Each business day, TheStreet.com Ratings compiles a list of the top five stocks in five categories -- fast-growth, all-around value, large-cap, mid-cap and small-cap -- and publishes these lists in the Ratings section of our Web site.

This list is based on data from the close of the previous trading session. Today we focus on mid-caps. These are stocks of companies that have market capitalizations of between $500 million and $10 billion that rank near the top of all stocks rated by our proprietary quantitative model, which looks at more than 60 factors.

The stocks must also be followed by at least one financial analyst who posts estimates on the Institutional Brokers' Estimate System. They are ordered by their potential to appreciate.

Note that no provision is made for off-balance-sheet assets such as unrealized appreciation/depreciation of investments, market value of real estate or contingent liabilities that might affect book value. This could be material for some companies with large underfunded pension plans.


Designing, manufacturing and servicing electrical components and equipment for aircraft and industrial engines, Woodward Governor ( WGOV) has had a buy rating since December 2005. It demonstrates robust revenue growth, a very low debt-to-equity ratio and a largely solid financial position with reasonable debt and valuation levels.

Fiscal-year fourth-quarter profit totaled $36 million, or $1.02 a share, up from $17.1 million, or 49 cents a share, a year earlier. Revenue increased 25% during the same time frame.

Woodward Governor's stock price climbed 73.5% over the 12 months prior to Dec. 14, and while almost any stock can fall in a broad market decline, it should continue to move higher. These strengths outweigh the company's low profit margins.


Amphenol ( APH), which has been rated a buy since October 2005, designs, manufactures and markets electrical, electronic and fiber-optic connectors. Third-quarter revenue increased 15.3% over a year ago to $733.85 million, supported by healthy demand from the military, commercial aerospace and automotive markets across all geographic regions. Net income grew 37.2% to $91.5 million, benefiting from margin expansion and lower taxes.

Amphenol has undertaken initiatives to strengthen margins and reduce costs; it now makes about 67% of its products in low-cost countries. It also leases facilities instead of buying them and frequently employs temporary or part-time workers in place of full-timers. These strategies helped it achieve significant cost savings and attain some of the highest profit margins in the industry, despite increasing raw-material costs.

The company focuses on the needs of its original equipment maker customers to develop highly engineered products and systems that meet specific customer needs. It directs its R&D efforts mainly in those areas which it believes have the potential for broad market applications and considerable sales within a one- to three-year time frame, fueling both its revenue and profit growth.

There are a few risks. The company has widespread global operations, and as a result, any significant change in the political and economic conditions could have an adverse impact on its business performance. Also, intense competition and increasing raw-material costs could harm its margin.


Heico ( HEI), a maker of aerospace, defense and electronics products, has been rated buy since December 2005. Third-quarter profit increased 32% to $10.9 million, or 40 cents a share.

The company has demonstrated a pattern of positive EPS growth over the past two years, and its year-on-year revenue growth of 30.3% for the third quarter was well above the industry average of 6.2%. This growth is expected to continue. Its debt-to-equity ratio of 0.12 is below that of the industry average, implying that there has been very successful management of debt levels.

The stock has risen by 10.71% the last 12 months prior to Dec. 14, to a price level that is now somewhat expensive compared with the rest of its industry. The other strengths this company shows, however, justify the higher price levels. Heico's weak operating cash flow is not a threat to the buy rating at this time.


Flowserve ( FLS), which makes industrial pumps and valves, has been rated a buy since January. The company has experienced good cash flow from operations, expanding profit margins and impressive growth in EPS, revenue and net income. Although the company may harbor some minor weaknesses, they do not appear likely to have a significant impact on results.

Third-quarter profit more than doubled to $63.1 million, or $1.10 a share. Flowserve has demonstrated a pattern of positive EPS growth over the past two years and this is expected to continue. Revenue jumped 19% to $919.3 million in the third quarter compared with the same period last year.

Challenges faced by the machinery industry include the recent surge in commodity costs, which has lowered margins on many goods. This has resulted in higher prices, which customers have generally absorbed as surcharges have helped cover the difference, though there is no guarantee this will continue.


Electronic instruments and electromechanical device manufacturer Ametek ( AME) has been rated a buy since November 2005. The company's acquisition strategy is expected to augment revenue growth, with nearly 30 acquisitions completed since 1999.

In June, the company announced the acquisition of Hamilton Precision Metals -- a deal that will diversify its electromechanical segment -- and two privately held aerospace businesses. It also picked up Cameca SAS, a maker of high-end analysis systems, in August. The company has also invested more than $300 million in new-product initiatives over the last five years.

Ametek's third-quarter revenue was up 13.9% compared with the same period last year, driven by strong organic growth and contributions from acquired businesses. Net income grew 20.8% over the same time frame, supported by margin expansion, partly offset by higher interest and taxes.

The principal risks to the buy rating include possible difficulties integrating acquisitions, rising raw-material costs and any prolonged downturn in the aerospace, heavy-vehicle and process instrumentation markets.


This article was written by a staff member of TheStreet.com Ratings.

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