|Steel Dynamics (STLD) |
Mid-cap stocks are often treated like middle children. They don't get all the exposure that the older kids get, and they also aren't the cute darlings the younger siblings are seen as. Mid-caps have the same issues. They aren't ready for an index like the Dow Jones. But on the other hand, they don't have the risk/reward potential of small-caps or micro-caps. That said, mid-caps are the best category to invest in. They've survived the small-cap stage, so they are probably here to stay. And they still have a lot of potential growth ahead of them. On Stockpickr, we've identified the top mid-cap value plays. These are stocks between $1 billion and $5 billion in market cap, that have a low trailing P/E ratio (less than 10) and very little debt. Furthermore, this portfolio identifies companies that have quality hedge funds or mutual funds accumulating their shares. For instance, hedge fund SAC Capital returned 34% last year on about $5 billion under management. More than half of that money is the personal money of Steven A. Cohen, the SAC of SAC Capital. He's known as an active trader, but lately he's been a long-term holder and often follows activists into a position. Cohen has been loading up on Teekay Shipping ( TK - Get Report). Basically, if you're a major oil company drilling in some offshore location and you need to get the oil to your customers, Teekay is the company you call. It isn't easy to transport oil from the choppy waters of the North Sea (where it is impossible to build a pipeline) to various locations around the world. The company has the largest fleet of shuttle tankers in the world. Analysts expect Teekay to earn $3.44 a share next year, giving it a forward P/E of just 13. I also like Steel Dynamics ( STLD - Get Report), which trades at less than six times EBITDA (earnings before interest, taxes, depreciation and amortization). As the name implies, the company manufactures and sells steel in the U.S., including beams, foundational supports, tubes, pipes and various other steel components used for buildings. It has a 35% return on equity and 20% operating margins, and the company reported great earnings last year. In addition, the stock hasn't done poorly, as seen here:
One of its shareholders is the Oppenheimer Main Street Small Cap Fund, which has a five-year average annual return of 13.82%, soundly beating the S&P 500. One of my favorite companies on the mid-cap value list is Markel ( MKL - Get Report). Not that many people have heard of Markel, but it's often considered close to being the next Berkshire Hathaway ( BRKA). First off, Markel doesn't split its stock. It's currently trading at $482, and it trades at just 12 times last year's earnings and at about nine times cash flows. Markel is also an insurance company, like Berkshire. The beauty of an insurance company is this: Everybody gives you their money, and they never want it back; you can keep it. Eventually you have to give it back, when people have accidents or a hurricane hits, etc. But for now, you get to keep it and invest it. All the profits you make? They're yours. We track Markel's investments at Stockpickr as well, and you can see some overlap between this name and other value investors. Among the shareholders in Markel is Buffettesque investor Fairholme, run by Bruce Berkowitz. I like some of his quotes from a 2000 interview with Business Week: "We recognize that you only need a few good ideas in a lifetime to be fabulously wealthy. ... We're always trying to wonder what can go wrong. We're very focused on the downside." And when asked what his biggest mistake was, he responded: "I've never had a big mistake. I've had some tiny ones, but, no, we've never had a big mistake." And in the past five years he's had an average annual return of 15%. We have 20 stocks on the mid-cap value plays list, and I believe all of them are worth looking at. They aren't the exciting tech names, but they are ones that are here to stay. They're all growing and in good fields, and they all seem to have interesting funds that own them. Stockpickr tip of the day: I plan to feature more user portfolios in my Blogwatch column and in my Stockpickr articles. If you set up a portfolio on Stockpickr with some good analysis, just email me your name on the site and I'll check it out.