NEW YORK (TheStreet) -- Despite 12 months of rising valuations, Brian Peery, who helps oversee $4 billion in assets at Hennessy Funds, identifies three mid-cap stocks with growth potential at a reasonable price.
The stocks all have market capitalizations between the $1 billion and $10 billion, and project to above-average growth. All three are holdings in the Hennessy Cornerstone Mid Cap 30 Fund (HFMDX):
Brunswick Corporation (BC). Brunswick is famous for pool tables, but its marine business accounts for 75% of sales from brands such as the Boston Whaler and Bayliner, and marine engine names including Mercury Marine. Peery says Brunswick is "doing everything right: growing revenue, operating earnings, exanding margins and profit while paying down debt. That's quite a combination.
If Brunswick can double its free cash flow over the next couple of years, that could translate into double digit earnings per share growth, Peery says. At a price to sales ratio of 1.1 times, shares would have to rise another 35% to 40% before hitting the 1.5 threshold whereby Brunswick would be considered too expensive. Wall Street for the most part shares Peery's upbeat view on Brunswick, with eight of 11 analysts covering the stock at outperform (4) or buy (4).
Brunswick shares were gaining 1.32% to $46.12 in mid-day trading.
Lithia Motors (LAD) represents the trend of cash-rich companies seeking ways to reward the shareholders in a slow-growth environment.
One strategy has been to fuel top line growth through acquisitions, and that's exactly what Lithia Motors has been doing. The Medford, Oregon-based company is almost doubling domestic sales and more than doubling import sales.
"Their strategy is really focusing on a volume-based strategy and it seems to be working," says Peery. "I think the acquisitions are going to keep playing an increasingly important role going into 2014."
With a price to sales ratio of just 0.4, Lithia Motors is looking incredibly cheap. The sell-side is generally in agreement with Peery's bullish recommendation, with all 10 analysts covering Lithia at either buy (5) or outperform (5).
Lithia was adding 1.4% to $67.44.
Alaska Air (ALK), which has won the best customer service accolade from J.D. Power six years in a row, has been generating cash flow of nearly $1 billion that is going towards capital expenditures and rewarding shareholders through dividends and share buybacks. The Seattle-based airline is essentially debt free and its pensions are fully-funded.
"They're kind of doing everything that they need to do in managing the business effectively," says Peery. The stock has a price to sales ratio of 1, or must increase 50% before looking too expensive at 1.5. Wall Street is bullish on Alaska Air, with 11 out of 16 analysts covering the stock at buy (6) or "outperform (5).
Alaska Air was advancing 0.9% to $74.53.
-- Written by Andrea Tse in New York.
>Contact by Email.