A Specific Formula Says to Buy these 5 Mid-Cap Stocks

One mutual fund uses the following four criteria to identify the best mid-cap stocks on the market. Here are five that meet the criteria now.

test tubes in lab

The Hennessy Cornerstone Midcap 30 Fund (HFMDX) uses a unique, specific strategy for identifying the best mid-cap stocks on the market.

Hennessy Cornerstone’s stock-picking formula is four-pronged. For a mid-cap stock to pass its screen, it must meet the following qualifications:

  • A price-to-sales ratio below 1.5
  • Annual revenue between $1 billion and $10 billion
  • Earnings must exceed the previous year’s
  • The stock must have appreciated in the last three to six months

The Hennessy fund strictly adheres to these four criteria. And it’s worked well for them, not only now but in the last decade, producing positive returns every year but 2018 (when it lost 22.4%).

So, let’s use Hennessy’s formula to identify the five best mid-cap stocks on the market currently.

Remember: mid-caps are companies with market caps between $2 billion and $10 billion, an attractive mid-point in the growth cycle of company because, as fund CEO Neil Hennessy told the Times, “They’re large enough to withstand an economic tsunami and to acquire smaller companies, but they’re small enough to be acquired themselves.”

One other note: although I used the Hennessy fund’s screening criteria, I did not actually look up what stocks they hold in their portfolio – in part because many of the names in the listing are a quarter old, which these days is a long time.

Let’s get to the stocks.

Williams-Sonoma (WSM)

  • Market cap: $8.2 billion
  • Price-to-sales ratio: 1.38
  • Revenue (trailing twelve month): $6 billion
  • Quarterly earnings growth: 114.8%
  • 3-month stock return: 25.7%
  • 6-month stock return: 104%

Casey’s General Stores (CASY)

  • Market cap: $6.8 billion
  • Price-to-sales ratio: 0.91
  • Revenue: $7.6 billion
  • Quarterly earnings growth: 40.5%
  • 3-month stock return: 13.5%
  • 6-month stock return: 20.3%

Hanesbrands (HBI)

  • Market cap: $6 billion
  • Price-to-sales ratio: 0.94
  • Revenue: $6.7 billion
  • Quarterly earnings growth: 7.8%
  • 3-month stock return: 22.8%
  • 6-month stock return: 96%

Dick’s Sporting Goods (DKS)

  • Market cap: $5.5 billion
  • Price-to-sales ratio: 0.62
  • Revenue: $8.6 billion
  • Quarterly earnings growth: 146%
  • 3-month stock return: 51.8%
  • 6-month stock return: 134%

Flowers Foods (FLO)

  • Market cap: $5.2 billion
  • Price-to-sales ratio: 1.24
  • Revenue: $4.3 billion
  • Quarterly earnings growth: 9.1%
  • 3-month stock return: 12.8%
  • 6-month stock return: 6.2%

Tallying it all up, that’s an average three-month return of 25.3% and an average six-month return of 76.1% among those five mid-cap stocks. That’s some pretty good momentum!

Also, notice the companies: they’re all either food or retail related. Dick’s Sporting Goods and Williams-Sonoma have certainly benefited as American brick-and-mortar retail stores re-opening from Covid-19 lockdowns over the summer, as the earnings growth indicates.

Hanesbrands, which makes Hanes underwear, Champion athletic gear and Playtex women’s undergarments, among other recognizable brands, is getting a similar bump from all the retail re-openings.

Casey’s General Store is a midwestern convenience store chain, with 2,146 stores in 16 states. Convenience stores, along with grocery stores, have been one of the few constants this year.

Finally, Flowers Foods is a Georgia-based producer and distributor of packed bakery foods, whose brands include Nature’s Own bread, Wonder Bread and Tastykake. People certainly didn’t stop eating bread, pastries and snack cakes in the last seven months.

If these five stocks follow the Hennessy fund’s third-quarter pattern, they could be among the best-performing mid-cap stocks in the fourth quarter. Any one of them could make a good addition to your portfolio.

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