3 hot mid-caps set to report Q3 earnings

Key Points

• XPO, Inc. is up approximately 116% so far this year and is scheduled to report pre-market on October 30th.
• Duolingo's use of generative AI could not only strengthen its core market position but also open up doors to learning modules outside of language.
• Expectations will be high when Yelp reports Q3 results because profits were up 91% year-over-year in Q2 and well ahead of the Street.

Up as much as 13% earlier this year, the S&P 400 has slipped into negative territory for 2023. Like its large-cap cousin, the S&P 500, the mid-cap index is being weighed down by surging Treasury yields and rising geopolitical risks. The 10-year Treasury note’s return to 5% (the highest it's been since 2007) and a lack of ceasefire in Gaza have pushed the S&P 400 down 2% year-to-date, compounding 2022’s 14% decline. 

With third-quarter earnings season getting into full swing, this means that most companies will limp into their report dates. With roughly three out of five S&P 400 stocks in the red for the year, much of the losses have come in the past three months. 

There are some notable exceptions. 

A select group of mid-caps have managed to hold on to most of their 2023 gains during the recent market downturn. Some have even added to their gains.

So while expectations will be tempered for most mid-cap stocks, the bar is set high for the outperformers — including these three winners.

Why is XPO stock up so much this year? 

XPO, Inc. NYSE: XPO is up approximately 116% so far this year, making it the second-best S&P 400 performer after popular artificial intelligence (AI) play Super Micro Computer. The global freight transportation leader has been turning in some better-than-expected quarterly numbers that, while down big year-over-year, point to strength in a weak industry. Investors appear to be getting ahead of a potential recovery in freight demand, which could coincide with a rebound in truckload spot rates that are near historic lows. 

In recent months, the stock has held onto its 2023 gains thanks to two important ‘drivers.’ First, the bankruptcy of major competitor Yellow which operated more heavy-duty trucks than XPO. The liquidation is poised to shake up the freight industry since Yellow customer goods will need to be shipped by other players. Second, rising oil prices tied to Middle East unrest could be a boon for XPO’s future results. The company generates a significant portion of its revenue from fuel surcharges.

When XPO reports pre-market on October 30th, shareholders will be hoping for further improvement in revenue and earnings — but more importantly, an upbeat outlook for 2024. 

What is driving gains in Duolingo shares?

Duolingo, Inc. NYSE: DUOL is up 125% year-to-date. While not part of the S&P 400, the language learning platform is one of the hottest mid-caps around. Management’s decision to ride the AI bandwagon is paying off handsomely. The AI-powered Duolingo app had 5.2 million paid subscribers as of June 30th, a 59% jump from the previous year. With both social media interactions and business communication becoming more global, learners are gravitating toward the platform to learn new languages to enhance their careers and social networks.

Last month, UBS called Duolingo “a best-in-class brand” in a language learning market that is still in the early stages of online development. The company’s use of generative AI could not only strengthen its core market position but also open up doors to learning modules outside of language. Evercore ISI echoed the bullish sentiment a couple of weeks ago when it gave the stock a $200 12-month price target that implies another 25% upside. Investors will ‘learn’ about Duolingo’s latest quarterly numbers after the close on November 8th.

When does Yelp report third-quarter results?

Yelp Inc. NYSE: YELP is scheduled to report third-quarter financials post-market on November 2nd. The online review website is enjoying a resurgence this year due to increasing use of local sales teams and marketing to capitalize on retail and restaurant localization trends. It is also benefiting from a shift from term-based advertising to ad-hoc advertising, which has afforded macro-weary advertisers greater flexibility with their campaign spending. Finally, a tie-up with food delivery leader GrubHub has added a valuable revenue stream while additional partnerships with Google, GoDaddy and Visa have brought more growth opportunities.

Expectations will be high when Yelp reports Q3 results because profits were up 91% year-over-year in Q2 and well ahead of the Street. Analysts are projecting 169% earnings growth for Q3 — impressive given the soft discretionary spending and advertising environments. Up 56% this year, the mid-cap is getting rave reviews for its ability to tap new revenue sources and manage costs simultaneously.