5 best mid-cap stocks to buy for a bounce back

JPMorgan Chase has pinpointed a number of mid-cap stocks that have been taken down too far. The rest of Wall Street is particularly high on these five.

  • By Dan Burrows,
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Big technology companies are getting all the glory this year, but the biggest bargains might just be hiding among mid-cap stocks.

JPMorgan Chase (JPM) says the huge selloff in midcaps since the beginning of the coronavirus crisis means that it has "never been easier to make money." Translation: There is no shortage of mid-cap stocks that are beaten down out of proportion to their earnings prospects.

To take advantage of this opportunity, JPM analysts pinpointed a number of the best mid-cap stocks to buy now. They sorted through the space, which is typically defined as stocks between $2 billion and $10 billion in market value, looking for stocks that are primed to bounce back. They limited themselves to names that are still down more than 30% since the beginning of the coronavirus crisis. The midcaps also had to have "solid balance sheets, near trough valuations, and businesses that are not structurally damaged."

JPMorgan Chase came up with a long list of stocks. Not to disparage JPM, but it's only one opinion. So to find the best of JPMorgan's midcap buys, we went with the wisdom of the crowd. We combed through the picks and singled out those with Buy calls and upbeat commentary from a wider range of analysts.

Here are five of the best mid-cap stocks to buy now for a bounce back. JPM likes this eclectic list – which includes an airline, a regional telecom, an educator and more – and the rest of the Street broadly agrees.

Share prices are as of Aug. 12. Analysts' recommendations and other data courtesy of S&P Global Market Intelligence, unless otherwise noted.

Alaska Air Group

Market value: $4.8 billion

Dividend yield: N/A

Analysts' recommendations: 7 Strong Buy, 3 Buy, 3 Hold, 0 Sell, 0 Strong Sell

The airline industry is taking a pounding from the pandemic, which has led to a huge drop-off in travel, and Alaska Air Group (ALK) has been no exception. Indeed, shares in the air carrier are down roughly 43% for the year-to-date, essentially in line with the broader industry.

Where Alaska Air stands apart is that the selloff has made its stock look like a bargain, analysts say. Wall Street's pros broadly include ALK among their best mid-cap stocks to buy, with an average rating of Buy on the stock. And their average price target of $45.54 gives the stock implied upside of about 13% over the next year or so.

The optimism is due in part to the expectation that Alaska Air will swing back to profitability in the second quarter 2021. But it's also because ALK makes for an attractive acquisition target.

"We believe Alaska's favorable exposure to a relatively strong and durable geography of the U.S. economy reduces the risk that Alaska emerges from the COVID-19 pandemic with significantly lower structural demand," write Stifel analysts, who rate the stock at Buy. "Further, should the pandemic and the downcycle in airline earnings it is triggering lead to eventual consolidation within the industry, we believe Alaska would be a highly valued asset."

JPMorgan analyst Jamie Baker rates ALK at Overweight and recently raised his 12-month price target from $54 per share to $55.

Laureate Education

Market value: $2.7 billion

Dividend yield: N/A

Analysts' recommendations: 2 Strong Buy, 4 Buy, 1 Hold, 0 Sell, 0 Strong Sell

For-profit educator Laureate Education (LAUR) isn't your typical investment. Ordinarily, investors buy shares in a company because they expect it to grow. But in this case, analysts are bullish on the higher education company because it keeps getting smaller.

The Street says LAUR is worth more if it's broken up. Indeed, the stock is up about 37% over the past month thanks to dealmaking. The company recently came to an agreement to sell its Australian and New Zealand operations. And it's looking to offload the rest of its operations in Brazil after selling some Brazilian assets last year.

Stifel analysts, who rate the stock at Buy, like "LAUR shares longer-term on the sum-of-the-parts valuation with an expressed desire to break up and sell the company in pieces."

Laureate's "sum-of-the-parts valuation well exceeds the current public market valuation," Stifel adds.

