The stock market has taken us on a roller coaster ride the past couple of months as the coronavirus crisis took hold in the U.S. In the wake of the unexpected downdraft, there are gems of mid-cap opportunity hiding in plain sight. All of the three companies outlined below should easily recover from the recent market drop, and hold great long-term potential for growth.
This highly technical company deserves respect
The stock price of Leidos Holdings (LDOS 0.83%) has pulled back along with the general market as the nation feels the pain of the pandemic. While the price was a bit too high before the coronavirus, at current levels it looks like it's time to buy.
The company offers a well-diversified portfolio in cybersecurity, healthcare, and intelligence. Leidos holds a number of government contracts in support of civilian and defense agency missions. In terms of income streams, 48% comes from defense, 34% from civil, and 18% from health.
Besides having risk spread over different industries, investors benefit from a dividend yielding 1.4%.
Leidos is a global player in the integration and application of information technology, engineering, and science. Given the company's strength in the healthcare sector and in digital workplace technologies, I think it will emerge virtually unscathed from the current crisis. The government contracts are steady, healthcare analytics are even more essential given COVID-19, and the new work-from-home environment should boost its digital workplace technologies business.
Year to date, the stock has managed to rise 1.4%. Leidos' P/E is 21.6, compared with the industry average of 37.6. The company's price-to-sales ratio stands at 1.26, versus the industry average at 1.53. The stock is showing resilience in the face of market downdrafts, and is undervalued using comparative metrics. Leidos should be at the very top of stock buyers' lists.
The strangest of bedfellows make lots of money together
Cincinnati-based Chemed (CHE 0.23%), founded in 1970, is a mid-cap company that operates through two very different businesses.
One is VITAS, the largest provider of hospice services for patients with severe, life-limiting illnesses. The company has approximately 7% of the U.S. market share through 48 operating programs in 14 states and the District of Columbia.
The other is Roto-Rooter, the largest provider of plumbing and drain cleaning services in North America. With 130 company-owned territories and about 365 franchise territories, Roto-Rooter has an estimated 15% of the drain cleaning market and 2% to 3% of the same-day-service plumbing market.
This unlikely combination of businesses has resulted in impressive performance for Chemed over the past 16 years. In that time period, the average annual increase in adjusted net income is 23.5%, and 24.9% for adjusted diluted earnings per share.
Chemed is actively acquiring and operating Roto-Rooter franchises and, in the VITAS space, small community hospices. The company streamlines operations and increases market share in both businesses, resulting in both top- and bottom-line growth.
It is succeeding in growing both businesses, but is open to ultimately divesting itself of either business in the long run. The company's P/E is 32, compared with 45 for its closest competitor, Amedisys (AMED 0.82%).
Considering how management is successfully optimizing growth and earnings of two disparate companies, I think Chemed is a great buy for the long-term investor.
A company whose future's so bright, it has to wear shades
California-based Enphase Energy (ENPH 2.63%) manufactures and sells solar-energy management technology for residential and commercial use. The company's systems have been deployed in over 130 countries. Enphase introduced a semiconductor-based microinverter, and in mid-2020 is scheduled to launch the next-generation intelligent microinverter system, called IQ8. This system is unique in that it will allow a solar system to operate without the power grid.
The company is serving a growing market. Of all renewable energy generation, solar energy is expected to grow the fastest from now to 2050.
Enphase delivered strong financial performance in 2019. Revenue was $624 million, up from $316 million in 2018, growth of almost 100% year over year. Adjusted gross margin was more than 35% in 2019, versus 30.2% in 2018.
Solar energy storage will be a crucial driver of top-line growth. Enphase's storage-system product Encharge is expected to ramp up storage systems for North American customers in 2020, and increase revenue potential per home from about $2,000 to $10,000.
Enphase has a history of improving on existing products and creating new ones. With the intelligent microinverter system IQ8 and the Encharge storage system rolling out, the future is looking bright. Investors shoud consider this company a buy.