Unum, Agco and 3 More Mid-Cap Stocks to Consider
If your nose bleeds when you look at the high prices of the market's most popular stocks, you may find some bargains in mid-sized stocks.
I believe that mid-capitalization stocks are poised to do well in 2024. I define mid-caps as stocks with a market value of $1 billion to $10 billion. I classify anything over $10 billion as large and under $1 billion as small.
As of Jan. 26, GuruFocus software shows the median mid-cap stock traded for 13.60 times earnings, while the median large-cap stock commanded a multiple of about 18.
That gap -- more than four percentage points -- is unusually large. According to Standard & Poor's, the gap has averaged only 0.8 percentage points over the past 20 years.
Here are a handful of mid-sized stocks you might way to research and consider adding to your portfolio.
Unum
One of the largest disability insurance companies in the U.S. is Unum Group (NYSE:UNM), based in Chattanooga, Tennessee. The stock peaked at about $58 in 2018, and fell to a nadir near $10 during the Covid-19 pandemic. Now it's around $47.
Disability insurers typically face a raft of claims (some of them dubious) during economic downturns. In the past year, as investors have gotten more optimistic about the economy, Unum stock has risen 15%. It still seems attractively valued to me at eight times recent earnings.
The firm of the late Donald Smith, whom I considered to be a noted value investor, has had more than 5% of its portfolio in Unum since mid-2018.
Agco
Based in Duluth, Georgia, Agco Corp. (NYSE:AGCO) makes tractors and other farm products, and sells a wide variety of agricultural supplies worldwide through about 3,000 dealers. It has shown a profit every year for the past 16 years, getting through the Great Recession and the Covid-19 pandemic without a loss.
The stock has nearly doubled in the past five years, but still sells for what I consider reasonable valuations: 8 times recent earnings and 0.64 times revenue. The return on equity (profits as a percentage of corporate net worth) in the past four quarters was 28%, which is quite high.
The risk here is the U.S. agricultural economy, recently strong, will tail off. And indeed, analysts expect Agco's profits will drop to about $13 a share in 2024 from an estimated $15-plus in 2023.
But I take some comfort in the fact Agco doesn't depend exclusively on the U.S. It gets about 38% of revenue in Europe and the Middle East, 25% in North America, 19% in Asia and 18% in South America.
John Bean
John Bean Technologies Corp. (NYSE:JBT), based in Chicago, makes machinery and equipment for two industries food processing and air transportation.
The FoodTech segment makes equipment for chilling, grinding and sterilizing, among other things. The AeroTech segment makes equipment for towing planes, de-icing, cargo handling and other jobs.
John Bean was a California man who invented a piston pump to spray insecticide on fruit orchards. He founded the company that became the Food Machinery Corp., later FMC Corp. John Bean stock went public in 2008, in a spinoff from FMC. It has been profitable every year since.
The company had a great return on equity in the past four quarters, 57%. I don't expect that to be repeated, but half of it would be enough to please me.
Callon Petroleum
Callon Petroleum Co. (NYSE:CPE) hit a high of $176 in 2016. Today it trades for about $33. Yet the company's earnings per share are higher today than they were when the stock peaked.
Callon is based in Houston, and produces oil and gas mainly in Texas and New Mexico. Its earnings have swung wildly from year to year, so investors accord it only a low valuation. At today's price, Callon sells for only four times recent earnings and five times the earnings analysts expect in 2024.
M.D.C.
Homebuilding stocks got smacked last year as mortgage interest rates rose, pricing many potential home buyers out of the market. Rates have come down a notch, and potential home buyers are starting to house hunt again. I believe there is a lot of pent-up demand for single-family houses.
M.D.C. Holdings Inc. (NYSE:MDC) is a homebuilder active mostly in the South and West. It has an 11-year profit streak going, and 2023 should be the 12th year of that streak, once the year-end figures are in.
I like a lot of the homebuilding stocks, and this one seems like a reasonable value to me, at 13 times earnings.
John Dorfman is chairman of Dorfman Value Investments in Boston, Massachusetts. His firm or clients may own or trade the stocks discussed here. He can be reached at jdorfman@dorfmanvalue.com.
This article first appeared on GuruFocus.
