Pity the poor mid-caps. Many investors tend to focus on
large-cap blue-chip stocks, while more aggressive investors often
seek out robust potential upside among off-the-radar small-cap
stocks. Stuck in the middle: Mid-cap stocks -- which I define as
values between $1 billion and $5 billion-- often fall into the
cracks. And that's a shame because these companies often represent
the stability of large caps and the potential for unappreciated
value of small caps, as many of them are still not widely-known by
I went looking for the most interesting
stocks right now. I focused on companies that exceeded
forecasts by at least 30% (with
of at least $0.25 per share). After a deeper look, a few stocks in
the group appear especially appealing right now.
Right off the top, we have two stocks that beat the pants off of
Goodyear Tire (
which I noted
in this article
, looks like a deep-value play. The other is
, which my colleague Tim Begany nailed back in January, and
thinks is still a buy now
Is it sustainable?
It's important to remember the old investing maxim "one quarter
does not a trend make." Indeed, a company can show real strength in
one period, thanks to industry pricing and
trends, only to see a deep reversal in those factors just three
Consider the case of
U.S. Steel (
. The steel maker missed estimates in the second quarter of 2011,
blew past forecasts in the third quarter, once again badly lagged
the consensus in the final quarter of the year -- and just
announced a very solid quarter to start the current year. Goldman
Sachs analysts say the first-quarter results will be the high
watermark for the year, and rates
a "sell" with a $23
-- roughly 15% below the current stock price. "We remain of the
view that steel prices will be lower in 2H2012 and thus, steel
price-sensitive companies like U.S. Steel would see a material
deterioration in earnings in the latter part of the year," they
wrote in an April 24 note to clients.
On the other hand, any company that can top estimates while
industry conditions remain challenging is likely to produce
ever-stronger results as that industry starts rebound. As an
example, check out
, which provides a range of construction equipment (such as cranes,
aerial lifts and other gear) that helps build roads, buildings and
other infrastructure projects.
Terex really took it on the chin during the recent
. Sales fell from $8 billion in 2007 to just $3.9 billion in 2008,
leading to an 80% drop in gross profits to $297 million. The top
line has bounced back up to a recent $6.5 billion in 2011, should
exceed $8 billion this year and top $9 billion in 2013, according
to Merrill Lynch. Meanwhile, after falling from $90 back in 2007 to
a recent $23, shares trade for less than six times Merrill's
. That multiple slips even lower if you anticipate an improving
in coming years that boosts construction spending.
General Cable (
is another company geared up for an improving level of construction
spending. The company's utility-grade cables are used in office
parks, submerged power line programs and general construction.
General Cable is also a leading provider of communications network
wiring that is deployed by phone companies. Shares had been
slumping since last summer after a string of earnings
disappointments, but industry conditions have now turned up, and a
just-announced strong first quarter could be the start of a new
Analysts anticipate only moderate 5% sales growth in 2012 and 2013
(to around $6.7 billion), but they also see a lot of
. As a result,
earnings per share (EPS)
are expected to rise around 20% this year to around $2.60, and more
than 30% in 2013 to around $3.40. Shares trade for less than 10
times that 2013 outlook, which may not even be the top of the
cycle. Analysts at DA Davidson see shares rising form a recent $32
to $40, and that target price assumes shares will trade up to just
six times projected 2013 EBITDA.
Risks to Consider:
A slowing U.S. economy would make it a lot harder for these
companies to exceed a rising level of expectations.
Action to Take -->
A few companies on this list may be poised to put together a string
of successful quarters. But as noted, don't assume that a one-time
profit surge can last. You need to dig into the factors behind the
beat to be assured that better-than-expected profits will be the
case throughout the year.
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-- David Sterman
David Sterman does not personally hold positions in any
securities mentioned in this article. StreetAuthority LLC does not
hold positions in any securities mentioned in this article.
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