Mid-cap stocks tend to have more solid financial underpinnings than small caps, but they lack the size and scale of large caps. They can present an odd, though sometimes intriguing, mix of growth and stability.
That's certainly the case with surprisingly diversified biotech company Ligand Pharmaceuticals Incorporated (NASDAQ:LGND), out-of-favor outlet mall owner Tanger Factory Outlet Centers, Inc. (NYSE:SKT), and expanding software-maker New Relic, Inc. (NYSE:NEWR). Take the time for a deep dive, and you might find that one of these three mid-cap stocks is just right for your portfolio today.
Power in numbers
Keith Speights (Ligand Pharmaceuticals Incorporated): Most mid-cap biotechs would consider themselves lucky to have half a dozen pipeline candidates. Ligand Pharmaceuticals has 52. Eight of those are either in late-stage clinical testing or awaiting regulatory approval. And Ligand also claims 16 approved products that use its technology.
The key to the biotech's impressive portfolio numbers is Ligand's business model. The company doesn't develop drugs itself. Instead, Ligand provides platforms that help other biotechs and pharmaceutical companies develop drugs more effectively. The company's 90-plus partners include many of the biggest drugmakers in the world -- and plenty of smaller ones, too.
Ligand's revenue and earnings continue to skyrocket, thanks especially to growing sales for cancer drugs Evoloma, Kyprolis, and Promacta. Another big winner could soon join the list. The U.S. Food and Drug Administration (FDA) expects to announce an approval decision for Sage Therapeutics' (NASDAQ:SAGE) postpartum depression drug brexanolone by Dec. 19, 2018. Brexanolone uses Ligand's Captisol technology, which improves solubility, stability, and bioavailability of active pharmaceutical ingredients (APIs) in drugs.
Wall Street analysts think that Ligand will be able to achieve average annual earnings growth of 30% over the next five years. With the company's large number of shots on goal, I think this mid-cap biotech stock has a bright future.
Down but not out
Reuben Gregg Brewer (Tanger Factory Outlet Centers, Inc.): Focused on high-quality outlet centers, Tanger is being treated like a retail pariah by investors. The real estate investment trust, or REIT, is down roughly 45% since mid-2016 and yields roughly 6.1%, higher than it was during the depths of the last recession.
To be fair, Tanger is facing notable headwinds today, including the impact of a shift toward online shopping -- the so-called retail apocalypse scenario that has investors so worried about low-end enclosed malls. Outlet malls, however, aren't enclosed malls. They have lower operating costs, lessee rents are lower (making it easier for renters to turn a profit), and have no anchor tenants to worry about.
That doesn't mean that retail bankruptcies don't sting. Tanger has seen its occupancy drop to around 95%. It resorted to offering rent concessions in 2017 to support occupancy but has been working successfully to get leases back to market rates. It's basically muddling through the shifting retail landscape.
But its doing so from a rock-solid financial foundation, which gives it plenty of leeway to take whatever actions management deems most appropriate. For example, the dividend is well covered: Tanger expects it to account for less than 60% of 2018 funds from operations. In addition, almost the entire portfolio is mortgage free, interest coverage is around 4.4 times, and net debt to EBITDA is roughly six times. All are reasonable metrics that highlight financial strength.
Short-term investors fretting about the transition taking place in the retail sector have put Tanger on sale. But this financially strong outlet-center REIT has what it takes to adjust. If you buy now, you can collect a fat yield while you wait for better days.
An SaaS company helping companies track their apps
The company helps IT departments monitor how a company's apps are performing. It's been winning over converts, and now counts a roster of over 17,000 customers. Crucially, the number of customers with annual contracts over $100,000 grew 35% last quarter, to 748.
But perhaps the biggest draw for me is the company's dollar-based net expansion rate. This is a measure of how much all the customers in Year One are spending in Year Two -- it backs out the effect of new customers. Last quarter, this figure stood at 118%.
This means that New Relic is not only keeping customers locked into its ecosystem, it's adding new tools -- like New Relic Browser, Synthetics, or Insights -- over time. That creates high switching costs and reliable revenue streams that the company can count on for years to come.