3 Mid-Cap Stocks We Approach with Caution
Many investors pay attention to mid-cap stocks because they have established business models and expansive market opportunities. However, their paths to becoming $100 billion corporations are ripe with competition, ranging from giants with vast resources to agile upstarts eager to disrupt the status quo.
This is precisely where StockStory comes in - we do the heavy lifting to identify companies with solid fundamentals so you can invest with confidence. Keeping that in mind, here are three mid-cap stocks to pass on and some alternatives you should look into instead.
J. M. Smucker (SJM)
Market Cap: $14.04 billion
Best known for its fruit jams and spreads, J.M Smucker (NYSE:SJM) is a packaged foods company whose products span from peanut butter and coffee to pet food.
Why Do We Pass on SJM?
- Shrinking unit sales over the past two years show it’s struggled to move its products and had to rely on price increases
- Forecasted revenue decline of 2.3% for the upcoming 12 months implies demand will fall off a cliff
- Low returns on capital reflect management’s struggle to allocate funds effectively, and its falling returns suggest its earlier profit pools are drying up
J. M. Smucker’s stock price of $131.42 implies a valuation ratio of 13x forward P/E. Check out our free in-depth research report to learn more about why SJM doesn’t pass our bar.
Regal Rexnord (RRX)
Market Cap: $10.71 billion
Headquartered in Milwaukee, Regal Rexnord (NYSE:RRX) provides power transmission and industrial automation products.
Why Are We Hesitant About RRX?
- Sales tumbled by 2.4% annually over the last two years, showing market trends are working against it during this cycle
- Absence of organic revenue growth over the past two years suggests it may have to lean into acquisitions to drive its expansion
- Below-average returns on capital indicate management struggled to find compelling investment opportunities
At $161.19 per share, Regal Rexnord trades at 13.5x forward P/E. If you’re considering RRX for your portfolio, see our FREE research report to learn more.
Penske Automotive Group (PAG)
Market Cap: $14.32 billion
With a diverse global network spanning the US, UK, Canada, Germany, Italy, Japan, and Australia, Penske Automotive Group (NYSE:PAG) operates automotive and commercial truck dealerships across the globe, selling new and used vehicles while providing service, parts, and financing options.
Why Do We Steer Clear of PAG?
- Disappointing same-store sales over the past two years show customers aren’t responding well to its product selection and store experience
- Gross margin of 13% is an output of its commoditized inventory
- Earnings per share fell by 10.1% annually over the last three years while its revenue grew, showing its incremental sales were much less profitable
Penske Automotive Group is trading at $218.16 per share, or 15.6x forward P/E. To fully understand why you should be careful with PAG, check out our full research report (it’s free).
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