As the stock markets continue their impressive rally into 2024, mid-cap stocks are catching the eye of savvy investors looking for substantial upside potential. Despite a few bumps along the way, the market has defied some skeptics who were wary of high valuations and the Federal Reserve’s prolonged interest rates.
Investors looking for opportunities within the mid-cap space could consider investing in companies with strong upside potential, such as Acuity Brands, Inc. (AYI), PVH Corp. (PVH), and NewMarket Corporation (NEU).
Currently, the global economic outlook presents a mixed picture. The International Monetary Fund (IMF) forecasts modest growth over the next two years, with a 2024 global real GDP growth rate of 3.2% and a slight uptick to 3.3% in 2025. However, the IMF notes that inflationary pressures and potential delays in interest rate easing could impact economic momentum. In the U.S., growth projections have been slightly adjusted downward to 2.6% for 2024, reflecting slower consumer activity and tighter monetary policies.
Even as the stock market hits near record highs, billionaire investor Mark Spitznagel raises red flags. He believes we might be heading toward a significant downturn despite the current bullish mood fueled by the Fed's rate cuts and falling inflation. Spitznagel sees this as a “Goldilocks phase” that might not last, suggesting that rate cuts could lead to future market reversals.
Similarly, John Hussman, known for predicting past market crashes, warns of a possible 50-70% drop in the S&P 500.
Mid-cap stocks are often considered smart investment moves in an uncertain environment. They offer a blend of the growth potential of small caps and the stability of large caps, making them a solid choice for diversification.
If economic conditions weaken, mid-caps are likely to be less vulnerable to losses compared to large caps due to their lower international exposure. Conversely, if the economy remains strong, these stocks could outperform small caps thanks to their established management, broad distribution networks, and solid market presence.
With that in mind, let’s dig deeper into the fundamentals of the above-mentioned mid-cap stocks in detail:
Acuity Brands, Inc. (AYI)
AYI offers lighting, lighting controls, building management systems, and location-aware applications. The company operates in two segments: Acuity Brands Lighting and Lighting Controls (ABL) and the Intelligent Spaces Group (ISG). It provides products under the A-Light, Aculux, eldoLED, Eureka, Gotham, Indy, IOTA, Lithonia Lighting, and Lumin brands.
On June 26, the company declared a quarterly dividend of 15 cents per share, payable to its shareholders on August 1, 2024. AYI pays an annual dividend of $0.60, which translates to a yield of 0.24% at the current share price. Its four-year average dividend yield is 0.31%. Moreover, the company’s dividend payouts have increased at an 8.3% CAGR over the past five years.
In terms of the trailing-12-month gross profit margin, AYI’s 45.45% is 46.3% higher than the 31.06% industry average. Similarly, its 11.60% trailing-12-month levered FCF margin is 81.2% higher than the industry average of 6.40%.
For the third quarter that ended May 31, 2024, AYI posted net sales of $968.10 million. The company’s adjusted operating profit rose 2.6% from the year-ago value to $167.10 million. Its adjusted net income and EPS of $130.70 million and $4.15 indicate 8.8% and 10.7% year-over-year growth, respectively.
Also, the company’s adjusted EBITDA increased 2.5% from the prior year’s quarter to $180 million. Its cash and cash equivalents stood at $699 million as of May 31, 2024, compared to $397.90 million as of August 31, 2023.
Analysts expect AYI’s revenue for the fourth quarter (ending August 2024) to increase marginally year-over-year to $1.01 billion, and its EPS for the ongoing quarter is expected to grow 5.6% year-over-year to $4.19. Furthermore, the company has topped the consensus EPS estimates in each of the trailing four quarters.
Shares of AYI have gained 54.1% over the past nine months and 24.2% year-to-date to close the last trading session at $254.43. Its 12-month price target of $294.25 reflects a 15.6% potential upside.
AYI’s strong fundamentals are reflected in its POWR Ratings. The stock has an overall rating of A, which translates to a Strong Buy in our proprietary rating system. The POWR Ratings are calculated by considering 118 different factors, each weighted to an optimal degree.
AYI has an A grade for Quality and a B for Growth and Value. It is ranked #2 out of 59 stocks in the Home Improvement & Goods industry. Click here to access additional AYI ratings (Momentum, Stability, and Sentiment).
PVH Corp. (PVH)
PVH operates as an apparel company through Tommy Hilfiger North America, Tommy Hilfiger International, Calvin Klein North America, Calvin Klein International, and Heritage Brands Wholesale segments. It designs and markets a wide range of products, including apparel, footwear, accessories, home furnishings, luggage, eyewear, and more.
