Megacompanies valued in the hundreds of billions of dollars get most of the attention from investors. But there are plenty of opportunities among smaller, mid-cap companies worth between $2 billion and $10 billion. According to three of our Motley Fool contributors, First Solar (FSLR 0.43%), Oaktree Capital (OAK), and Goldcorp (GG) top the list. Here's what you need to know about these three mid-cap stocks.
Great management team, cheap stock
Tyler Crowe (First Solar): For all the potential that solar power has as a growth industry, it is an absolutely brutal business that has led to numerous bankruptcies and investor capital going up in smoke. The rapid development of technology means that panels becomes quickly commoditized and it's extremely difficult for companies to exert pricing power. Also, the industry is much more cyclical than most investors think. Even though the industry as a whole continues to put up gaudy growth rates, it habitually goes through periods of over- and under-capacity that lead to wild swings in panel prices.
Image source: First Solar.
To navigate this volatile industry, it takes an exceptional management team. That, more than anything else, is what makes First Solar one of the best investments in this business. First Solar's management has been able to consistently generate free cash flow despite not always having the most efficient or cheapest panels on the market.
What's surprising is that despite this steady hand in a volatile market and a massive cash war chest, Wall Street has bid this company's stock down based on lower panel prices and fears that solar panel import tariffs will go away over time. The stock is so cheap right now that cash and short-term investments make up 62% of First Solar's market capitalization.
Yes, First Solar's stock will rise and fall with the industry's prospects, and the cyclical nature of the business means that you need to be very price conscious when buying a stock in this industry. That said, First Solar's management has shown over the years that it is capable of handling the volatility of the market, and the stock's cheap price today suggests now is one of the more opportune times to buy.
Distressed debt
Tim Green (Oaktree Capital): If you're worried about a stock market crash or a looming recession, Oaktree Capital deserves a place in your portfolio. The mid-cap asset manager specializes in distressed debt, buying when no one else wants to. Opportunities have been scarce in the past few years, which have been marked by ever-rising stock prices, ultra-low interest rates, and a general lack of concern about risk. But that could change at any time.
Howard Marks, co-founder and co-chairman of Oaktree, described the current environment as "too much money chasing too few deals" in his latest memo to Oaktree clients. This is the type of environment where Oaktree exercises caution, careful not to overpay for assets. But the tide will eventually turn, as it always does. When that happens, Oaktree will be there with its $21 billion of dry powder, buying assets that no one else wants at prices that ensure exceptional returns.
Oaktree also pays a generous dividend, although the quarterly payment fluctuates. The latest quarterly dividend of $0.70 per share represents an annualized yield of nearly 7%. This yield will vary, so don't be surprised if the dividend payment decreases in the future.
There's no telling what Oaktree stock will do in the short term. But whenever the next downturn may hit, Oaktree is a stock you'll want to own.
A lustrous mid cap worth your while
Sean Williams (Goldcorp): Although Goldcorp has had a pretty miserable stretch over the past seven years -- its shares are down more than 80% from their peak in 2011 -- this gold miner has all the makings of a deeply discounted mid-cap value stock that long-term investors can appreciate.
The company's most recent quarterly report was a bit of a disaster due to lower throughput and grades at its flagship Penasquito mine. However, the company was pretty clear in its press release that this was a short-term problem. The Penasquito Pyrite Leach Project, which reduced production in the third quarter, is complete, which should lead to better ore grades and substantially lower production costs in the sequential fourth quarter.
Goldcorp has also made significant headway in its intermediate strategy, dubbed "20/20/20." This strategy involves boosting production by 20%, reducing its all-in sustaining costs (AISC) by 20%, and increasing its asset reserves by 20%, all by 2020. This year alone, Goldcorp has seen ramped-up activity at Eleonore and Cerro Negro, which should lead to sustainably higher production and cash flow in 2019 and beyond. Not to mention, as a producer of numerous byproduct metals, Goldcorp can lean on these metals to help drive down AISC.
Speaking of driving down costs, arguably no gold miner has had more success in improving operating efficiency and reducing expenses than Goldcorp. Initially aiming for $250 million in annual cost reductions, Goldcorp is now targeting $350 million in annual savings by 2019. This has been instrumental in keeping costs down, as well as helping the company reduce its net debt-to-EBITDA ratio from an estimate of 1.2 in 2018 to potentially zero by 2021.
Lastly, with more than $2 in cash flow per share (CFPS) forecast by Wall Street in 2020, it now means Goldcorp is valued at less than five times its 2020 CFPS. Having followed the mining sector for a long time, I've opined that a CFPS multiple of 10 typically represents a "fair" valuation. At less than half this amount, Goldcorp looks ripe for the picking.
