3 Undervalued Midcaps Ready to Pop
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U.S. mid-cap stocks are off to a strong start in 2021. The S&P 400 mid cap index is up 17% year-to-date compared to 11% for its large cap counterpart the S&P 500.
Many investors like to buy mid-cap companies because they reside in the sweet spot of the capitalization spectrum. Not too big, and not too small. This is where we find mature companies that are well-established in their respective markets but still have a lot of room to grow.
Here we highlight three undervalued mid cap companies that have a good chance of graduating to large cap status.
Is the Badger Meter Pullback a Buy Opportunity?
Not long ago Badger Meter (NYSE:BMI) was considered a small cap stock. Today, the $2.7 billion stock is hanging out with the mid cap crowd and may be on its way to the big leagues.
The Wisconsin-based company makes a range of products that measure water flow and related technology solutions. Its offerings are used by customers around the world to optimize water flow and be a part of the world's push towards sustainable water usage.
Badger Meter is considered the global leader in the so-called 'smart water' market. Its smart water metering and flow measurement technologies are seeing record demand from utilities and industrial customers. In the first quarter of this year, the company posted 9% top line growth and exited the period with a record backlog of smart water product orders. The gross margin is also moving in the right direction and led to 15% EPS growth last quarter.
Just as the pandemic has accelerated many pre-existing trends like e-commerce and telemedicine, it has also sped up the adoption of digital smart water solutions. Water safety and security is an increasingly important issue for utilities and municipalities—and sales of Badger Meter's electronic solutions should continue to benefit from these trends.
Badger Meter has a leading position in a smart water market that is viewed as an oligopoly. Over the next few years, software and electronics will increasingly be used to monitor water quality and for automated water reading in many parts of the world. This translates to international expansion opportunities for Badger Meter. The recent $20 pullback to the low $90's screams buy opportunity for this mid cap growth winner.
Is Herbalife Nutrition Stock Undervalued?
On February 18th Herbalife Nutrition (NYSE:HLF) stock gapped lower after the company reported fourth quarter results that fell short of the Street's expectations. Quarterly sales grew 16% but adjusted EPS fell 7% year-over year.
The market punished the stock in a classic case of nearsightedness. The bigger picture here is that Herbalife had its best year yet in 2020. Despite COVID-19 making in-person meetings a challenge for the company's army of independent entrepreneurs, annual sales were the highest they've ever been.
Herbalife is benefitting from increased consumer interest in health and nutrition in the wake of the pandemic. It’s a trend that is only likely to get stronger as people stay vigilant about healthy eating and exercise habits to build immunity in the post-COVID world.
And as global employment trends improve people will have more money to spend on Herbalife's weight management, specialty nutrition, fitness, skin, and hair care products. The fourth quarter overreaction also glazed over management's raised guidance for 2021 and a new $1.5 billion stock buyback program.
This week Herbalife reported strong first-quarter 2021 results that got value investors rethinking the stock. Sales jumped 19% to $1.5 billion, and EPS jumped 71% to $1.42 (albeit with easy comparison to the prior-year quarter). Still, both figures beat the consensus expectations, and management once again upgraded its full-year outlook.
Herbalife stock gapped higher in heavy volume on the Q1 news which accompanied by a timely press release about 28 NFL draft picks having been trained with Herbalife products. At just 13x forward earnings, investors will want to make this undervalued mid cap a high draft priority.
Is Integra LifeSciences Stock a Buy?
Integra LifeSciences (NASDAQ:IART) is a $6.3 billion health care company that makes medical devices for neurosurgery, orthopedic joint reconstruction, and wound repair. It doesn't take a brain surgeon to know that this stock is undervalued.
The 25x forward P/E is well below that of the medical device industry average as is the 4.5x price-to-sales ratio. Integra LifeSciences is trading near an all-time high but has pulled back this week after touching $77.40. The down volume has dwindled in each of the last four days since May 3rd suggesting the selloff is losing steam.
Buying the mid-cap here would give investors inexpensive exposure to a growing medical device company with an expanding product lineup and international growth prospects. Mainly through acquisition, Integra has broadened its product line in sync with trends in hospital demand. It bought regenerative medicine company ACell to strengthen its regenerative tissue and wound care product portfolio. Regenerative medicine is an area that is expected to be a strong source of growth for the company as spine and orthopedic elective procedures resume post-COVID.
Integra's largest overseas market is the Asia-Pacific region which is seeing strong demand for surgical equipment and products as hospital operating conditions begin to normalize. Last quarter Integra posted double digit revenue growth in both China and Japan. These two markets along with other parts of Asia will be key growth avenues.
Look for Integra to capitalize on its international growth opportunities and derive growth from more value-added acquisitions that complement its product portfolio. Given the momentum in the business, it won't be long before this mid cap stock trades in the $80's.
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