By ratings, LAUR is among the best midcaps in its industry. Buy calls outnumber Hold calls by 6 to 1 – including JPMorgan's Overweight rating, which includes a $16 price target. No analyst has a Sell rating on LAUR stocks at present. Meanwhile, an average target price of $16.64 gives LAUR implied upside of about 27% over the next 12 months or so.

Levi Strauss

Market value: $5.1 billion

Dividend yield: N/A

Analysts' recommendations: 5 Strong Buy, 2 Buy, 2 Hold, 1 Sell, 0 Strong Sell

Shares in Levi Strauss & Co. (LEVI), the apparel company best known for its iconic jeans, have lost about a third of their value in 2020. Fortunately, Wall Street's pros think the worst is behind it.

The best news to come out of the pandemic for Levi is that its e-commerce channel is on fire – and starting to turn profitable. "The pandemic is accelerating retail landscape shifts and consumer behavior in ways that play to the strength of the Levi's brand," says CEO Chip Bergh.

Levi also benefits from strong customer loyalty, notes UBS, which rates the stock at Buy.

Analysts expect the company to swing back to profitability in 2021 on 30% revenue growth to $5.4 billion. Furthermore, the stock looks reasonably cheap at less than 16 times analysts' estimates for next year's earnings. By comparison, the S&P 500's forward price/earnings ratio is closer to 23.

LEVI sits solidly among the best mid-cap stocks to buy now, at seven Buy calls versus just two Holds and one Sell. A collective 12-month price target of $16.50 gives shares about 28% upside.

Parsley Energy

Market value: $5.1 billion

Dividend yield: 1.6%

Analysts' recommendations: 21 Strong Buy, 10 Buy, 1 Hold, 0 Sell, 0 Strong Sell

The pros are practically falling over themselves to slap Buy recommendations on Parsley Energy (PE), an independent oil and natural gas company. The midcap is down by about 35% year-to-date, but it's on the rebound, and Wall Street loves the value PE presents right now.

Indeed, JPMorgan's Overweight call is joined by 30 other Buy calls versus just one Hold and no Sells. That puts PE among the best mid-cap stocks you can invest in right now, in analysts' minds.

UBS (UBS), which is one of those many Buys, applauds Parsley's successful efforts cutting costs. "In the new post Covid-19 environment, the focus is shifting towards financial returns and less towards growth, and PE anticipates a more mid-single digit growth longer term," UBS analysts say.

Some experts believe PE's growth is going to blast out of the gate in the post-pandemic recovery. They forecast average annual earnings growth of 35.7% over the next three to five years, according to S&P Global Market Intelligence.

Parsley is projected to deliver an adjusted profit of 45 cents a share in 2020. The Street expects that to rise to 71 cents a share next year and $1.14 in 2022.

Telephone & Data Systems

Market value: $2.7 billion

Dividend yield: 2.9%

Analysts' recommendations: 3 Strong Buy, 2 Buy, 0 Hold, 0 Sell, 0 Strong Sell

The mass migration to working from home has given the telecommunications business a nice boost. Telephone and Data Systems (TDS), which owns 83% of U.S. Cellular (USM), among other properties, sells wireless and wireline services in 36 states. U.S. Cellular, which operates mostly in the Midwest, is the seventh largest wireless operator by subscribers in the country.

JPMorgan is among five analysts covering the stock who are tracked by S&P Global Market Intelligence and say to pick up shares. The pros' average target price of $30.90 gives TDS implied upside of about 32% over the next 12 months.

The Street forecasts decent long-term annual average earnings growth of 9% over the next five years. Given that, the stock's valuation of trading at 16.5 times 2021 profits looks quite reasonable.

And let's not forget that income investors often gravitate toward telecoms because they typically pay generous dividends. TDS isn't punching with the likes of AT&T (T) and Verizon (VZ), but it still offers a nice yield of nearly 3% that puts most fixed income to shame right now.

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© 2020 The Kiplinger Washington Editors, Inc.
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