NEW YORK (TheStreet) -- As investors feel more comfortable with risk, mid-cap stocks may be the place to be in 2011, two fund managers say.
So far in 2010, the
iShares S&P MidCap 400 Index ETF
has risen 24%, in line with the
iShares SmallCap 600 Index ETF
and more than double the 12% increase in the large-cap
. Over five years, the MidCap ETF has returned 21%, compared with an increase of 15% for the SmallCap ETF and a 1% loss for the S&P 500.
"Historically, returns of mid-caps have outpaced large-caps, while performing almost as well as small-caps but with less volatility. Looking at the valuations and growth profiles of the three indices, for 2011 we expect this trend to continue," says Matt Fahey, manager of the
Marshall Midcap Value Fund
"Europe's struggles with sovereign debt and China's attempts to slow its economy to prevent an asset bubble of their own will benefit U.S. stocks -- especially mid-caps, which are traditionally a sweet spot in the market -- in 2011 as investors look for a combination of safety and growth," says Frank Ingarra, co-manager of the
Hennessy Focus 30 Fund
searched for four magnificent mid-caps for 2011 with Fahey and Ingarra.
Community Health Systems
Community Health is a U.S. operator of hospitals. At the start of 2010, it owned or leased 122 hospitals with an aggregate of 18,140 licensed beds in non-urban and selected urban markets in 29 states. The company also owned and operated four home-care agencies.
Fahey says the stock is cheap, trading at just over 11 times earnings with expected growth in earnings of 8% and a free cash yield of 10%. One reason why Community Health and other hospital stocks have been out of favor is the uncertainty over health-care reform. But Fahey does not expect the discounts in the sector to last long as regulations become clearer and the industry consolidates.
"We expect the earnings multiple to expand toward a more normal low- to mid-teens range as the company continues to deliver solid earnings and free cash flow growth," says Fahey. "Should the company acquire
for $6 to $7 per share, we expect significant earnings accretion, whereby the company could produce earnings on a run rate of $4 per share. Using a conservative multiple of 12 times, we could see the stock trade into the high $40s by year-end 2011."
Whirlpool is the world's leading maker of major home appliances, with annual sales of about $17 billion in 2009. The Benton Harbor, Michigan-based manufacturer boasts 67,000 employees, and 67 plants and technology research centers around the world. Brands include Whirlpool, Maytag, KitchenAid, Jenn-Air, Amana, Brastemp, Consul and Bauknecht.
Whirlpool trades at under 10 times earnings, despite owning a worldwide franchise generating a high-single-digit free cash yield and a dividend of 2%. Fahey, however, says that will grow in 2011 as the company's emerging-markets business takes off.
"We expect the company to expand its operating margin toward 8% from the current level of 6.5%, as the company continues to grow its emerging-markets revenue base and experiences growth in mature markets as economies worldwide recover," says Fahey. "With earnings power of $12 a share, we expect the stock to move toward $120 by year-end 2011."
Tenneco is one of the world's largest designers, manufacturers and marketers of emissions-control and ride-control products and systems for the automotive industry. The Lake Forest, Ill.-based manufacturer has about 21,000 employees worldwide, selling its products under the Monroe, Walker, Gillet and Clevite Elastomer brand names.
Earlier this month, Tenneco improved its balance sheet by selling $500 million of senior notes due in 2020 in a private offering in order to buy back debt due in 2014.
"Our Hennessy Focus 30 model uses a price-to-sales ratio below 1.5 with improving earnings and stock-price momentum, and with a price-to-sales of 0.4 and a sizzling stock price, Tenneco certainly fits the bill," says Ingarra. "The rebound in the automotive sector is benefitting this industry. With fewer competitors, the auto-parts suppliers are finally able to make some money."
Shares of Crocs are crackling in 2010, up three-fold. The Niwot, Colo.-based company makes footwear for men, women and children. It also offers a line of products for boys and girls featuring its proprietary closed cell-resin Croslite, as well as accessories that include snap-on charms and messenger bags.
In terms of distribution, Crocs sells its products through domestic and international retailers, as well as directly to consumers through its Web stores, company-operated retail stores, outlets and kiosks. As of the beginning of this year, the company operated 170 domestic and international retail kiosks located in malls and other high-foot traffic areas, 84 domestic and international retail stores, 63 domestic and international outlet stores and 23 Web stores.
"This is not the same old Crocs," says Ingarra. "They have enhanced their inventory management and improved their focus on product development versus marketing. Finally, they are clearly seeing international growth."
Disclosure: TheStreet's editorial policy prohibits staff editors and reporters from holding positions in any individual stocks.