especially stocks in the mid-cap category (market capitalization between $1 billion and $10 billion), may soar to higher prices.
So, ahead of this possible continuation of the recovery, which mid-cap stocks look like buys right now? These seven, a combination of growth and value plays, stand to continue their rallies. Or, if they’ve been trending lower lately, make their way to past high-water marks:
- Bally’s (NYSE:BALY)
- Cleveland-Cliffs (NYSE:CLF)
- Gap (NYSE:GPS)
- Microvast (NASDAQ:MVST)
- Newell Brands (NASDAQ:NWL)
- Smartsheet (NYSE:SMAR)
- Victoria’s Secret (NYSE:VSCO)
Mid-Cap Stocks: Bally’s (BALY)
Take a look at a chart of BALY stock, and you may say it’s recovery has already happened. And then some. Its down from its all-time high of nearly $76 per share. Yet the casino operator (formerly known as Twin River Worldwide Holdings) is up nearly seven-fold since March 2020.
So, after its epic recovery, why buy now? To use a Wall Street cliché, the easy money’s been made with this situation. Still, there are two factors that help justify a move back to its past high for Bally’s.
First, its reasonable valuation compared to peers. Right now, it trades for just 16.2x its estimated 2022 earnings. Compare that to larger rivals, like Caesars Entertainment (NASDAQ:CZR), which trades for 81.2x its estimated earnings for next year.
Second, Bally’s may be still building out its online gambling business. But as it rolls out Bally Bet, and builds its brand through deals like its partnership agreement with Sinclair Broadcast Group’s (NASDAQ:SBGI) regional sports networks? It could grab a larger-than-expected piece of the expanding sports gambling pie. One of the best gambling stocks in the mid-cap category, consider it a buy at today’s prices (around $50 per share).
Cleveland-Cliffs (CLF)
Admittedly, with a market capitalization of around $12 billion, Cleveland-Cliffs is technically no longer a mid-cap stock. But given its big upside, and the fact it’s barely in the large-cap category? It’s a name worth mentioning here.
As you may know, conversation about it on Reddit’s r/WallStreetBets subreddit spiked in the summer, and it’s spiking again as of this writing. An “old economy” industrial name, it may seem like an odd target for the meme stock crowd. But while they may be into it due to momentum and short-squeeze potential, there are other reasons to be bullish on CLF stock.
As our Louis Navellier put it earlier this month, its iron ore business is facing headwinds right now. Yet upcoming tailwinds for its steel business may more than make up for it. What tailwinds? The infrastructure boom, plus the prospect of automotive production getting back to normal, once the global chip shortage resolves.
With investors pricing CLF stock low, with a forward price-to-earnings, or P/E ratio, of just under 6x? Just meeting expectations with next year’s earnings may be enough to give it a boost. Not only that, if earnings come in at the high end of estimates (around $7.55 per share, versus analyst average of $4.04 per share), it may not be out of the question for it to double or perhaps triple in price from current levels (around $24 per share).
Mid-Cap Stocks: Gap (GPS)
Given the supply shock headlines, it’s more than understandable that GPS stock has given back a lot of its recovery gains. Trading for as much as $37.63 per share during the spring, recently it was changing hands for around $22.50 per share.
Yet priced for further disappointment at just 10.2x earnings for this fiscal year (ending January 2022), and 9.1x earnings for its next fiscal year, today’s challenges appear priced in for the apparel retailer. In short, further downside may be minimal. As for upside?
The Gap’s updated guidance, released just after it last announced earnings back in August, factors in risks like inflationary pressures and supply chain bottlenecks. Continuing to build on the success from its change in strategy (pivot to e-commerce, more focus on its Old Navy and Athleta brands), the company has plenty of potential to wow rather than underwhelm investors in the coming quarters.
This may mean a recovery for shares, even if investors are still not buying that inflation and supply shocks are short-term phenomena. If both prove to be as transitory as the experts say? An even greater rebound for GPS stock could happen. With risk/return looking more than favorable, consider this to be one of the best mid-cap stocks to buy right now.
Microvast (MVST)
After taking a look at several value plays, lets explore one that’s firmly in the growth stock category: Microvast. The maker of batteries for electric commercial vehicles, which went public via a SPAC (special purpose acquisition company) merger back in July, has like many other EV SPACs seen a sharp pullback in price.
