Mid-cap stocks have gained significant momentum in anticipation of lower interest rates. While the latest rate cut dealt by the Bank of Canada was as expected, I think mid-cap names could be in for continued gains over the next 18 months. Undoubtedly, lower interest rates are good news for the broader markets, but for smaller firms with limited earnings (or none at all), they’re a significant development, as interest payments on debts tend to, on average, be more burdensome for smaller, up-and-coming firms, especially those in growth mode.
For those seeking higher growth ceilings and more potential to snag a steeper discount to intrinsic value, the mid-caps are definitely worth pursuing, especially if you’re in the belief that we’ll be in for much lower rates. It’s hard to forecast just how many times the Bank of Canada (and the Fed in the U.S.) will cut rates.
Either way, I think the mid-cap universe is a great place to look if you’re becoming a bit worried that valuations on the large-caps are growing extended after the September rally, which might end with a painful pullback.
Badger Infrastructure Solutions
Badger Infrastructure Solutions (TSX:BDGI) is a standout mid-cap that has risen an impressive 62% year to date. With shares slipping 3% on Tuesday’s downbeat session following the Fed’s comments that stocks are “highly valued” after the latest run-up, I’d look to think carefully about buying incrementally on the way down. Given the momentum behind BDGI, I’d look to be a very gradual buyer, as shares could come in quite quickly. Indeed, explosive rallies can precede devastating plunges.
In any case, I find the soil excavation (daylighting) service provider to be attractively valued at a 25.9 times trailing price-to-earnings (P/E) ratio, given its improved operating efficiencies and industry tailwinds. As for an entry point, I’d look to get in at around $54 per share, where there’s a relatively steady level of support.
While I am a fan of the business, its vastly improved fundamentals, and fleet expansion plans for the year ahead, Badger stands out as more of a long-term winner (think the next five to eight years) that could take a bigger hit to the chin than the broader market if we are headed for a correction. As rates decline and demand for Badger’s services remains strong amid robust infrastructure spending, I’d not be afraid to be a buyer of any amplified weakness after such a historic six-month run.
Spin Master
Spin Master (TSX:TOY) is more of a deep-value play for investors with the patience and stomach to ride out the remainder of the sell-off. It’s hard to say if the stock, which is down 63% from its all-time high, has bottomed out yet. Regardless, I view the toymaker as a fantastic value, especially as the solid digital business looks to give margins a bit of a lift.
Amidst tariff turbulence and significant changes in upper management, TOY stock appears to be more of a wait-and-see play. And while a pick-up in consumer spending would probably be needed to fuel a comeback, I see the portfolio of brands (think PAW Patrol, Gund, and Etch-a-Sketch) as having staying power. I’m also a big fan of the innovative new trends that could boost toy sales. At 8.1 times forward P/E, I’d buy, hold, and ride out the waves. Spin is not a value trap, in my view. It’s a name that investors have been too quick to give up on amid rising headwinds.
Lower rates and a boost in the labour market might be enough to power TOY stock to an epic recovery. For now, the name remains off the radar of most. But I wouldn’t sleep on the name heading into a holiday season with very low expectations.
