We recently published a list of 16 Best Mid Cap Growth Stocks To Buy Now. In this article, we are going to take a look at where Toast Inc. (NYSE:TOST) stands against other best mid cap growth stocks.
50 Basis Point Reduction: Exaggeration or Hidden Benefit?
Recent discussions among financial strategists emphasize the current stock market dynamics, particularly regarding the upcoming US elections. Investors are encouraged to view dips in stocks of some sectors as long-term buying opportunities, as historical trends suggest that 10% corrections can be advantageous entry points.
While recent sell-offs were driven by sector-specific issues rather than broader economic concerns, the long-term outlook remains positive. Despite recession worries, the US economy is stable, with strong consumer performance and corporate profits exceeding expectations. This has contributed to a rebound in the NASDAQ and S&P 500.
Inflation has reportedly dropped to a three-year low of 2.6% in August, marking the lowest rate since March 2021. As inflation continues easing, there has been ongoing speculation that the Fed may begin cutting interest rates, potentially starting with a 25 basis point reduction.
Market analysts, including Gene Goldman and Craig Johnson, anticipate multiple rate cuts due to slowing inflation and economic growth. We discussed this earlier in our article about the 12 Best Small Cap Tech Stocks to Buy. Here’s an excerpt from it:
“Gene Goldman expressed that his base case anticipates 3 rate cuts of 25 basis points each, beginning in September. His belief lies in the slowing inflation, a deceleration in economic growth, and the overall resilience of the economy, which he thinks is not as dire as some reports suggest. Goldman noted that while the labor market showed mixed signals, with both positive and negative data, the market’s expectations for deeper rate cuts may be exaggerated….
Craig Johnson was also of the opinion that a 25 basis point cut is already anticipated by the market, suggesting that a 50 basis point cut could raise concerns among investors. He believes that a series of 25 basis point cuts would align with their perspective. Craig emphasized the importance of staying calm considering that, historically, October has been a strong month for the markets, with gains observed 86% of the time since 1929.”
However, on September 16, Erika Najarian, UBS senior equity research analyst, mentioned that small and mid-cap stocks could potentially benefit from a 50 basis point cut.
Najarian attributes the recent underperformance of financial stocks to market concerns about the implications of potential rate cuts for economic stability, leading investors to question a less favorable economic outlook. She believes some anticipated cuts may already be reflected in money center bank stock prices due to their strong year-to-date performance. A 50 basis point cut could especially benefit mid-cap stocks affected by commercial real estate issues.
She explains that a 50 basis point cut would significantly impact net interest income. Money center banks benefit more from rising rates, while mid-caps are liability-sensitive and may see deposits repriced faster, favoring them if rates are cut aggressively.
The recent Basel III news with lower capital thresholds triggered negative stock reactions, exacerbated by JPMorgan’s comments on reduced investment banking and trading growth targets. Factors included ongoing Basel III discussions since December 2023 influencing pricing, a leading bank suggesting consensus net interest income expectations are too high, casting doubt on other banks, and emerging signs of consumer weakness potentially spreading beyond lower-income segments.
Najarian highlights the challenges analysts face in predicting net interest income due to shifting rate expectations. While higher rates have traditionally benefited bank profitability, potential cuts create uncertainty about financial performance. She points out that banks must choose between cutting rates to remain competitive or maintaining volume, complicating forecasts for net interest income.
As Najarian emphasizes the uncertainty surrounding interest rate cuts and their effects on the financial sector, and investors await clarity from the Fed, we’re bringing you a list of the 16 best mid-cap growth stocks to buy now.
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).
An aerial shot of a computer server station, highlighting the company’s focus on cloud-based technology.
Toast Inc. (NYSE:TOST)
Market Capitalization as of September 13: $14.72 billion
Number of Hedge Fund Holders: 43
Toast Inc. (NYSE:TOST) is a leading restaurant management software platform that offers a range of tools and technologies to help restaurants streamline their operations, from point-of-sale (POS) systems and online ordering to inventory management and employee scheduling.
In Q2, the company set a new record by adding 8,000 net new locations. The company is broadening its Total Addressable Market by targeting important international markets, large enterprise chains, and the food and beverage retail sector.
Revenue for the quarter was $1.24 billion, up 26.99% year-over-year. The earnings per share were $0.04, missing Street estimates by $0.06.
Management announced that Bizoria, a fast-casual concept in Greater Atlanta, switched to Toast Inc. (NYSE:TOST) and increased its revenue by 25% after integrating the POS terminals. Similarly, Canadian quick-serve restaurant Tahini rolled out Toast Inc. (NYSE:TOST) in 42 locations and plans to double it next year, based on a 15% increase in check sizes.
The company added 100 stores to its partnership with Mussels Pretzels, expanding from 300. It is also being deployed with brands like Wet Soils and Barbecue Holdings. It entered grocery and convenience stores, totaling 220,000 locations and $660 billion in US spending, securing 1,000 new customers.
With 2,000 live locations as of Q2, Toast Inc. (NYSE:TOST) is improving its offerings by catering to all stakeholders in the restaurant industry, generating value by facilitating new revenue opportunities and streamlining operations. These elements position the company for growth.
Here is what Baron Opportunity Fund has to say about Toast, Inc. in its Q3 2021 investor letter:
“Toast, Inc. is a cloud-based end-to-end technology platform purpose-built for the restaurant industry. Its platform provides a comprehensive suite of cloud software products and financial technology solutions to its customers to connect front-of-house with back-of-house operations across all customer channels. Toast’s core module is its point-of-sale software solution and requires all customers to use Toast as their payment processor. Customers then have the option to bundle or add-on additional modules across operations, digital ordering and delivery, marketing and loyalty, team management, and back office. Toast today powers 48,000 restaurants within the 860,000 U.S. restaurant industry, largely focusing on small- and medium-sized (“SMB”) restaurant customers (generally fewer than 10 locations but up to 50), with some larger enterprise customers as well. Toast is the clear market leader in SMB restaurant technology with the best product offering and only full, end-to-end platform. We believe that as restaurants continue to invest in technology at an accelerated pace emerging from COVID, Toast will be a big beneficiary given its leading market position and best-in-class product. At less than 6% penetration of U.S. restaurants and 3% penetration of its $15 billion recurring-revenue TAM, Toast has a long runway for growth by signing on additional locations to the platform and increasing the attach rate of its value-add modules. Only 54% of customers today use 4 or more of Toast’s 10-plus modules, each of which provide significant value to the customer and would drive Toast’s recurring revenue stream higher.”
Overall, TOST ranks 11th on our list of best mid cap growth stocks to buy now. While we acknowledge the potential of TOST as an investment, our conviction lies in the belief that AI stocks hold great promise for delivering high returns and doing so within a shorter timeframe. If you are looking for an AI stock that is more promising than TOST but that trades at less than 5 times its earnings, check out our report about the cheapest AI stock.
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Disclosure: None. This article is originally published at Insider Monkey.
