In this article, we will explore the 7 most profitable mid-cap stocks to invest in.
Inflation Data Raises Concerns
On October 10, the market faced a decline as economic data indicated persistent inflation, as reported by CNBC. The S&P 500 fell by 0.21%, closing at 5,780.05, while the Dow Jones Industrial Average decreased by 57.88 points, or 0.14%, to finish at 42,454.12. The Nasdaq Composite also dipped slightly, ending down 0.05% at 18,282.05.
The market reaction was largely influenced by the Consumer Price Index (CPI) report for September, which showed a monthly increase of 0.2%. This brought the annual inflation rate to 2.4%, slightly above analysts’ expectations of a 0.1% monthly gain and a year-over-year rate of 2.3%. Although this annual figure is the lowest since February 2021, some underlying data suggested stronger inflationary pressures than anticipated.
Luke O’Neill, a portfolio manager at CooksonPeirce, noted that the CPI report was as expected in most respects but highlighted that certain data points were “a little bit hotter than anyone would prefer.” He pointed out that investors were selling off small- and mid-cap stocks that are more sensitive to interest rates.
In response to the CPI report, Atlanta Fed President Raphael Bostic stated he was open to pausing interest rate cuts during the upcoming November meeting. He expressed that the current market fluctuations might warrant a more cautious approach rather than aggressive cuts. However, according to CME Group’s FedWatch Tool, fed funds futures trading data suggests an approximately 85% chance of a quarter-percentage-point cut.
Recent minutes from the Federal Reserve’s last meeting revealed some disagreement among officials regarding the size of September’s rate cut. While the majority supported the cut, some favored a smaller move.
On October 11, Northwestern Mutuals’ Brent Schutte appeared on CNBC’s “Power Lunch” to discuss the CPI report and the market reaction.
Brent Schutte, Chief Investment Officer at Northwestern Mutual, expressed concerns about a potential wage-price spiral, noting that significant wage increases at companies like Amazon and Walmart could contribute to ongoing inflation. He highlighted the Federal Reserve’s challenge in managing this situation, as they often react too late to labor market changes. Schutte pointed out that even with recent rate cuts, inflation remains a concern, particularly with the median CPI rising. He believes the Fed’s path forward will be more complex than investors anticipate, given the persistent inflationary pressures in the economy.
Schutte also expressed concern about the valuations of large-cap stocks, suggesting that the market is in a late-cycle phase. He noted that the economy is currently supported by a narrow segment, particularly manufacturing and lower-income consumers affected by rising interest rates. Schutte believes that small and mid-cap stocks could provide greater value for investors looking for returns over the next 3-5 years, as they are priced for a recession.
With this background in mind, let’s take a look at the 7 most profitable mid-cap stocks to invest in.
A portfolio manager in front of their computer screen, evaluating a variety of mid-cap stocks.
Methodology
To compile our list of the 7 most profitable mid-cap stocks to invest in, we used stock screeners from Finviz and Yahoo Finance. First, we defined mid-cap stocks as those with a market capitalization between $2 billion and $10 billion. Next, we focused on profitability by screening for stocks that had a 5-year EPS growth rate of over 10%. We sorted our results based on market capitalization and picked the top 20 stocks.
From this initial list of 20 profitable mid-cap stocks, we further narrowed our choices to stocks that had positive trailing twelve-month (TTM) net income and stocks that have grown their net income positively over the past 5 years. To ensure the reliability of our findings, we consulted reputable sources such as SeekingAlpha, which provided insights into the net income compound annual growth rate (CAGR) over the past five years, and YCharts, which offered information on TTM net income.
Finally, from this list of mid-cap stocks that met our criteria, we focused on the top 7 stocks most favored by institutional investors. Data for the hedge fund sentiment surrounding each stock was taken from Insider Monkey’s database of 912 elite hedge funds. The 7 most profitable mid-cap stocks to invest in are ranked below in ascending order based on the number of hedge funds holding stakes in them as of Q2 2024.
Why do we care about what hedge funds do? The reason is simple: our research has shown that we can outperform the market by imitating the top stock picks of the best hedge funds. Our quarterly newsletter’s strategy selects 14 small-cap and large-cap stocks every quarter and has returned 275% since May 2014, beating its benchmark by 150 percentage points (see more details here).
7 Most Profitable Mid-Cap Stocks To Invest In
7. Dayforce Inc (NYSE:DAY)
TTM Net Income: $47.1 Million
5-Year Net Income CAGR: 19.17%
Market Capitalization: $9.86 Billion
Number of Hedge Fund Holders: 23
Dayforce Inc (NYSE:DAY) is a global human capital management (HCM) software company that provides human resources software and services. The company’s flagship cloud HCM platform, Dayforce, integrates various HR functions, including payroll, workforce management, benefits administration, and talent management capabilities. The Dayforce HCM platform is designed to streamline HR processes for businesses, helping them manage their workforce efficiently.
