We recently compiled a list of the 10 Oversold Midcap Stocks to Buy Right Now. In this article, we are going to take a look at where XP Inc. (NASDAQ:XP) stands against the other oversold midcap stocks.
The outlook for mid-cap stocks is looking increasingly bullish after lagging large-cap stocks for the better part of the year. That’s the sentiment in the equity market in the aftermath of the “red wave” sweep in the just concluded US elections. Growing optimism that a Republican administration will help foster a pro-growth environment while reducing regulatory constraints are some factors that make a case for mid-cap stocks heading into year-end.
While interest rate cuts by the US Federal Reserve were expected to be a positive for small-cap stocks, that has not been the case. Most have underperformed in the market on investors paying close attention to fundamentals. While most small-cap companies are struggling with disappointing financial results and outlooks, Bank of America Global Research Head Jill Carey Hall believes it is time to pay attention to mid-cap stocks.
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“I think midcaps could be a better hedge for the near term, they have seen better earnings and guidance trends and they have historically still done well and often time better than smaller caps following the initial Federal Reserve cut historically,” said Hall in an interview with CNBC’s Squawk Box.
The S&P 400, a benchmark for midsized companies, is only up by about 17% year to date. While it has underperformed the larger S&P 500, up by about 22%, the S&P 400 index has started showing signs of edging higher, signaling renewed investor interest in mid-cap companies. The optimism comes from growing expectations that they will be one of the biggest beneficiaries of reduced regulations and tax cuts from the Trump administration.
Similarly, the case for oversold mid-cap stocks is growing amid the interest rate cutting spree by the Fed which is expected to steer the economy into a soft landing. The interest rate environment is becoming increasingly favorable for small and mid-sized companies looking to access cheap capital to enhance their operations.
“Historical data suggest that smaller-cap stocks have tended to be main beneficiaries once the Fed begins to lower rates. Therefore, we continue to advise investors to increase exposure to this area since we believe it is only a matter of time before the fortunes of this group take a turn for the better,” BMO Capital Markets’ Brian Belski wrote in October.
Compared to large-cap stocks, which can issue debt at a rate that reflects the quality of their income statement and balance sheet, small-cap stocks are more vulnerable to high interest rates due to their cost of borrowing.
Consequently, technology companies focused on revolutionary technologies such as artificial intelligence and machine learning should be the biggest beneficiaries of being able to access cheap capital to accelerate their research and development activities. Likewise, small-cap utilities and industrial companies are on the cusp of booming business amid a massive increase in power demand driven by the artificial intelligence boom.
Mid-cap stocks that have pulled back significantly while backed by solid underlying fundamentals offer opportunities heading into the year-end. With valuations in the overall market appearing overstretched, now would be the best time to pay close watch to the best oversold mid-cap stocks to buy, as most are well poised to benefit from a favorable monetary policy environment and regulatory environment under the new administration.
Our Methodology
To compile our list of the oversold midcap stocks to buy right now, we used the Finviz and Yahoo stock screeners to find stocks with a market cap of between $2 billion and $10 billion. We then focused on stocks that have fallen significantly by more than 30% year to date and have a forward P/E of less than 10 as of November 14. We then narrowed our choices to 10 stocks that have significant upside potential based on analysts’ average price targets. The list is sorted in ascending order of their upside potential.
At Insider Monkey, we are obsessed with 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 financial professional examining price changes on a stock broker’s trading floor.
XP Inc. (NASDAQ:XP)
Forward P/E: 10.22
Analysts Upside Potential as of November 14: 36.90%
Year to date performance as of November 14: -34.32%
XP Inc. (NASDAQ:XP) is a financial services company that provides products and services. While down by about 34.32% year to date, growth in the core business depicted by solid financial results should support a bounce back from the current slump.
The company is enjoying successful cross-selling of new product offerings such as insurance and cards. Additionally, XP Inc. (NASDAQ:XP) is benefiting from improving economic conditions in Brazil as the central bank lowers interest rates. Management has also embarked on a cost control drive, with expenses decreasing as a revenue percentage, fueling better gross margins. With the better-than-expected financial results, XP remains on track to meet its fiscal 2026 financial targets.
XP Inc. (NASDAQ:XP) is one of the best mid-cap stocks to buy, boasting a solid balance sheet with a net asset value of over $1.5 billion. Consequently, it has started returning value to shareholders through buybacks. It is also on course to pay a special dividend in the fourth quarter. While trading at a price-to-earnings multiple of 10.22, the stock is rated as a buy with an average price target of $23, implying a 36.90% upside potential as of November 14, 2024.
Overall XP ranks 7th on our list of the oversold midcap stocks to buy right now. While we acknowledge the potential of XP as an investment, our conviction lies in the belief that some AI stocks hold greater promise for delivering higher returns, and doing so within a shorter timeframe. If you are looking for an AI stock that is more promising than XP 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.
