Mid-Cap Stocks to Outperform the Market This Cycle

Key Points

• Mid-cap stocks tend to outperform during market cycles; as the U.S. enters a new one, three names quickly become top picks. 
• Each riding on different industry tailwinds, Wall Street strategists couldn't help but start buying them last quarter. 
• Analysts saw the developing stories and started boosting their price targets. 

When the economy enters a new cycle, investors must rotate their portfolios accordingly or else live with leaving money on the table. Mid-capitalization stocks outperform all others during an expansionary cycle, such as the one the U.S. is about to witness, so they might rally before the next quarter.

Not all stocks are created equal, though; specific names in the consumer discretionary sector, the basic materials space, and even a mix of technology on top of consumer staples products could be the perfect mix to navigate what’s about to come. For these trends, consider stocks like Foot Locker Inc. NYSE: FL, FMC Co. NYSE: FMC, and even Chewy Inc. NYSE: CHWY.

The Federal Reserve (the Fed) is looking to cut interest rates this year. Though the timing and magnitude of these cuts are still up for speculation, traders are pricing in for May or June 2024. Investors can watch trader sentiment and bets through the FedWatch tool at the CME Group Inc. NASDAQ: CME and notice that a window is quickly closing before potential cuts are here.

Foot Locker Became a Target

Analysts at Evercore and Guggenheim both boosted their price targets for Foot Locker stock in March 2024, the former pushing for $32 a share and the latter for $30. Both of these targets suggest a double-digit upside of 12% to 19%.

Starting there, it is easier for investors to understand how lower interest rates could facilitate consumer financing. Credit cards can offer lower rates on their balances, potentially making consumers more confident in their purchases.

Knowing that history tends to repeat itself in consumer names like Foot Locker, analysts are comfortable projecting 46.8% earnings per share (EPS) growth in the next 12 months. The apparel and shoes industry expects to grow its EPS by 18%, giving Foot Locker a more than double rate advantage.

Investors can compare Foot Locker’s valuation against the sector and see that, on a price-to-sales (P/S) and price-to-book (P/B) basis, there is a roughly 50% discount. Because Foot Locker is only a $2.5 billion company, its industry-leading growth at a discount may help to push its valuation much higher.  

A Super Cycle for FMC

According to the fourth quarter 2023 earnings presentation hosted by CF Industries Holdings NYSE: CF, the current stocks-to-use ratio against crop futures is at a cyclical inflection point. Now that futures are falling to 2020 levels, bets are that crop inventories could rise soon.

Farmers need FMC's products to protect their crops and deliver the underlying economy's needs. Knowing that these crop cycles aren't easy to come by, analysts at the UBS Group NYSE: UBS boosted their valuations for FMC up to $84 a share. These targets call for a rally of up to 34% from today's stock price.

Others on Wall Street, such as The Goldman Sachs Group Inc. NYSE: GS, also see the trend. The investment bank increased its position in FMC by 62.8% in the past quarter, a transaction of roughly $20 million.

More than that, analysts agree that EPS is set to jump by 31% in the next 12 months. Foot Locker isn’t the only one offering above-average growth at a discount, as FMC’s P/E ratio 6x is 76% below the chemical industry’s 26x valuation.

FMC’s management knows that the cycle could be unpredictable at times, so it gives shareholders an annual dividend yield of 3.7% today. This dividend lets investors keep up with inflation and trail the ‘risk-free’ ten-year government yields of 4.2%. At the same time, they wait for the crop cycle to bring FMC’s potential profits.

Unexpected Safety in Chewy Stock

Part of the low-beta stocks group, Chewy’s business model is set to keep its shareholders on a relatively smooth ride while still growing. Whether the economy is booming or busting, pet owners still need to care for their pets’ needs.

But the benefits don’t stop there. Also considered one of the technology names, Chewy stock has yet to feel the contagion of the all-time highs made over at Nvidia Co. NASDAQ: NVDA. However, a 162% advance in EPS might do the trick for a potential catch-up.

Goldman analysts boosted their price targets in March 2024, this time seeing a valuation as high as $32 for Chewy. If these predictions are correct, it would mean a 109% rally for the stock. No wonder the Vanguard Group also upped its stake by 13.5% in the past quarter, a $30 million purchase.