- These three mid-cap stocks have been resilient during the pandemic and have either remained in or are reapproaching year-over-year growth.
- Skechers and STORE Capital have been hit by store closures but are outpacing many of their peers as the economy slowly normalizes.
- GoHealth is benefiting from the thousands of Americans turning 65 each day and trends favoring online insurance shopping.
The outbreak of COVID-19 and subsequent response to halt its spread has turned the economy on its head. Digital technology is more important than ever, and new dynamics like work-from-home policies have rendered old ways of doing business redundant.
But while many companies continue to struggle, others have made adjustments and are doing just fine. Three mid-cap stocks -- defined as those with a market capitalization between $2 billion and $10 billion -- that fit this bill are Skechers (NYSE:SKX), STORE Capital (NYSE:STOR), and GoHealth (NASDAQ:GOCO).
1. Skechers: In-demand shoes trading on the cheap
Skechers may still carry the reputation of quirky, affordable knock-off brand here in the U.S., but that isn't a fair assessment anymore. Over the past decade, the company has built itself into a top-notch brand with global star power -- especially among young consumers.
Skechers has been knocked around this year by the pandemic along with the rest of the apparel industry, but the shoe maker isn't getting enough credit. Thanks to its international appeal, sales were down just 16% through the first nine months of 2020 -- including a massive rebound during the summer months that nearly brought total sales back to even with a year ago -- and sales in China are growing in the double-digit percentages again. According to data compiled by the U.S. Census Bureau, average apparel and accessories sales are down 30% this year, so Skechers is handily outpacing most of its competition.
Besides winning with young consumers around the globe, Skechers has been resilient thanks in no small part to its e-commerce business. In my opinion, Wall Street has been unkind to the shoe maker in recent years, criticizing lumpy earnings as the company has spent heavily at times to build out its distribution and online selling capabilities. But it's paying off this year. In Q3 alone, Skechers reported 172% year-over-year growth in online revenue.
And best of all, in spite of all the disruption the pandemic has brought, Skechers remains profitable with net income of $68.1 million through the first nine months of the year -- although free cash flow (revenue minus cash-only operating and capital expenditures) was negative $156 million because of the especially steep drop in sales back in the spring and other expenses related to the online business. Looking a few years down the road, though, Skechers' market cap around just $5.3 billion -- which means shares trade for just 1.3 times trailing 12-month revenue at Monday's closing price -- makes this an inexpensive long-term growth story.
2. STORE Capital: Not all real estate is in a hole
With social distancing and remote work in full force, the fate of many real estate companies was placed in question. STORE Capital has had its fair share of shade thrown at it as well, and units of the real estate investment trust (REIT) are down 14% 2020 to date, with a current market cap of $8.5 billion.
But I see no reason this commercial property owner won't continue to rally. After all, while many commercial properties are struggling, STORE's portfolio of nearly 2,600 properties is on average doing just fine. Sure, some states are putting stricter social distancing rules back in place, and STORE's exposure to industries like movie theaters, family entertainment, and health clubs isn't ideal right at the moment. Nevertheless, no single customer makes up more than 3% of total income here, and the overall portfolio remains healthy.
In fact, total revenue increased 2% year over year in Q3, and adjusted funds from operations (FFO, the real estate equivalent to earnings) increased 2.6% year over year. Paired with growth in the number of properties owned compared to the same period last year, the reason for STORE returning to growth mode is because 90% of rents and interest were collected in the month of October with the rest being deferred with interest. Those deferred interest payments should be another source of growth later on as the economy continues to rebound.
Speaking to the strength of its real estate holdings, STORE once again increased its dividend earlier this year and the annualized yield is currently at 4.5%. After a difficult stretch back in the spring, this REIT's future is far from in doubt. I remain a buyer for the long haul.
3. GoHealth: Updating the insurance buying process for the 21st century
GoHealth went public this summer, and while I usually wait at least a quarter or two before deciding to make a purchase of a fresh IPO, I made a buy a little ahead of my typical time frame. Alas, shares are down by more than 40% since its first trading day, bringing the company's market cap down to just $3.5 billion.
But I still like this business long-term given the sheer size of the baby boomer population that will reach retirement age in the next decade. GoHealth is an online direct-to-consumer marketplace for Medicare insurance plans. And the company's trajectory is proof that online purchasing isn't just a phenomenon among the youngest generations. The company's revenue grew 52% year over year in Q3, a slowdown from the recent past but still making for growth of 72% year over year through the first nine months of 2020. At the midpoint of guidance, GoHealth expects fourth-quarter sales to increase another 53%.
As it expands, this online insurance marketplace is getting even more profitable. The company increased its outlook for full-year adjusted EBITDA (earnings before interest, tax, depreciation, and amortization) to a range of $270 million to $290 million, implying growth of no less than 58% compared to 2019 and good for an adjusted EBITDA margin of 32% at the midpoint of guidance. Not bad for a high-growth company.
Granted, not everything is perfect at GoHealth. Decelerating growth rates are worth keeping an eye on. The company also had cash and equivalents of $295 million and debt of $401 million at the end of September. Nevertheless, the stock trades for roughly 4 times full-year expected sales and 13 times expected adjusted EBITDA. Slowing growth and high debt look adequately priced into the stock valuation at this juncture. With 10,000 people turning 65 every day in the U.S., there is plenty of opportunity for GoHealth to continue growing its online Medicare insurance marketplace in the years ahead.