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Mid-Cap Stocks for Market Meltdowns

These companies can provide some relative stability in uncertain times for your portfolio.

Vikram Barhat 24 August, 2022 | 4:28AM
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Lifesaver

Investors seeking growth through small-cap stocks and stability through large-cap names, often miss out on opportunities in mid-cap stocks.   

Mid-cap companies are businesses with a market value between US$2 billion and US$10 billion. While they may not produce blockbuster gains, many mid-cap stocks have been consistent performers and shown resilience during turbulent times. This is borne out by the fact that the S&P Midcap 400 index with an 8.5% loss has been less volatile than the S&P 500 (10.33% loss), for the year to date, as of Aug 18.

The following low-volatility mid-cap stocks may provide investors with a way to hedge against broader market selloffs. They also offer investors the opportunity to capture strong risk-adjusted returns, as well as growth and stability.

 

Irish biopharmaceutical firm, Jazz Pharmaceuticals (JAZZ) offers treatments for sleeping disorders and oncology. The firm has nine approved drugs across neuroscience and oncology indications, including treatments for narcolepsy, metastatic small cell lung cancer, acute lymphoblastic leukemia, and acute myeloid leukemia.

Acquiring recently launched drugs has been part of Jazz’s portfolio diversification strategy. It’s US$123 million acquisition of Orphan Medical added the latter’s leading drug, Xyrem, to Jazz’s portfolio in 2005. The drug became a blockbuster, accounting for 74% of 2020 revenue, “as its strong efficacy has propelled its success in the difficult-to-treat sleep indication,” says a Morningstar equity report.

More recently, Jazz acquired GW Pharmaceuticals for US$7.2 billion in 2021. GW contributed US$677 million to Jazz's overall 2021 revenue, largely driven by its leading product, Epidiolex. It is a cannabis-derived drug for the treatment of severe, rare forms of epilepsy.

“We like that management has been focused on diversifying its portfolio, and it has received three drug approvals since June of 2020 for the following drugs: Xywav, Rylaze, and Zepzelca,” says Morningstar equity analyst Rachel Elfman,

Xywav, a low-sodium version of Xyrem, has achieved market-leading adoption in narcolepsy and increased patient adoption in idiopathic hypersomnia.

“We anticipate Xywav, Rylaze, Zepzelca, and Epidiolex will lead revenue generation for Jazz, contributing 75% of our 2031 revenue estimate of US$5.1 billion,” forecasts Elfman, who recently raised the stock’s fair value to US$187 from US$172, prompted by greater than expected prescriber and patient adoption of these drugs.

 

The largest television station owner/operator in the U.S., Nexstar (NXST) owns 199 stations in 116 markets. Of its 199 full-power stations, 155 are affiliated with the four national broadcasters: CBS (49), Fox (42), NBC (35), and ABC (29). The firm has networks in 12 of the top 20 television markets and reaches over 68% of U.S. TV households. It also has a 31% stake in Food Network and Cooking Channel.

Though declining in importance, advertising remains an important source of revenue for Nexstar. “Just under 38% of total 2021 revenue came from nonpolitical advertising, down from 44% in 2017 with pandemic-related issues driving some of the decline,” says a Morningstar equity report.

Notably, over 70% of nonpolitical advertising revenue is generated by selling ad time to local area businesses, including restaurants and auto dealerships. However, Nexstar’s size and geographic reach also allows it to sell advertising nationally to auto manufacturers, telecom firms, fast-food restaurants, and retailers.

“The large scale of the firm, along with increased political ad spending, has increased the importance of elections,” says Morningstar equity analyst, Neil Macker, who forecasts “Nexstar will continue to benefit from political ad spending growth, helping offset weaker local and national ad growth.”

Nexstar recently acquired 75% controlling stake of The CW Network from Paramount and Warner Bros Discovery.

While The CW has struggled in recent years to generate profits, management plans for The CW to turn a profit in 2025 through cost controls on both operations and content,” says Macker, who pegs the stock’s fair value at US$195.

 

XPO Logistics (XPO) is a diversified trucking and logistics company, built mostly via acquisition. Following the 2021 spinoff of its global contract logistics division, XPO’s portfolio reflects its transportation operations--asset-based less-than-truckload shipping (33% of gross revenue), asset-light freight brokerage (29%), heavy goods last mile delivery (8%), and its European truckload and LTL operations (24%).

Owing to strategic acquisitions, XPO now “ranks among the top U.S. freight brokers (including highway and intermodal) and is the fourth-largest LTL carrier after FedEx Freight, YRC Worldwide, and Old Dominion (based on 2020 revenue),” says a Morningstar equity report.

Over the years, XPO has successfully integrated its acquisitions, driving down duplicative costs and materially improving efficiency, the report adds.

XPO's strategy pivoted to simplification mode after years of focusing on segment optimization. As a result, it span off its global contract logistics division as a separate publicly traded company in 2021. “We generally agree that separating the transportation and contract-logistics operations opens the door to more targeted decision-making and capital allocation,” says Morningstar equity analyst, Matthew Young, who puts the stock’s fair value at US$70.

Following the spinoff, LTL became the firm's flagship division in terms of net revenue and EBITDA generation.

The company’s transition has continued this year with the divestiture of its intermodal segment and upcoming spinoff of its asset-light truck brokerage operations into a separately traded company (by year-end).

The spinoff would allow “remaining core LTL operations to benefit from greater strategic focus in their respective end markets while unlocking incremental shareholder value,” says Young. 

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Securities Mentioned in Article

Security NamePriceChange (%)Morningstar Rating
Jazz Pharmaceuticals PLC135.45 USD1.62Rating
Nexstar Media Group Inc172.74 USD3.53Rating
XPO Logistics Inc46.74 USD4.99Rating

About Author

Vikram Barhat

Vikram Barhat  A Toronto-based financial writer specializing in investing, stock markets, personal finance and other areas of the financial services industry, Vikram also writes for CNBC, BBC, The Globe and Mail, and Toronto Star.

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