Mid-cap stocks are a shorthand way of describing companies with market capitalizations between $2 billion and $10 billion. Generally speaking, companies of this size have a few advantages. For instance, they're generally still small enough to grow significantly, unlike some large-cap stocks. However, they're big enough for investors to expect some business stability, unlike the volatility often found in early-stage small-cap companies.
There are many good mid-cap stocks to choose from as an investor, but here's why I believe Whirlpool (NYSE:WHR), Planet Fitness (NYSE:PLNT), and Five Below (NASDAQ:FIVE) are three top mid-cap stocks to buy right now.
1. Whirlpool: A high-yield dividend
It's easy to understand why Whirlpool is a company with staying power. Household appliances have been widely adopted around the world. Most of us are pretty used to our washing machines, dishwashers, refrigerators, and microwaves, so we don't need to be convinced to buy them. Appliances wear out with time, and when it comes time to replace them, Whirlpool is a top-of-mind name brand for consumers.
The trick isn't necessarily getting the sale; it's making it profitable. Products with widespread adoption face steep competition and pricing challenges. But Whirlpool's management has proven to be up to the challenge. Consider that before the recession in 2008-09, Whirlpool's margin for earnings before taxes and interest (EBIT) was 5%. As revenue fell, the company eventually posted losses. But going into the coronavirus pandemic this spring, its EBIT margin had improved to around 7%.
For 2020, Whirlpool expects revenue to decline by 13% to 18% year over year. U.S. sales have held up since many retail venues stayed open, but that's not the case worldwide, where sales are down. However, this won't be a repeat of 2008-09 since the company entered this crisis with a stronger profit margin. Additionally, COVID-19 reduced the cost of raw materials, leading the company to expect $500 million in savings from 2019. As a result, the company should stay profitable even in this down year.
Whirlpool's management paused share repurchases, but doesn't expect to stop dividend payouts. Its dividend is safe and yielding almost 4%. That's historically high, making this a top dividend stock for consideration.
2. Planet Fitness: Substantially discounted price
It's hard to operate a gym during a pandemic. After all, how can a gym generate revenue if its customers aren't allowed in the building? Just ask Planet Fitness' competitors: Gold's Gym filed for bankruptcy in May and 24 Hour Fitness filed in June. Planet Fitness had all 2,000 locations closed by March 22. But about half of its gyms are now reopened.
What does Planet Fitness' new normal look like? More people are canceling their memberships than last year, but there are also more people signing up for the first time, resulting in an unchanged member count. About 60% of new members are opting for the premium Black Card membership, as is normal for the company. Furthermore, 40% of new members are first-time gym members, which is also in line with historical trends. All of this suggests that Planet Fitness' long-term story is unchanged.
In Planet Fitness' first-quarter earnings call, CFO Tom Fitzgerald said it had enough cash to last 2020 even with all locations closed. With locations reopening, it has plenty of breathing room to survive. And with competitors hurt by bankruptcy, it's possible that Planet Fitness will emerge in a more competitive position. It still has a ways to go, but these are all reasons for cautious optimism.
Planet Fitness stock has tripled from March lows. However, it's still down around 25% from 2020 highs, which provides today's investors with a substantially discounted entry point.
3. Five Below: Already on the rebound
Five Below is a discount retailer with over 900 locations in the U.S., all of which were closed for half of the first quarter due to the coronavirus. That resulted in a 45% drop in Q1 sales and a massive $50.6 million loss, or a $0.91 loss per share. The company was particularly vulnerable to stay-at-home orders because its e-commerce operations are weak.
As bad as its business got, Five Below is already coming back with a vengeance. The company has reopened 90% of its stores, and comparable sales at those stores are up 8% year over year. Furthermore, it intends to open 100 to 120 net new stores in 2020; of these, it has already opened 20. That's fewer than the 180 locations it originally planned to open this year, but it still represents a very quick recovery.
Planned new distribution centers (DC) for Five Below are also back on track after a short delay. Its Texas DC should open in the second quarter. Its West DC is slated for 2021, and its Midwest DC for 2022. These facilities will improve the company's profits and facilitate its growth target of 2,500 locations. In other words, this growth-stock story is still on track.
But there's one more interesting development for Five Below: Of its 8% comp-sales gain, half came from e-commerce. In January, it acquired Hollar.com, an e-commerce platform and fulfillment operation. Little did the company know the acquisition would pay off so quickly. E-commerce is still a minuscule percentage of total sales, but Five Below is at least taking a step forward in strengthening the weakest link in its business.