We recently compiled a list of the 10 Best Mid Cap Value Stocks To Invest In. In this article, we are going to take a look at where LKQ Corporation (NASDAQ:LKQ) stands against the other best mid cap value stocks to invest in.
Mid-Cap Stocks are Better in the Near Term
An easing cycle coupled with an upcoming election creates quite the environment for differing opinions to co-exist. On October 9, Jill Carey Hall, Bank of America Global Research head of U.S. small and mid-cap strategy and senior U.S. equity strategist, joined ‘Squawk Box’ on CNBC to discuss her bullish stance on mid-cap stocks, especially in the near term.
Hall stresses that small-cap stocks have been underperforming since the 50 basis point rate cut, going against historical expectations of small-caps performing well in such cases. She emphasized that investors are focused on stocks with stronger fundamentals and small-cap stocks are currently stuck in an earnings recession. We have yet to see a recovery season for small caps, the way we have been seeing it for slightly larger stocks, Carey adds.
READ ALSO: 10 Most Profitable Value Stocks To Invest In and 10 Most Promising Mid-Cap Stocks According to Hedge Funds.
Carey shares that mid-cap stocks are likely to be a “better hedge” in the near term, as they boast stronger fundamentals and have better earnings trends. Overall, she believes that mid-cap stocks have historically performed better than small-caps and are, therefore, a better area to target. She also emphasized that one rate cut is not going to solve the re-financing risk that small-caps, especially companies in real estate and tech, inherently come with.
She adds that investors must focus more on themes rather than specific sectors. However, with the current economic backdrop and a soft landing in sight, she advises investors to remain inclined towards stocks with positive revisions, higher quality, and stronger dividend yields, given that as the Fed continues to cut rates, money is expected to be driven more into equity income.
Carey also shares that the current economic environment has been weak but we may see acceleration after this quarter, keeping in mind that current GDP and jobs data have been “encouraging.” While she upholds an element of uncertainty, she remains focused on less risky and high-quality stocks. As investors look to the Fed as a catalyst for the market, high-quality stocks trading at discounted valuations are likely to reap greater benefits.
Our Methodology
To come up with the 10 best mid-cap value stocks to invest in, we used the Finviz stock screener. We set the market capitalization filter to range between $2 billion and $10 billion and the Forward P/E filter to under 15. We then examined the hedge fund sentiment of these stocks as of Q2 2024 and picked the most popular ones. The stocks are sorted primarily in ascending order of the number of hedge fund holders as of Q2 2024 picked from our database and secondarily in order of their forward P/E and market capitalization.
Why are we interested in the stocks that hedge funds pile into? 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).
A worker assembling parts in an automotive factory for an autonomous vehicle.
LKQ Corporation (NASDAQ:LKQ)
Number of Hedge Fund Holders: 31
Market Capitalization as of October 28, 2024: $9.95 Billion
Forward P/E as of October 28, 2024: 10.9
LKQ Corporation (NASDAQ:LKQ) ranks 10th on our list of the best mid cap value stocks to invest in. The auto parts company is engaged in the provision of salvage/aftermarket and recycled auto parts. The company has operations in North America, Europe, and Taiwan.
It provides customers with a range of replacement discount auto parts such as engines, transmissions, components, and equipment. LKQ Corporation (NASDAQ:LKQ) has been in business since 1998 and was formed through a combination of wholesale recycled product businesses. The company then grew through strategic initiatives and nearly 270 acquisitions. Today, the company has over 45,000 employees in 1,600 locations across 25 countries.
In the third quarter of 2024, LKQ Corporation (NASDAQ:LKQ) generated $3.6 billion in revenue with $420 million in operating cash flow and $341 million in free cash flow. During the same quarter, the company logged $191 million in net income and returned over $200 million to shareholders.
The company’s acquisitions and partnerships have helped it grow and sustain its business model. During Q3, the net impact of acquisitions and divestitures led to a 3.1% increase in revenue, offsetting declines due to macroeconomic conditions in other areas. LKQ Corporation (NASDAQ:LKQ) is confident about its long-term earnings potential despite current macroeconomic headwinds and short-term industry dynamics.
Artisan Partners’ Artisan Mid Cap Value Fund stated the following regarding LKQ Corporation (NASDAQ:LKQ) in its Q2 2024 investor letter:
“In the health care and consumer discretionary sectors, Baxter International and LKQ Corporation (NASDAQ:LKQ) were key detractors. LKQ is the dominant player in salvage/aftermarket collision parts distribution in North America, with over 70% market share. In addition to continued cost inflation, lower-than-expected collision claims in North America due partly to a mild winter resulted in disappointing quarterly earnings. What was already a cheap stock when we initiated our position in January of this year has become even cheaper. At a 10X P/E, shares trade at a distinct discount to their historical 10-year average of 14X and are also cheaper relative to LKQ’s auto parts retailer peers, which arguably have similar long-term growth profiles. LKQ isn’t a fast-growing business, but it can grow 2% to 4%, and given its dominant market share and mid-teens return on tangible capital, we believe it should trade at a higher valuation. Over the last decade, LKQ has also become the largest mechanical parts distributor in Europe. As is the case in North America, independent European mechanics value LKQ’s reliable distribution and competitive pricing. The European business has improved operationally over the last five years as LKQ has focused on the integration of its various acquisitions to drive margin and free cash flow improvements. LKQ operates in end markets with limited cyclicality as 90% of revenues are tied to non-discretionary spending and reliably has strong free cash flow generation. The company also meets our requirement for a sound financial condition as its debt load is manageable at 2X EBITDA due to its attractive free cash flow. We added to our position on weakness.”
Overall, LKQ ranks 10th among the 10 best mid cap value stocks to invest in. While we acknowledge the potential of LKQ as an investment, our conviction lies in the belief that AI stocks hold greater promise for delivering higher returns, and doing so within a shorter time frame. If you are looking for an AI stock that is more promising than LKQ but that trades at less than 5 times its earnings, check out our report about the cheapest AI stock.
READ NEXT: 8 Best Wide Moat Stocks to Buy Now and 30 Most Important AI Stocks According to BlackRock.
Disclosure: None. This article is originally published at Insider Monkey.