On May 1, the company’s Board of Directors declared a quarterly dividend of $0.0375 per share, payable to its stockholders on June 26, 2024. PVH also pays an annual dividend of $1.15 per share, translating to a yield of 0.15% on the current share price. Its four-year average yield is 0.12%.
PVH's trailing-12-month gross profit margin of 58.94% is 60% higher than the industry average of 36.83%. Similarly, its trailing-12-month net income and levered FCF margins of 7.53% and 8.09% are 52.3% and 47.9% higher than their respective industry averages of 4.95% and 5.47%.
In the first quarter that ended May 5, 2024, PVH’s total revenues amounted to $1.95 billion. Its earnings before interest and taxes came in at $205.10 million, reflecting a 3.2% increase from the year-ago period.
The company’s net income stood at $151.40 million, up 11.3% year-over-year, while its net income per common share for the quarter improved by 21% from the year-ago value to $2.59. In addition, PVH’s cash and cash equivalents increased marginally year-over-year to $376.20 million.
Street expects PVH’s EPS for the second quarter (ending July 2024) to increase 14.8% year-over-year to $2.27, while its revenue for the ongoing quarter is expected to amount to $2.07 billion. Moreover, the company surpassed consensus EPS estimates in each of the trailing four quarters, which is excellent.
PVH’s stock has gained 36.1% over the past nine months and 14.7% over the past year to close the last trading session at $100.58. Its 12-month price target of $138.62 reflects a 37.8% potential upside.
It’s no surprise that PVH has an overall rating of A, which equates to Strong Buy in our proprietary rating system. It has a B grade for Growth, Value, Sentiment, and Quality. Out of 59 stocks in the A-rated Fashion & Luxury industry, it is ranked #5.
In addition to the POWR Ratings we’ve stated above, we have also rated PVH for Momentum and Stability. Get all PVH ratings here.
NewMarket Corporation (NEU)
NEU engages in the manufacture and sale of petroleum additives. The company provides lubricant additives for use in various vehicle and industrial applications, engine oil additives, and industrial additives designed for products for industrial applications and industrial specialty applications.
In January, NEU acquired AMPAC Intermediate Holdings, LLC, the ultimate parent company of American Pacific Corporation (AMPAC), for approximately $700 million.
Commenting on this acquisition, Thomas E. Gottwald, NEU’s Chairman and CEO, said, “AMPAC’s existing management team is highly qualified, and this was an important factor in our decision to acquire the business. While we remain committed to our core petroleum additives business, we are also committed to identifying terrific opportunities outside of the petroleum additives business that meet our M&A and diversification criteria.”
Buoyed by its strong financials, the company declared a quarterly dividend of $2.50 per share on its common stock for the first quarter, reflecting an increase of 19% year-over-year. NEU pays a $10 per share dividend annually, translating to a 1.85% yield on the current price level.
The company’s dividend payments have grown at a CAGR of 7.7% over the past three years, and its four-year average dividend yield is 2.18%.
NEU’s trailing-12-month EBIT margin of 19.95% is 91.8% higher than the industry average of 10.40%. In addition, its trailing-12-month net income margin, ROCE, and ROTA of 14.82%, 40.28%, and 12.64% are considerably higher than the industry averages of 4.82%, 5.94%, and 2.70%, respectively.
During the first quarter that ended March 31, 2024, NEU’s net sales amounted to $696.74 million, while its gross profit increased 9.3% year-over-year to $216.36 million. Its operating profit rose 12.6% from the year-ago value to $140.80 million.
In addition, the company’s net income increased 10.4% year-over-year to $107.73 million, while its EPS amounted to $11.23, reflecting an increase of 11.3% from the prior-year quarter. Also, its EBITDA came in at $178.60 million, up 14.6% year-over-year.
Over the past year, the stock has gained 24.9%, closing the last trading session at $539.31.
NEU’s POWR Ratings reflect this promising outlook. The stock has an overall rating of B, which translates to Buy in our proprietary rating system.
It also has a B grade for Growth, Stability, Sentiment, and Quality. Among the 81 stocks in the B-rated Chemicals industry, it is ranked #7. Click here to see NEU’s rating for Value and Momentum.
What To Do Next?
Discover 10 widely held stocks that our proprietary model shows have tremendous downside potential. Please make sure none of these “death trap” stocks are lurking in your portfolio:
AYI shares closed at $254.43 on Friday, down $-2.89 (-1.12%). Year-to-date, AYI has gained 24.44%, versus a 16.23% rise in the benchmark S&P 500 index during the same period.
About the Author: Shweta Kumari
Shweta's profound interest in financial research and quantitative analysis led her to pursue a career as an investment analyst. She uses her knowledge to help retail investors make educated investment decisions.
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