3 bullish mid-cap earnings plays for January 2024

Key Points

• Price targets for tech-education player Stride are in the $60 to $70 range and any sort of pre-earnings release pullback may present an opportunity.
• Analysts will be looking for a fourth consecutive period of 20%-plus revenue growth and a 37% jump in profits when Badger Meter reports in early February.
• As businesses continue to invest in AI data centers, machine learning tools and cloud storage, activity is expected to pick up for Celestica.

Whether it be a pair of jeans, a smart TV or a box of cereal, ‘25% off’ is a significant deal these days. In the U.S. stock market, mid-cap stocks are that deal.

Based on Wall Street’s earnings per share (EPS) estimates for the next 12 months, the mid-cap S&P 400 index is trading at a 15x multiple. Compare this to the forward P/E multiple of the large-cap S&P 500, 20x, and there’s a 25% off sale happening in the mid-cap aisle of the stock supermarket.

The sizable valuation disparity reflects several variables. First, in the shaky economic environment that was 2023, investors were more willing to pay up for established blue-chip companies that are theoretically better equipped to weather the storm. Second, higher interest rates tend to have a greater impact on smaller companies’ ability to borrow money for growth projects. Third, 2023 was a dominant year for technology, a sector that commands 29% and 10% weightings in the S&P 500 and S&P 400, respectively.   

The result: large-cap stock prices have gravitated higher, and mid-cap stock prices lower for the same dollar of earnings.

With U.S. mid-caps trading at relatively low valuations, some of the biggest fourth-quarter earnings pops could come from the middies. Companies that post strong results could get outsized attention from traders because their P/E ratios have more room to expand.

For swing traders and day traders, these are a few names to keep on the radar.

Will Stride gap up again? 

Tech-education player Stride, Inc. NYSE: LRN reported record fiscal 2024 first quarter revenue last time out, causing the stock to gap up 18% in 12-times normal volume. The company is benefiting from rising demand for both general education and career learning solutions for children and adults. Led by a 20% jump in middle to high school sales, total revenue grew 13% year-over-year, turning a prior period loss into a profit. 

Management gave an upbeat outlook for the second quarter and fiscal 2024 that (along with the broad market uptrend) has enabled the stock to hang onto its post-earnings gains. Despite running 90% in calendar 2023, Wall Street remains bullish on the name. Price targets are in the $60 to $70 range and any sort of pre-release pullback may present an opportunity.

How did Badger Meter shares perform in 2023?

Badger Meter, Inc. NYSE: BMI is expected to announce fourth quarter numbers in early February. Analysts will be looking for a fourth consecutive period of 20%-plus revenue growth and a 37% jump in profits. For a provider of water flow instruments, this tech-like growth is quite impressive. 

As the leader in the global water meter market, Badger Meter is benefitting from a greater emphasis on water conservation and safety from municipalities and businesses alike. In the third quarter, this translated to a 44% increase in earnings per share (EPS) and a 20% dividend hike. In turn, the stock ran 3% on the day of the release and 42% for the year. 

Water isn’t the only thing Badger Meter doesn’t like to waste. The company wasted no time building on its 2023 momentum by announcing an acquisition last week. To expand its smart water offerings, BMI is buying Trimble’s remote real-time water monitoring business.

What is the Q4 EPS estimate for Celestica?

Former IBM division Celestica Inc. NYSE: CLS is projected to deliver fourth quarter EPS of $0.68, which represents 21% year-over-year growth. The electronic manufacturing services (EMS) specialist is an emerging beneficiary of the artificial intelligence (AI) boom. It serves a range of technology industries as well as customers in the automotive, industrial and medical spaces. As businesses continue to invest in AI data centers, machine learning tools and cloud storage, activity is expected to pick up for Celestica. 

The company will be coming off two straight sizable EPS beats that have revived the stock price to its highest level since 2002. Trading around 11x this year’s earnings estimate, CLS still has a lot of room for P/E expansion when stacked up against the broader technology sector. This ‘backdoor’ mid-cap AI play probably won’t fly under the radar for much longer.