Could Mid Caps Outperform in 2022?

Mid-caps tend to get left out in the cold between safer large caps and more growth-oriented small caps. 

Last fall, Citi Research analysts issued a report that said U.S. mid-cap stocks were ready to deliver the performance edge they haven’t seen since the financial crisis of 2008.

“‘The set up for U.S. Mid Cap, from both an absolute and relative performance perspective, is getting quite interesting,’ MarketWatch reported the analysts wrote. ‘It becomes a viable alternative for investors concerned about the ability of large cap tech to outperform from here, yet confident in underlying economic traction even as the Fed unwind commences.’”

Here we are almost five months later and the Vanguard S&P Mid-Cap 400 Index ETF (IVOO), which tracks the performance of the S&P Midcap 400 Index, has moved sideways while the SPDR S&P 500 ETF Trust (SPY), which tracks the performance of the S&P 500 Index has delivered a slight gain.

Even though midcap stocks have yet to take off, I don’t believe the analysts were wrong. The future looks bright for these stocks despite the lack of appreciation.

Barchart’s S&P Midcap 400 page says there are 30 companies with zero debt and three-year annual cash flow growth of 20% or more.    

Here are three that I would consider.

Here’s a Toast to Better Times

It hasn’t been an easy 11 months for the Boston Beer Company (SAM), the maker of products such as Samuel Adams beer, Truly hard seltzer, Angry Orchard cider,  and Twisted Tea hard iced tea; to name a few. 

Between the March 2020 correction and April 2021, the Boston-based craft alcohol company saw its shares rocket from $306 to $1,350 on the strength of its Truly hard seltzer brand. 

Last fall, the company made news for saying it would destroy millions of cases of its popular product after overestimating the ongoing consumer popularity of hard seltzers. As a result, it ramped up capacity at precisely the wrong time.  

 “We were very aggressive about adding capacity, adding inventory, buying raw materials, like cans and flavors, and, frankly, we overbought… And when the growth stopped, we had more of all those things than we were going to be able to use, because there is a shelf life,” Koch said in a CNBC interview in October 2021. “We want Truly to have that fresh, bright taste, so we're going to crush millions of cases of product before it goes stale.”

As a result of the Truly slowdown, Boston Beer’s earnings in 2021 fell to $14.6 million from $192.0 million in 2020. Since hitting a 52-week high of $1,349.98 in April 2021, it has fallen back into the $300s, where it traded almost 24 months ago.

However, the Truly experience is now in the rearview mirror. Trading at 2.35x sales -- its lowest price-to-sales ratio in more than a decade -- you’re getting a business with no debt that will be back on top before you know it.   

Homeowners Continue to Love Their Decks

Trex Company (TREX) is a Virginia-based maker of composite decking, railings, and other outdoor living products made from recycled materials. Its stock is down 47% year-to-date and 20% over the past year. 

Trex reported its Q4 2021 results at the end of February. For all of 2021, it generated record full-year sales of $1.2 billion, 36% higher than a year earlier. In terms of profits, its adjusted net income in 2021 was $243 million, 35% higher than 2020.

“Consumer interest in and preference for sustainable outdoor living products is accelerating industrywide annual market share gains to approximately 200 basis points,” stated CEO Bryan Fairbanks in the company’s Q4 2021 press release. “As the market leader, Trex continues to capitalize on strong remodeling activity and wood conversion to capture incremental market share from the strength of our products and brand.”

Why the major correction in 2022?

The company expects its sales to return to more normal growth experienced before Covid-19. As a result, it expects YOY sales growth in 2022 in the double digits. Just not the 30% variety. 

Assuming 15% sales growth in 2022, its adjusted earnings before interest, taxes, depreciation and amortization (EBITDA) should be approximately $449 million, 26% higher than in 2021.   

TREX stock currently trades at 6.8x sales, its lowest multiple since 2018. Most of its other financial metrics are also at four-year lows. With $141 million in cash and no debt, Trex can continue to buy back its shares and invest in the third manufacturing facility that it’s building in Little Rock, Arkansas. 

All is good at the environmentally-friendly company.   
Interactive Brokers Looks to Steal Robinhood’s Thunder

The broker/dealer got its start 44 years ago when current Chairman and founder Thomas Peterffy bought a seat on the American Stock Exchange. In 2007, Interactive Brokers Group (IBKR) went public at $30 a share. It’s been growing ever since. 

On March 8, the company launched its IBKR GlobalTrader app, which allows investors to buy stocks traded in 23 different currencies worldwide. It also allows investors to purchase fractional shares, buy cryptocurrencies, and other features. 

Historically, Interactive’s services have been more for advanced individual traders and institutions -- it has more than 1.75 million accounts in more than 200 countries -- but is now going after a newer, younger audience. 

“‘We view it as a way to attract a new audience that’s used to something simpler,’ Bloomberg reported Steve Sanders, executive vice president of marketing and product development at Interactive Brokers, said about the product. ‘Our other platforms have lots of features, but some people may find them complex.’”

Interestingly, on its website, Peterffy asks people considering buying IBKR shares to refrain from doing so until they’ve become active users of its platform.

How many billionaires do you know that would say that? Not many. 

In 2021, Interactive had revenues of $2.71 billion, 22.4% higher than in 2020. On the bottom line, its earnings per share were $3.24, 33.9% higher than a year ago.

One thing to keep in mind is that Peterffy controls 76.5% of the voting shares in IBG LLC, the holding company that operates its various businesses. Interactive Brokers Group owns 23.5% of IBG LLC. Therefore, it is a controlled company.

A very good one.