In this piece, we will take a look at the 11 undervalued mid cap stocks to buy. If you want to skip our analysis of mid cap investing and the stock market, then check out 5 Undervalued Mid Cap Stocks To Buy.
When it comes to selecting stocks, different sectors allow investors to cater to different strategies. These depend on risk preference, the investing strategy, the fundamentals of the firm, and the broader economic environment among other factors, all of which carry the chances of making or breaking an investment portfolio.
One category of stocks that offers the chance of strong returns and also provides some buffer against losses is the mid cap stock category. These stocks have a market capitalization that ranges between $2 billion and $20 billion, and they typically belong to sizeable companies with well developed markets. Additionally, since their shares are often cheaper than the large cap and mega cap stocks, they offer a chance for stronger returns if the conditions are right. However, at the same time, mid cap companies are not as well insulated against external shocks due to smaller balance sheets than their mega and large cap peers. This makes the investment riskier if the economy is not performing well as during such times money generally flows either to consumer defensive stocks that have a nearly guaranteed and stable market or large cap companies which often have billions of dollars in cash and assets to withstand severe economic storms.
But what about returns? After all, some of the factors that we’ve outlined above are qualitative factors, investing is often a mathematical game. Well, mid cap stock performance actually carries the potential of outpacing the performance of broader market indexes and the small cap sector according to research from S&P Global. The firm behind the notable S&P 500 index outlines that when we map out and compare the returns of the S&P500, the S&P MidCap 400, and S&P SmallCap 600 stock indexes over a period of two decades starting from 1994, then mid cap stocks often outperform both the S&P500 and small cap stocks. This performance is actually agnostic of market conditions, meaning that the trend persists regardless of whether the market as a whole is doing well or not. In fact, the data shows that mid cap stocks can post stronger returns than other stocks when a market is doing well, such as during the six years between March 2009 and August 2015, and lag other stocks in losses during a downturn such as the sixteen months between October 2007 and March 2009.
This mid cap advantage is also visible in an extension of the results of a well known research paper by Eugene Fama and Kenneth French. The research paper took a look at stock returns from 1926 to 1992, and its data was expanded by Wespath Institutional Investments to analyze stock returns until 2018. The data shows that during this time period, while large cap stocks delivered 9.7% in annual returns, mid cap returns stood at 11.9% which was even higher than small cap returns which were 11.6%. This shows that there might be more at play than simply the lower share prices helping returns as we would assume when analyzing the difference in returns between large and mid cap stocks.
This is because if only lower prices were driving the higher returns, then small cap stocks would have returned more. One reason why mid cap stock returns are higher than small cap returns could be the well known Efficient Market Hypothesis, which assumes that the market price of a stock is its fair value as investors have all the information that they need to make an investing decision. Since mid cap stocks see more analyst coverage than small cap stocks, investors could be more confident about their decisions when investing in these companies, and when this is coupled with the inherent advantage of lower priced stocks being capable of delivering higher returns, then the out performance of mid cap stocks over large cap stocks might be unsurprising.
Shifting gears to focus on the stock market, right now it’s earnings season on Wall Street. Stocks saw some action in early October when strong earnings results by big banks lifted market sentiment. The onset of the earnings season has buoyed indexes at some level, despite worrying news from the Middle East and inflation data that shows that the Federal Reserve might not have reached the end of its interest rate hiking cycle. And, investment bank Morgan Stanley believes that there might be some juice left in the market even though the third quarter of 2023 saw rather muted performance when compared to the stunning gains made during the first half of this year. Year to date, the S&P500 is up by 14.45%, and Morgan Stanley believes that this rally, which slightly reversed in September and then somewhat resumed in October can extend into the fourth quarter of 2023 should current levels persist and investors remain eager to ride the growth wave that started mostly due to mega cap stocks benefiting from the hype surrounding artificial intelligence.
With these details in mind, let’s take a look at some undervalued mid cap stocks to buy, out of which the top picks are Corteva, Inc. (NYSE:CTVA), ON Semiconductor Corporation (NASDAQ:ON), and DexCom, Inc. (NASDAQ:DXCM).
Image by Sergei Tokmakov Terms.Law from Pixabay
Our Methodology
To compile our list of undervalued mid cap stocks, were first made a list of the thirty largest constituents of the Vanguard Mid–Cap ETF. Out of these, those that had the greatest percentage upside between their market price and analysts’ average price targets were chosen for our list of undervalued mid cap stocks to buy.
