Year-to-date, mega-cap stocks have been the big winners while their smaller peers have lagged. For instance, each of the magnificent seven stocks is up more than 30%, while the Rusell 2000 is up a measly 1%. Based on this underperformance, one of my stock predictions is that mid-cap stocks will close the performance gap.
Although markets are nervous about the economy and consumer spending, mid-cap stocks could outperform. They trade at a discount to large-cap peers. Yes, markets have several headwinds. First, market participants are predicting that higher rates will slow the economy. Secondly, they expect consumers will exhaust their savings in the fourth quarter. Thirdly, they fear the restart of student loan repayments will dampen consumer spending.
However, given the correction throughout the last two months, this news is major. While investors’ fears are reasonable, these mid-cap stock predictions have priced in weaker economic conditions. Besides, they are trading at a significant discount to peers. The undervaluation and the tendency for a fourth-quarter rally set these stocks for solid gains into 2024.
Spirit Airlines (SAVE)
Buying Spirit Airlines (NYSE:SAVE) is a bet that the merger with JetBlue Airways (NASDAQ:JBLU) will close. In October 2022, shareholders voted in favor of the $3.8 billion buyout by JetBlue. At the time of this article, SAVE stock trades at almost a 50% discount to the $31 all-cash deal and is one of the best merger stock predictions.
Given the strict regulatory environment, it’s no surprise that the deal has had its skeptics. In March, the United States Department of Justice sued to block the deal. They claimed that the agreement was anti-competitive and would increase consumer fares. Furthermore, there has been political pressure from Senator Elizabeth Warren regarding the merger.
However, amid the scrutiny, JetBlue has provided some concessions. It hopes these initiatives will allay fears that the deal could be anti-competitive and bad for consumers.
One step it has taken is to drop the JetBlue-American Northeast Alliance. After a federal court ruled in May that the alliance should be unwound, JetBlue decided not to fight against that ruling.
JetBlue has also announced divestments of several slots at key airports to gain approval. On September 11, it announced it would transfer all Spirit Airline assets at Boston and Newmark to Allegiant Travel (NASDAQ:ALGT). Also, it agreed to relinquish five gates and ground facilities at Fort Lauderdale’s airport.
These divestitures follow the June transfer of all Spirit’s holdings at New York’s LaGuardia Airport to Frontier (NASDAQ:ULCC). After the transactions, JetBlue has a better chance of beating the DOJ at trial later this month.
If JetBlue wins in court, Spirit shareholders will receive $31 in cash. That is a significant premium to the current price. Citi analyst Stephen Trent thinks JetBlue will prevail. “JetBlue’s pledged divestitures seem significant, and they possibly strengthen the carrier’s hand in its bid for Spirit,” he noted.
e.l.f. Beauty (ELF)
Since going public in September 2016, e.l.f. Beauty (NYSE:ELF) has been one of the best-performing mid-cap stocks. Throughout the past year, it’s up more than 190% compared to 20% for the Standards and Practices (S&P) 500 index. The outperformance is incredible, considering the company operates in the slow-growth beauty category.
The company has found the formula for success. First, all their products are cruelty-free, clean and vegan and each is certified by People for the Ethical Treatment of Animals (PETA). This sets it apart and differentiates it from other beauty brands.
Secondly, its premium beauty products are affordable to accommodate younger and lower-income consumers. Due to the strong value proposition, e.l.f. has become the favorite cosmetics brand among Generation Z.
Thirdly, the company has been effective at using marketing to drive growth. It is using innovative marketing to engage customers. For instance, its Super Bowl ad saw more than 57 billion impressions.
Offering cruelty-free and affordable cosmetics has translated into stellar revenue growth. In the first quarter of fiscal year 2024, net sales grew 76% year-over-year. What’s more, it saw 260 basis points of market share gains. The company has grown sales and market share for 18 straight quarters, averaging 20% sales growth per quarter.
There is plenty of room for growth. At Target (NYSE:TGT), its longest-standing retail partner, it is already the number one cosmetics brand with 18% market share. Management hopes to replicate this success across other retailers. Also, the firm continues its international expansion efforts to drive growth.
Finally, the recent acquisition of Naturium will increase its skincare presence and be accretive to earnings. After the 25% pullback, it’s time to buy one of the best mid-cap growth stocks.
Toast (TOST)
After its first quarter of adjusted EBITDA profitability, Toast (NYSE:TOST) is one of the stock predictions for the next year. The digital technology platform is gaining momentum and is set for secular growth.
The company is becoming the restaurant operating system of choice, offering a cloud-based platform encompassing all restaurant operations. Its software-as-a-service suite includes payment processing, front-of-house and back-of-house operations across takeout, dine-in and delivery channels.
As the CEO highlighted, the SAAS provider is in the early innings of penetrating the restaurant industry. “We’re still in the early stages of the opportunity ahead of us, and with proof points including our new Marriott deal and adding a record number of restaurant locations, we are more confident than ever in our ability to penetrate the entire restaurant TAM.”
The firm is focused on location growth and added 7,500 locations in the quarter. Indeed, the company has seen incredible progress and now has 93,000 locations. Also, as the Marriot deal showed, it is expanding into all restaurant industry segments. Considering that the U.S. alone has an estimated 860,000 restaurant locations, there is massive potential for expansion.
Lastly, due to the considerable guidance raise, Toast is one of the stock predictions that will roar into 2024. Management expects revenue growth of 41% YOY for the 2023. Also, adjusted EBITDA expectations rose to $15 million to $35 million from flat to slightly negative.
On the date of publication, Charles Munyi did not hold (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.
