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5 Forgotten Stocks in the Market's Sweet Spot

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During troubled times like these, most investors tend to follow a simple concept: the idea that there's safety in numbers. But if you really want to stand out from the crowd, you can't afford to stay in the pack when things get scary. If you can walk your own path, you stand a much better chance of outperforming the masses.

That doesn't mean, though, that you have to take stupid risks. Sometimes, great investments are hiding in plain sight, and all you have to do is take a closer look to find powerful profit opportunities.

Later in this article, I'll reveal five names that many investors miss yet have several favorable characteristics. First, though, I want to point you in a general direction that could give you fertile ground for your research for years to come.

The Goldilocks syndrome
All too often, investors adopt polar thinking. When the markets are nervous, they gravitate toward blue chip stocks from megacap companies. These well-known names have certainly stood the test of time, going through similar crises in the past and emerging relatively unscathed and sometimes stronger for the experience. Yet with so many investors having the same thought process, their shares no longer have much margin of safety, fetching premium prices from defensively oriented investors more interested in preserving principal than creating growth.

At the other end of the spectrum, most investors are constantly searching for the next big score. Combing through lists of penny stocks and other small-cap companies, they hope to cash in on 100-bagger stocks before most people have ever heard of them. That high-risk, high-reward approach certainly has its strengths, but especially when the economy rebounds, it seems like everyone starts looking for those stocks. That in turn pushes the prices of the best prospects up significantly, eliminating much of the return potential even if a call proves correct.

What many investors forget is that there's a middle ground. Between too big and too small is the just-right world of mid-cap stocks. Unlike small caps, they've already put together a decent record of growth. Yet unlike large caps, they still have plenty of room to run. In other words, mid caps can give you the best of both worlds.

Some monumental mid-cap ideas
What makes a top mid cap really depends on what you're looking for. If you want to emphasize growth, you can find plenty of companies with stellar growth rates that are plowing everything they earn back into their businesses. Looking for value or income will point you in a different direction.

Personally, I like stocks that have it all. So looking for stocks that combine strong income growth over the past five years of 15% or more, solid dividend yields of 3% or more, and reasonable valuations, I came up with a number of candidates. Let's summarize the findings:

  • Financial stocks were well represented, with New York Community Bancorp (NYSE: NYB  ) and First Niagara (Nasdaq: FNFG  ) making the list. With too-big-to-fail banks targeted for increased regulation and scrutiny, midsize banks are benefiting from the same macroeconomic tailwinds helping Wall Street's finest, but could avoid the worst of new regulation. Of the two, New York Community has the cheaper valuation and the better yield, especially after First Niagara's recent dividend cut. But both are well positioned for the future.
  • Refiner HollyFrontier (NYSE: HFC  ) has benefited from favorable conditions in the oil markets, with a glut of U.S. energy production helping to reduce input costs while keeping refined product revenue high. You have to include special dividends to get above the 3% yield threshold, but as long as current trends persist, HollyFrontier should keep delivering the goods.
  • ManTech International (Nasdaq: MANT  ) is a rising player in one of the most important services in today's technologically advanced world: cyber-defense. With Internet-based threats on the increase, ManTech provides products that help companies and governments fight back.
  • Diebold (NYSE: DBD  ) is midsize, but it's been around a long time. With more than a half-century of annual dividend increases, the maker of ATMs, voting machines, and other mechanical devices has proven it has staying power.

Dig deep
Of course, just because a stock happens to be midsize doesn't automatically mean it's a screaming deal. But if you're discriminating, you can find some overlooked companies with just the attributes you want. That's a much better deal than lukewarm porridge, in my book.

Midsize banks have some interesting prospects, but there's only one big bank that's truly built to last. Find out about it in the Fool's newest special report on banking. It's free and yours for the taking.

Fool contributor Dan Caplinger likes things just right. He doesn't own shares of the companies mentioned in this article. The Motley Fool owns shares of ManTech International. Try any of our Foolish newsletter services free for 30 days. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Fool's disclosure policy never gets old.

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