The beauty of investing in mid-cap stocks is that you get a business of sufficient size, strength, and stability that has proved its business model, a hallmark of its large-cap brethren, but you also get a better growth component, something that tempts more investors to look into arguably riskier small-cap stocks.
With this perfect blend in mind, we asked three Motley Fool contributors to identify a mid-cap stock that would meet the criteria of value, growth, and opportunity. They came up with Universal Display (NASDAQ: OLED), Oshkosh (NYSE: OSK), and Harley-Davidson (NYSE: HOG).
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This stock is cheap for all the wrong reasons
Anders Bylund (Universal Display): This company, which develops and licenses out the technologies behind organic light-emitting diode (OLED) screens, is having a rough year so far. The stock is down 42% in 2018, including a 22% drop in the last week.
And I think that's a big mistake.
The company's fortunes have been tied to Apple (NASDAQ: AAPL) since last summer, when Cupertino announced that the iPhone X would come with OLED screens instead of the aging LCD technology. Universal Display's shares soared on the first rumors of that development and continued to fly higher as the Apple story developed. And when the iPhone X turned out to sell in less impressive unit volumes than expected, Universal Display's stock chart turned negative in a hurry.
Both the swift rise and the following plunge were based on sloppy analysis. Apple sure is a nice customer to have, but the Android market already provided plenty of fodder for Universal Display's smartphone-screen licenses. Samsung (NASDAQOTH: SSNLF) alone can go toe to toe with Apple's smartphone shipments in any given quarter, and it has been using OLED screens for its flagship models for years. And that's just one of several OLED adopters in the Android camp.
On top of that, Universal Display is leaning into non-smartphone markets in a big way. Samsung and friends are selling big-screen OLED television sets about as fast as they can crank them out of their factories. OLED-based lighting panels may become Universal Display's largest revenue driver in the long run. Long story short, many of Universal Display's investors are taking the whole Apple-based business way too seriously. Apple is just another customer and not even a very large one.
The recent third-quarter report was a mixed bag, showing strong earnings but soft top-line sales, and share prices plunged on the news. But the smartphone-based softness here will be followed by a swifter shift into TV and lighting in 2019 and beyond. If Universal Display's surging stock chart kept your finger off the "buy" button for this stock in the past, the current batch of ill-advised discounts should make you look again. Universal Display is absolutely a buy right now.
Back in the buying range
John Bromels (Oshkosh Corporation): Right in the middle of the mid-cap range, with a market cap of about $5 billion, is specialty truck maker Oshkosh Corporation (not to be confused with OshKosh B'Gosh, which is actually owned by Carter's).
While other truck makers manufacture 18-wheelers, Oshkosh makes cement mixers, fire engines, light military vehicles, and light construction equipment. There's comparatively little competition in some of these markets, which allows Oshkosh to command high prices and rack up good margins.
The market hasn't been kind to Oshkosh so far in 2018. It had bid shares up throughout 2017 in anticipation of higher defense spending and a federal infrastructure spending package that would have boosted the market for Oshkosh's construction equipment. When defense spending didn't result in any big new contracts for Oshkosh, the infrastructure package failed to materialize, and steel tariffs caused Oshkosh's materials prices to go up, investors began to sell off shares, which were down nearly 45% for the year after the recent market correction.
However, a very strong Q4/FY2018 earnings report (Oshkosh's fiscal year ends in Sept. 29), together with upbeat guidance for 2019, caused the market to take notice, and shares have already partially rebounded. Oshkosh is managing higher steel prices well by introducing surcharges and upping prices where it can. Those higher prices have translated into double-digit percentage increases in earnings on modestly higher sales. The company's shareholder-friendly management team has been buying back stock and just boosted the dividend by 12.7%. In spite of higher steel prices, now looks like an excellent time to pick up shares of this beaten-down American manufacturing success story.
Betting big on a turnaround
Rich Duprey (Harley-Davidson): There's no question Harley-Davidson is struggling to gain traction once more as the market for motorcycles with large-bore engines contracts. Sales plummeted more than 13% last quarter, which marks the 14th out of the last 15 quarters that sales have fallen. Yet there's reason to think the bike maker can get back on track.
Despite the weakness, Harley has been able to maintain its profitability because it rarely engages in the discounting that others in the industry do to gain market share. Because it still owns half of the market for motorcycles with engines 601 cubic centimeters and larger, it has time to figure out a plan for recovery. Its "More Roads to Harley-Davidson" strategic roadmap, released in July, has a number of components that could work.
Now none of this is to say Harley-Davidson is going to be a breakout star overnight. Many of the new models it will introduce are still two years or more away, and I've been very critical of a number of the choices the company has made, like its electric motorcycle due out next year. But it's possible it could be a big hit and could be the jolt the industry needs.
Harley knows it has a problem it needs to correct and is actively pursuing a path to do so. Its stock is also trading at some absurd valuations for a company this strong and financially sound.
The stock trades at only 11 times trailing earnings and 10 times next year's estimates while also going of for only 10 times the free cash flow it produces, a bargain-basement valuation. The time to buy a stock is before the rest of the market figures out what a steal it is. This industry leader has been abandoned by investors and looks attractive at these prices, even if it takes some time for the rest of the market to catch up.
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Anders Bylund owns shares of Universal Display. John Bromels owns shares of Apple, Carter's, and Oshkosh. Rich Duprey has no position in any of the stocks mentioned. The Motley Fool owns shares of and recommends Apple, Carter's, and Universal Display. The Motley Fool has the following options: long January 2020 $150 calls on Apple and short January 2020 $155 calls on Apple. The Motley Fool has a disclosure policy.