Defined as companies valued between $2 billion and $10 billion, mid-cap stocks occupy an often-overlooked sliver of the stock market. The definition is arbitrary, but mid caps are often not yet large enough to garner widespread name recognition but have plenty of growth left in the tank. It's a sweet spot for investors who are looking for high-growth opportunities without the high risk that can come with smaller outfits.
A growing restaurant chain on sale
Nicholas Rossolillo (Texas Roadhouse): Who doesn't love a good deal? That has been this casual steakhouse chain's plan of attack, focusing on opening new stores in suburban America and offering generous portions at a fair price. After the recent rout in the stock market, the stock looks like a good deal, too.
Granted, there is one justifiable reason for the recent declines in Roadhouse's valuation: wages. To be more specific, labor costs are growing in the double digits -- driven primarily by minimum-wage hikes actively being enacted across the country. Those extra expenses have all but eliminated earnings growth for Texas Roadhouse so far this year.
Nevertheless, there's hope that a corner will eventually be turned. That's because this restaurant operator continues to open up new stores at a pace of about 5% a year, bringing its total location count to 591 at the end of Q2 2019. Existing restaurants are also some of the best performing in the whole industry, as same-store sales (a combination of foot traffic and guest ticket size) has been consistently increasing in the mid-single-digits for years. That's a key factor in growing profitability for a restaurant over time.
Starting with the third quarter, Roadhouse will start lapping some of the initial wage increases it put in place last summer, so the negative drag on the bottom line should start to subside. With new restaurants opening doors and management forecasting continued same-store sales growth, now could be a good time to bet on the chain with shares over 30% off of all-time highs.
Act now, before this hot stock takes off again
Anders Bylund (Universal Display): This display and lighting technology researcher has been on a tear over the last year. The company absolutely crushed Wall Street's earnings estimates in all three of the earnings reports it has posted in 2019. Revenues started out on the modest side, only to accelerate and exceed the analyst consensus by 49% in the recently reported second quarter.
Share prices have generally followed suit, rising 76% in the last 52 weeks and 120% from a year-to-date perspective. But the rocket ride hit a brick wall in recent weeks, and Universal Display's shares rose just 1% over the last month. That includes the stellar second-quarter report mentioned above, where sales doubled and earnings quadrupled compared to the year-ago quarter.
In all fairness, some of that quarter's excellent results rested on Chinese customers stocking up on organic light-emitting diode (OLED) materials before a proposed border-crossing tariff that was slated to take effect in the second half of 2019. So, some of the revenues and profits in the second quarter were really just accelerated orders that normally would have arrived in the third or fourth quarters. Even so, management raised its full-year revenue guidance by 7%.
I don't see anything wrong with Universal Display's business prospects right now, but market makers still decided to pump the brakes on the stock's torrential gains. That gives us a chance to stock up on shares at an unusually stable price. Given the company's fantastic long-term prospects and the stock's solid market momentum, that's a fairly rare event.
The best LNG stock nobody's talking about
Jason Hall (Chart Industries): If you were to go solely on valuation based on recent earnings, Chart looks a bit expensive. Over the past year, the maker of cryogenic gas processing equipment has earned $2.58 per share, pegging its price-to-earnings (P/E) ratio at 25.7 times earnings. That's a good bit higher than the 21 times earnings the S&P 500 -- a decent proxy for the stock market's valuation -- trades for at recent prices.
But take a close look at Chart's recent results, the size of its backlog, and just how massive the LNG market opportunity will be over the next decade, and it might be an absolute steal at these prices. That's particularly true as most investors continue to look to the biggest energy companies, along with some pure-play LNG exporters, as the best LNG investments.
What they're missing is how important Chart's role is in getting the infrastructure to make LNG exporting and importing a reality, and how much upside that means for the company. This year alone Chart expects to grow earnings per share by 50% from 2018, but 2020 is set to be a monster, with adjusted EPS between $5.05 and $5.35, before factoring in any earnings from the so-called big LNG part of Chart's backlog.
With these potential deals factored in for equipment at major LNG export facilities -- Chart is the contracted supplier for at least one of them -- management anticipates earnings surging to $8.00 to $8.75 per share. Moreover, CEO Jill Evanko said on the latest earnings call that "we also anticipated that 2020 is not the peak in this cycle."
In addition, investors have sold out of Chart lately, pushing down shares 30% from the 2019 high. Now may be an excellent time to buy and hold this niche player in the explosive growth of LNG over the next decade.