The company is actively enhancing its position in the human capital management (HCM) sector through a series of strategic initiatives and product innovations. The company has differentiated itself as an all-in-one global platform that simplifies HR processes with a comprehensive suite powered by artificial intelligence (AI). Dayforce Inc’s (NYSE:DAY) recent achievements include reaching a significant milestone of $4 billion loaded into its Dayforce Wallet, which is expected to double its revenue this year, making it the fastest-growing product within the company.
In addition to this, Dayforce Inc (NYSE:DAY) is making good progress in significant projects like payroll modernization for the Canadian government, which aims to improve accuracy and timeliness in employee payments while also enhancing employee engagement. The company has secured notable contracts across various industries, including partnerships with a global agri-business and a family of hospitality brands in the UK.
The company is also continuously introducing exciting innovations like the Dayforce Skills Engine, which leverages AI to optimize workforce management and talent development.
In the second quarter of 2024, Dayforce Inc (NYSE:DAY) reported total revenue of $423.3 million, reflecting a 15.7% increase compared to the previous year. The company’s recurring revenue reached $321.6 million, marking a 19.9% year-over-year growth. For the first half of 2024, net cash from operating activities was $108.3 million, up from $93.0 million in the same period last year, while free cash flow also improved to $53.9 million from $36.5 million.
DAY ranks among the most profitable stocks to invest in. Over the past five years, the company has seen its net income grow at a compound annual growth rate (CAGR) of 19.17%, with revenue increasing at a CAGR of 16.12%. This growth underscores Dayforce Inc’s (NYSE:DAY) strong market position and its ability to expand its customer base while enhancing its product offerings in the competitive human capital management sector.
According to Insider Monkey’s Q2 database of over 900 hedge funds, 23 hedge funds held stakes in Dayforce Inc (NYSE:DAY). Baron Funds stated the following regarding Dayforce Inc (NYSE:DAY) in its first quarter 2024 investor letter:
“Humancapital management (HCM) software leader Dayforce Inc (NYSE:DAY) fell on concerns that slowing employment growth will reduce the company’s growth rate in the near term. Although Dayforce has some direct exposure to employment levels, it is also benefiting from powerful secular trends around the modernization of HCM software and growing adoption of SaaS.”
6. Primerica Inc. (NYSE:PRI)
TTM Net Income: $443.07 Million
5-Year Net Income CAGR: 4.93%
Market Capitalization: $9.3 Billion
Number of Hedge Fund Holders: 25
Primerica Inc. (NYSE:PRI) is a financial services company that focuses on serving middle-income families in the United States and Canada. The company offers a range of products including term life insurance, mutual funds, annuities and other financial products. It also offers various types of insurance such as auto and home coverage. Primerica operates using a multi-level marketing model, empowering representatives to sell its products while promoting financial literacy within their communities.
The company is actively enhancing its growth strategy by focusing on expanding its sales force and increasing the demand for its financial products. In the second quarter of 2024, Primerica Inc. (NYSE:PRI) reported a 12% increase in recruitment. The company also saw a 14% increase in licensing, with more than 14,000 representatives obtaining new life licenses. This helped drive the company’s sales force to record 145,789 representatives
In the second quarter of 2024, Primerica issued over 100,000 new term life policies, adding $33 billion in coverage for middle-income families, which reflects the company’s strong commitment to serving this demographic.
Primerica Inc. (NYSE:PRI) saw impressive growth in its investment and savings products segment, with sales reaching $3.1 billion in Q2 2024, reflecting an increase of 29% year-over-year. Investment and savings product client asset values increased 15%, ending the quarter at a record $105 billion.
During the second quarter, the company decided to exit the senior health market due to profitability challenges. However, Primerica Inc.’s (NYSE:PRI) focus on core offerings and innovative recruitment strategies positions it well for sustained growth in the competitive financial services landscape.
Over the past 5 years, Primerica Inc. (NYSE:PRI) has grown its net income at a compound annual growth rate (CAGR) of 4.93%, while its levered free cash flow has increased at a CAGR of 10% during the same period.
According to Insider Monkey’s database, 25 hedge funds held stakes in Primerica Inc. (NYSE:PRI) in the second quarter of 2024. This brings PRI to the 6th spot on our list of the most profitable mid-cap stocks to invest in.