- From home building to precious metals, here are seven undervalued mid-cap stocks that investors can buy now.
- Owens Corning (OC): The company is weathering inflation and growing its margins and free cash flow.
- Kinross Gold (KGC): Addition by subtraction suggests this mining stock is ready to move higher.
- Alcoa (AA): Higher aluminum prices in the short-term make this stock a buy-the-dip opportunity.
- Genworth Financial (GNW): The aging of America is likely to drive the stock price higher.
- Academy Sports and Outdoors (ASO): Never underestimate the power of free cash flow, and this company has plenty of it.
- Fortune Brands Home & Security (FBHS): Even if home building slows, the company’s products will remain in demand.
- KB Home (KBH): The company’s business model gives it an advantage if demand for housing picks up.
This is a time when many investors are playing defense. But I’d like to suggest you consider another factor: diversification. There’s never a bad time for investors to have a diversified portfolio, but it’s even more important in times when the market is being repriced.
However, real diversification means not just diversity of asset classes, but diversity within asset classes. So while blue-chip, large-cap stocks are always good choices, now may be a time to invest in undervalued mid-cap stocks. These are stocks with a market cap between $2 billion and $10 billion.
Many mid-cap stocks are still in the expansion phase. This means that some of them may become large-cap stocks at some point. However, many fall into the category of cyclical stocks.
That brings me back to defensive plays. Just like any other category, it’s important to look for mid-cap stocks that are in sectors of the market that are likely to benefit from stable, or increasing, consumer demand. Here are seven undervalued mid-cap stocks that meet that criteria.
|ASO||Academy Sports and Outdoors||$35.51|
|FBHS||Fortune Brands Home & Security||$69.17|
Owens Corning (OC)
The first of our undervalued mid-cap stocks is Owens Corning (NYSE:OC). From a purely fundamental perspective, OC stock sports a price-to-earnings (P/E) ratio of 9x, which is considerably less than the sector average of more than 15x.
Owens Corning does significant business in the remodeling and new construction markets. And currently, housing starts are showing signs of leveling off. The company also does significant business in the non-residential construction market, which is looking to be slightly weaker this year.
Furthermore, inflation is affecting the company’s input costs. With all that said, Owens Corning still generated operating margins of 18%, which were over 300 basis points higher than in the same quarter in the prior year.
Owens Corning reported earnings in late April and had a double beat on earnings and revenue. More importantly, both numbers were higher on a year-over-year (YOY) basis. Management expected that trend to continue in the second quarter.
A deeper dive into the numbers revealed healthy free cash flow generation of $51 million. The company also returned $264 million of free cash flow to shareholders through dividends and share repurchases.
Kinross Gold (KGC)
The story for Kinross Gold (NYSE:KGC) has been the impact of Russia’s invasion of Ukraine. The company addressed that situation by selling off its assets in Russia, then divested itself of its Chirano mine in Ghana. The two transactions will bring in just over $900 million.
Of course, investors are right to wonder how this will affect the company’s overall production. After all, one of the concerns about KGC stock is not its valuation (it has a forward P/E ratio of 10.3x), but its growth outlook. Analysts were already forecasting lower production in the years to come.
However, I share the opinion of Faisal Humayun, who argues selling these assets will allow Kinross to be more aggressive in generating revenue from its existing core assets. Investors can review its earnings released May 10 to get an idea of what the company believes.
Next on our list of undervalued mid-cap stocks is Alcoa (NYSE:AA). Like many stocks in this current market sell-off, AA stock is down significantly in the last month. In that time, the company reporting record earnings, but a slight miss on revenue. In an environment such as the one we’re in, that’s all it takes to send a stock lower.
But for opportunistic investors, this may represent a chance to get in on AA stock at a bargain price. Aluminum prices remain at historically high levels, and Alcoa is likely to benefit from the current supply-demand imbalance from the Russian invasion of Ukraine.
If that is indeed the case, expect earnings and revenue to move considerably higher. That seems to be the opinion of analysts, who give the stock a mean price target of $91.42, which is a 61% increase from the price as of May 10.
Genworth Financial (GNW)
Genworth Financial (NYSE:GNW) makes this list of undervalued mid-cap stocks because of its focus on long-term care insurance (LTC). Simply put, America is aging at an accelerating rate, and many people are taking proactive measures to address the potential challenges that come with this.
This is showing up in the company’s performance. In its most recent earnings report, Genworth announced a $350 million share repurchase authorization, the company’s first such program in 13 years. It also reported revenue of $149 million and earnings of 25 cents per share.
Genworth continues to retire its debt which helps a debt-to-equity ratio which is already among the lowest in its sector. Although there are some concerns about future growth, particularly earnings growth, the company is very undervalued with a P/E ratio of just 2.4x.
Investors should be advised that Genworth also has exposure to the mortgage insurance sector. This side of the business may not be as strong as interest rates increase in 2022.
Academy Sports and Outdoors (ASO)
Texas-based Academy Sports and Outdoors (NASDAQ:ASO) is becoming one of the nation’s largest sporting goods and outdoor entertainment retailers. This was a sector that thrived during the pandemic as individuals looked to bring the gym experience into their homes.
In 2021, ASO stock and others like it continued to thrive as youth sports reopened. But in November, ASO stock got caught up in the market selloff and is down nearly 30% from its 52-week high.
However, the company reported strong fourth-quarter earnings and revenue and has an impressive free cash flow. All of this supports other fundamental metrics that suggest ASO stock is certainly one of the undervalued mid-cap stocks to consider.
Fortune Brands Home & Security (FBHS)
Home buying may be cyclical, but home improvement is an evergreen sector. And with brands like Moen and MasterLock, Fortune Brands Home & Security (NYSE:FBHS) merits a place on this list of undervalued mid-cap stocks.
Analysts give the stock a consensus price target of $100.79, which is about 44% upside from its current level. In the company’s first-quarter earnings report, its revenue came in at $1.9 billion, which was higher than the $1.8 billion the company reported in the same quarter in 2021. However earnings were slightly lower. That’s perhaps the reason analysts are cooling on the FBHS stock price.
The key thing to know is the consensus price target stays high even though several analysts have lowered their price targets. It’s always a good sign when price targets are going down, but remain above the consensus estimate.
KB Home (KBH)
Several of the stocks on this list have been a play on growth in the home building sector, and perhaps none as directly as KB Home (NYSE:KBH). If you’re hesitant to jump on a home building stock, that’s understandable. The bears don’t have to do anything more than point to rising interest rates to suggest the housing market may be rolling over.
However, at the very least, this is one for your watchlist. KBH stock is undervalued by many fundamental metrics.
The company has a build-to-order business model that allows broader customization for home buyers. You could further theorize that buyers of custom homes may be less sensitive to rising mortgage rates.
Additionally, homebuilder stocks may have found a level of support. Federal Reserve chairman Jerome Powell is saying the Fed is not considering rate increases of more than 50 basis points at this time.
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On the date of publication, Chris Markoch 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.