Mid-cap stocks offer a balance between small caps' higher risk and large caps' stability, making them attractive in uncertain markets. With expected interest rate cuts improving financial conditions, investors may find growth potential in mid-caps like Abercrombie & Fitch Co. (ANF), PVH Corp. (PVH), and Semtech Corporation (SMTC), which analysts predict could rally over 25%.
In the past decade, mid-cap stocks have outperformed large-cap peers in earnings growth, fueled by innovation and streamlined business models. Despite their strong cash flows and profit margins, mid-caps are currently trading at a discount compared to historical averages. As earnings growth in the resilient U.S. economy extends beyond mega-cap tech, mid-cap stocks are gaining momentum.
The global economy is projected to grow by 3.2% in 2024 and 3.1% in 2025, though outcomes will vary by region. In the U.S., GDP growth is forecasted at 2.4% for 2024; however, slowing momentum and elevated prices could limit growth to 1.7% in 2025. Interest rates are expected to decrease to just above 3% as inflation moves closer to the Fed's target.
Therefore, focusing on high-quality mid-caps with competitive advantages can yield strong long-term performance with reduced volatility. These stocks are poised to deliver robust returns, making them appealing for diversification. Given these favorable trends, let's explore the fundamentals of the highlighted mid-cap stocks.
Abercrombie & Fitch Co. (ANF)
Valued at $7.30 billion by market cap, ANF and its subsidiaries operate as an omnichannel retailer internationally. The company offers an assortment of apparel, personal care products, and accessories for men, women, and kids under the Abercrombie & Fitch, Abercrombie Kids, Hollister, and Gilly Hicks brands. It sells products through its stores and various wholesale channels.
On August 15, 2024, ANF announced a partnership with Haddad Brands to expand global distribution for Abercrombie kids. The agreement adds new channels and introduces infant and toddler products to the brand's line.
In terms of the trailing-12-month levered FCF margin, ANF’s 9.86% is 95% higher than the 5.06% industry average. Its 14.39% trailing-12-month EBIT margin is 79.9% higher than the 8% industry average. Likewise, the stock’s 1.60x trailing-12-month asset turnover ratio is 60.7% higher than the 0.99x industry average.
For the second quarter that ended on August 3, 2024, ANF’s net sales increased 21.2% year-over-year to $1.13 billion. Its operating income grew 95.5% year-over-year to $175.63 million. Similarly, its net income attributable to ANF was $133.17 million, or $2.50 per share, up 134.1% and 127.3% over the prior-year quarter.
For the quarter ending October 31, 2024, ANF’s EPS and revenue are expected to increase 31.8% and 11.1% year-over-year to $2.41 and $1.17 billion, respectively. It surpassed the consensus EPS estimates in each of the trailing four quarters.
Over the past year, ANF’s stock has gained 158.8% to close the last trading session at $142.37. The average analyst price target of $186.43 indicates a 31% upside potential.
It’s no surprise that ANF has an overall rating of B, which translates to a Buy in our proprietary POWR Ratings system. The POWR Ratings assess stocks by 118 different factors, each with its own weighting.
It has an A grade for Quality and a B for Growth. Within the B-rated Fashion & Luxury industry, it is ranked #11 out of 59 stocks. To see ANF’s Value, Momentum, Stability, and Sentiment ratings, click here.
PVH Corp. (PVH)
Valued at $5.43 billion by market cap, PVH operates as an apparel company in the United States and internationally. The company operates through its Tommy Hilfiger North America, Tommy Hilfiger International, Calvin Klein North America, Calvin Klein International, and Heritage Brands Wholesale segments.
In terms of the trailing-12-month gross profit margin, PVH’s 59.52% is 60.3% higher than the 37.13% industry average. Its 13.64% trailing-12-month EBITDA margin is 19.7% higher than the 11.39% industry average. Also, the stock’s 10.53% trailing-12-month EBIT margin is 31.7% higher than the 8% industry average.
In the second quarter that ended on August 4, 2024, PVH’s total revenue amounted to $2.07 billion. Its earnings before interest and taxes rose 21.4% year-over-year to $173.90 million. The company’s net income stood at $158 million, up 67.7% year-over-year, while its net income per common share for the quarter grew 86.7% from the prior-year value to $2.80.
Street expects PVH’s EPS for the quarter ending January 31, 2025, to increase marginally year-over-year to $3.73. Its revenue for the quarter ending April 30, 2024, is expected to rise 1.3% year-over-year to $1.98 billion. It surpassed the Street EPS estimates in each of the trailing four quarters.
Over the past year, the stock has gained 31.6% to close the last trading session at $97.06. The average analyst price target of $128.36 indicates a 32.3% upside potential.
PVH’s strong fundamentals are reflected in its POWR Ratings. It has an overall rating of B, equating to a Buy in our proprietary rating system.
It has an A grade for Value and a B for Quality. It is ranked #6 in the Fashion & Luxury industry. Beyond what we stated above, we also have given PVH grades for Growth, Momentum, Stability, and Sentiment. Get all the PVH ratings here.
Semtech Corporation (SMTC)
SMTC designs, develops, manufactures, and markets analog and mixed-signal semiconductors and advanced algorithms. It provides signal integrity products and video products for broadcast applications, as well as video-over-IP technology for professional audio and video applications.
On September 25, 2024, SMTC announced a collaboration with Traxmate to provide a hybrid IoT asset-tracking solution. This combines Traxmate’s AI-enhanced location services with SMTC’s LoRa Edge platform for seamless indoor and outdoor tracking.
On September 24, 2024, SMTC announced the release of a one-channel LoRaWAN hub reference design and evaluation kit, enabling cost-effective small-scale network deployments for SMB and smart home applications.
In terms of the trailing-12-month gross profit margin, SMTC’s 49.83% is marginally higher than the 49.69% industry average.
SMTC’s net sales for the fiscal second quarter that ended July 28, 2024, were $215.36 million. Its non-GAAP operating income came in at $30.54 million. Similarly, its non-GAAP net income attributable to common stockholders and non-GAAP EPS stood at $8.11 million and $0.11, respectively. Moreover, its adjusted EBITDA rose 3.8% year-over-year to $40.54 million.
Analysts expect SMTC’s EPS for the quarter ending October 31, 2024, to increase considerably year-over-year to 0.23. Its revenue for the same quarter is expected to grow 15.5% year-over-year to $232.06 million.
Over the past nine months, the stock has gained 101.8% to close the last trading session at $42.43. The average analyst price target of $55.60 indicates a 31% upside potential.
SMTC’s POWR Ratings reflect its solid prospects. SMTC has a B grade for Growth. Within the Semiconductor & Wireless Chip industry, it is ranked #49 out of 92 stocks. To access SMTC’s additional ratings for Value, Momentum, Stability, Sentiment, and Quality, click here.
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ANF shares were trading at $140.42 per share on Wednesday afternoon, down $1.95 (-1.37%). Year-to-date, ANF has gained 59.17%, versus a 22.46% rise in the benchmark S&P 500 index during the same period.
About the Author: Abhishek Bhuyan
Abhishek embarked on his professional journey as a financial journalist due to his keen interest in discerning the fundamental factors that influence the future performance of financial instruments.
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