11 Undervalued Mid Cap Stocks To Buy
11. TransDigm Group Incorporated (NYSE:TDG)
Share Price Upside: 15%
TransDigm Group Incorporated (NYSE:TDG) is an aircraft component manufacturer that sells motors, power controls, and other components used in airplanes. A resurgence in global air travel is helping the firm on the financial front, as it has beaten analyst EPS estimates in all four of its latest quarters.
As of June 2023, 67 out of the 910 hedge funds part of Insider Monkey’s database had held a stake in TransDigm Group Incorporated (NYSE:TDG). Out of these, the firm’s largest shareholder is Mark Massey’s AltaRock Partners since it owns 1.3 million shares that are worth $1.2 billion.
Along with ON Semiconductor Corporation (NASDAQ:ON), Corteva, Inc. (NYSE:CTVA), and DexCom, Inc. (NASDAQ:DXCM), TransDigm Group Incorporated (NYSE:TDG) is a top mid cap value stock to buy.
10. Waste Connections, Inc. (NYSE:WCN)
Share Price Upside: 15%
Waste Connections, Inc. (NYSE:WCN) is an industrial company that provides waste collection and associated services. Its business stability allows the firm to be a dividend paying stock, which has paid hundreds of millions in dividends during the past couple of years.
By the end of this year’s second quarter, 41 out of the 910 hedge funds profiled by Insider Monkey were the firm’s investors. Henry Ellenbogen’s Durable Capital Partners is the biggest investor among these courtesy of its $315 million investment.
9. AMETEK, Inc. (NYSE:AME)
Share Price Upside: 15%
AMETEK, Inc. (NYSE:AME) is a heavy duty engineering firm that provides engineering products to industrial users. It is one of the handful of stocks on our list with a significant concentration of institutional investors as 89% of its stock is held by them.
38 out of the 910 hedge funds tracked by Insider Monkey had bought and owned AMETEK, Inc. (NYSE:AME)’s shares as of Q2 2023. The firm’s largest stakeholder among these is Israel Englander’s Millennium Management since it owns $152 million worth of shares.
8. Baker Hughes Company (NASDAQ:BKR)
Share Price Upside: 15%
Baker Hughes Company (NASDAQ:BKR) is a backend oil and gas firm that helps producers drill for oil and manage and maintain their production facilities. The firm scored a win in October when it won a contract to produce liquefied natural gas (LNG) in the Middle East.
During 2023’s June quarter, 34 among the 910 hedge funds tracked by Insider Monkey had bought the firm’s shares. Baker Hughes Company (NASDAQ:BKR)’s biggest hedge fund shareholder is Steve Cohen’s Point72 Asset Management since it owns 4.8 million shares that are worth $153 million.
7. PG&E Corporation (NYSE:PCG)
Share Price Upside: 18%
PG&E Corporation (NYSE:PCG) is an American electricity provider that is one of the oldest firms on our list since it was set up in 1905. It is the first stock on our list that has been rated Strong Buy on average, and analysts have set a $19.21 average share price target.
Insider Monkey dug through 910 hedge fund portfolios for their shareholdings during this year’s second quarter and discovered 51 PG&E Corporation (NYSE:PCG) shareholders. Dan Loeb’s Third Point owns the largest stake among these, which is worth $933 million.
6. Microchip Technology Incorporated (NASDAQ:MCHP)
Share Price Upside: 24%
Microchip Technology Incorporated (NASDAQ:MCHP) is a semiconductor firm that provides chips for industrial and automotive use cases. It has been busy expanding its product portfolio as of late, by introducing new products for outer space use and beefing up industrial security.
41 out of the 910 hedge funds surveyed by Insider Monkey were the firm’s investors as of Q2 2023 end. Kerr Neilson’s Platinum Asset Management is the biggest shareholder in our database since it owns 3.2 million shares that are worth $295 million.
Corteva, Inc. (NYSE:CTVA), Microchip Technology Incorporated (NASDAQ:MCHP), ON Semiconductor Corporation (NASDAQ:ON), and DexCom, Inc. (NASDAQ:DXCM) are some top undervalued mid cap stocks.
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Disclosure: None. 11 Undervalued Mid Cap Stocks To Buy is originally published on Insider Monkey.