The reasons behind this? First, factors like Fed tapering/rising interest rates dampening the appeal of richly-priced growth stocks. In addition, delays with the Biden administration’s ambitious clean energy plans dampened enthusiasm for green wave stocks like this one.
However, sentiment could soon shift back. In the near term, progress with the U.S. infrastructure bill may give EV stocks as a whole a boost. In the longer term? With the ingredients for success in place, such as partnerships with commercial vehicle makers, this could become a high-margin, multibillion dollar business as the 2020s play out.
With a $2.37 billion market capitalization, and just $143.5 million in projected revenue this year, its mid-cap valuation is entirely based on future possibilities instead of current actualities. But while risky, keep an eye on it, as it’s one of the more promising electrification plays out there.
Mid-Cap Stocks: Newell Brands (NWL)
It may be up around 100% since the March 2020 coronavirus-related stock market crash. Yet in a way, Newell Brands stock hasn’t “recovered” in price.
How so? Down nearly 57% from where it traded five years ago, shares in this housewares maker have long disappointed. Despite the involvement of activist investors such as Carl Icahn and Starboard Value since the late 2010s, a turnaround still remains a work-in-progress.
If even shareholder activism has failed to put it in the right direction, why buy NWL stock? Good question. Yes, investors who bought on the coattails of Icahn and Starboard haven’t exactly had success with their positions. But buying in today, after the groundwork for its turnaround has already been implemented, you could benefit from the upside that may finally get realized, after years of delay.
As a Seeking Alpha commentator argued last month, the Newell restructuring could soon start to pay off. If the above-mentioned inflationary pressures ease, it could have the potential to improve its margins, and with higher earnings, help boost shares through measures like debt reduction, and share buybacks. It may be less of a slam dunk opportunity than some of the names mentioned above and below. Yet don’t let its lackluster past performance make you think it’s out of the running to deliver much stronger future results.
Smartsheet (SMAR)
Do you think concerns that SaaS (software-as-a-service) stocks are in a bubble waiting to burst are overblown? If so, you may want to take a look at SMAR stock.
Smartsheet, a cloud-based workflow management platform, may (like scores of other SaaS) plays, have a lot of its future growth baked into its stock price. At current levels (around $71 per share), it trades for 16.8x estimated sales this fiscal year (ending January 2022).
However, despite my prior concerns, significant multiple compression for SaaS stocks overall may not lie ahead. At least, if inflation winds up actually being transitory, and the Federal Reserve is able to walk back its dovish monetary policies at a pace that prevents it from tanking the market. If this happens? A name like Smartsheet could stand to make new highs. Instead of making its way back to past lows.
Of course, for this to happen, its underlying business will need to continue growing as well. But given that remote work appears to be a trend that will continue, even after the pandemic, and that the corporate world’s capital spending, including on software, is set to see further improvement post-Covid? After months of staying stuck around its current price level, mid-cap SMAR stock could take off again in price during 2022.
Mid-Cap Stocks: Victoria’s Secret (VSCO)
After initially zooming following its spinoff from Bath & Body Works (NYSE:BBWI), since August shares in intimate apparel purveyor Victoria’s Secret have slid lower, from around $76 per share, to around $55 per share recently.
The reason? Supply chain worries, plus perhaps concerns that its rebranding of itself as a more inclusive brand will fail to drive the turnaround investors have been counting on. But as a result of this bearishness, VSCO stock changes hands at a bargain basement price, with a forward P/E ratio of 7.6x.
A valuation this low would make sense if analysts expected sales and earnings to take a dive in the coming year. Yet while projected revenue (5.04%) and earnings (7.22%) growth for the next fiscal year (ending January 2023) isn’t exactly gangbusters, it hardly warrants push this stock down to a single-digit P/E.
In fact, as it’s revamped branding continues to improve in-store and online traffic, especially among millennials, Victoria’s Secret stands to prove its skeptics wrong, with stronger-than-anticipated results. If this happens, and the supply chain worries recede? This cheap mid-cap stock could make its way back to $76 per share (and beyond). Ahead of this playing out, you may want to buy.
On the date of publication, Thomas Niel 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.
Thomas Niel, a contributor for InvestorPlace.com, has been writing single-stock analysis for web-based publications since 2016.
