Even given the recent selloff, it can be a challenge to find a good bargain with the U.S. stock market near record highs. When the usual list of S&P 500 suspects doesn't reveal any cheapies, the mid-cap space can be a valuable place to turn.
Midcaps hang out in the sweet spot of being big enough to attract investors' attention yet small enough to have the flexibility for above market growth. These three companies are especially worthy of consideration on account of their inexpensive valuations and unique upside potential.
Is it too Late to Buy AGCO stock?
AGCO (NYSE:AGCO) shares have tripled off their March 2020 low but amazingly are still very cheap relative to the peer group. The Georgia-based maker of agricultural equipment and replacement parts is firing on all cylinders in the wake off four straight quarterly earnings toppers.
After a tough run caused by uncooperative weather and crop prices, farmers worldwide are rejoicing in improving industry conditions and outlooks. As the global economy cultivates a rebirth, farmers that were previously hesitant to spend on new equipment are opening their wallets in preparation for greater crop demand and yields.
This represents a tremendous tailwind for a company like AGCO which distributes its equipment in 140 countries. It offers a wide range of tractors from compact to high horsepower that serve anyone from the local dairy farmer to high output farms (not to mention landscapers gearing up for the spring cleanup season). Together these tractors account for nearly 60% of revenue with parts, tools, and storage rounding out the revenue pie.
AGCO management is expecting roughly 40% earnings growth this year as the agriculture industry pivots to growth. Longer term AGCO will be a beneficiary of growth in emerging market countries which are experiencing increased protein consumption and improving their farming techniques. At 18x forward earnings and PEG ratio close to 1, AGCO has more room to expand into its valuation. Look for this stock to keep plowing ahead.
Is Polaris Stock Undervalued?
Polaris, the maker of snowmobiles, motorcycles, and boats (NYSE:PII) is also hanging out in the bargain bin. The stock trades at 14x forward earnings which is below its five year-average P/E. It also looks cheap relative to cash flow at 6.7x.
After a dismal start to 2020 when supply chain constraints and closures weighed heavily, consumer interest in Polaris's recreational vehicles has revved up. Following a strong Q4 performance when sales jumped 24%, the company managed to eke out 4% sales growth for all of 2020—no small feat given the challenges it faced.
People looking for recreation while adhering to social distancing rules are deciding that distancing themselves on a shiny new Polaris toy is one way to accomplish both. The company estimates it added 700,000 new customers last year with female customers surging 40%. This growing customer base helped the company grab market share in its largest product category— snowmobiles and off-road vehicles. A surging boat business that saw 50% growth last quarter has also been responsible for the acceleration.
And although the pandemic-related demand will likely subside at some point, Polaris should benefit from higher aftermarket sales which account for roughly a quarter of total revenue. The resumption of powersports events and trade shows should also provide support.
It's tough not to like the direction Polaris is headed not to mention the company's track record of dividend growth. With the undervalued stock still a distance away from its all-time high expect this joy ride to continue.
Why Did OneMain Stock Gap Lower?
A list of mid cap bargains wouldn't be complete without a financial stock and OneMain (NYSE:OMF) is one of the best values in the sector. The combination of a 6.5x forward P/E ratio, 3.6% dividend yield, and chances for growth in a rising interest rate environment are hard to pass up.
One main reason for the company's recent success is its strong digital presence. OneMain's technology platform has proved to be a valuable way to engage consumers and generate loan growth during the pandemic while its physical branch traffic slowed. Almost half of all new loans were closed digitally last quarter when EPS soared 40%. Far from an old-school lender the company also uses data analytics, artificial intelligence (AI), and machine learning to help it make lending decisions and minimize losses from non-performing loans.
After touching a record high of $59 earlier this month, OneMain has pulled back to around $47. While the market understandably didn't like the company's announcement of a secondary share offering, this created another entry opportunity for the long-term investor looking for a solid financial play.
Sell-side analysts haven't budged on their OneMain stance as all 15 analysts still have 'buy' ratings and most have priced targets of $60-plus. The company's strong Q4 report and outlook that preceded the add-on offering is the more important development here.
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