The last time U.S. mid-cap stocks outperformed large caps, Brexit was just getting underway and the markets were getting a November ‘Trump bump’. Amid concerns about slowing growth in China, the major indices began 2016 in a 10% hole. In the end, however, the S&P 500 finished up 9.5% and the S&P 400 up 14.5%.
Fast forward to 2022 and the market finds itself in a similarly daunting hole. Inflation, the Russia-Ukraine war, and, most recently, rising Covid cases in Asia and Europe have pushed the S&P 500 down 12% and the S&P 400 down 10%.
The slight lead held by mid-caps is largely tied to the underperformance of mega-cap technology shares. The trillionaires club—Apple, Microsoft, Alphabet, and Amazon—are each down between 13% and 18%. On the other hand, some of the mid-cap index’s top performers are energy and materials names.
Whether mid-caps can hang on and beat large caps for the first time in six years is anyone’s guess. What we do know is that mid-cap land is where many lesser-known growth and value stories reside—including these three companies.
What is AGCO’s 2022 Outlook?
AGCO Corp. (NYSE:AGCO) is a farming equipment manufacturer that sells tractors, sprayers, and other agricultural machinery globally through an extensive network of dealers and distributors. The company is benefitting from a revival in farming activity both in the U.S. and abroad. Increasing economic activity and surging commodity prices have farmers hustling to boost crop production—and buying AGCO products.
After a solid performance in 2021, management’s upbeat outlook for this year suggests things will only get better. Strong global demand is expected to drive a 10% jump in sales to $12.3 billion. And while AGCO won’t be immune to supply chain issues and cost inflation, an ability to raise prices is expected to result in higher profits as well. Management’s projection for EPS of $11.50 implies 11% bottom-line growth.
AGCO shares are up 11% year-to-date and poised to finish March on a four-month winning streak. The run may not be over though with the stock still trading 19% below last year’s record peak. At 11x forward earnings, cultivating a position in AGCO here should lead to steady growth.
What is a Good Defensive Stock?
Service Corp. International (NYSE:SCI) operates in the so-called death care industry as a funeral and cemetery company. It is a rather dreary business model but one that (unfortunately) has bright long-term growth prospects given the aging of the world’s population.
Last year, Service Corp.’s 1,400-plus funeral service locations and 488 cemeteries generated $4.1 billion in revenue and EPS of $4.57, which were up 18% and 57% respectively. Not surprisingly, the devastation caused by the pandemic had much to do with the results.
Management recently raised its EPS guidance for 2022 from $2.80 to $3.20. Although this marks a significant slowdown absent the effects of Covid-19, it is still well above 2019 levels and a base from which Service Corp. is expected to grow in 2023.
At a time when investors are looking for defensive stocks to soften the blow of the Russia-Ukraine crisis, Service Corp. fits the bill. After all, death and taxes are a constant in any economic environment. Buying Service Corp. while it’s in correction territory and offering a 1.6% dividend can help investors rest in peace.
Is Webster Financial Corp. Stock a Buy?
Webster Financial Corp. (NYSE:WBS) is a Connecticut-based regional bank that offers a full range of retail and commercial banking products and runs a fast-growing health savings account (HSA) business. Its 130 branch footprint primarily spread across New England will soon expand following a recently completed merger with upstate New York-based Sterling Bancorp.
In a sea of small Northeast banks, Webster Bank stands out on account of its rich history and strong financials. Founded in 1935, the company has deep roots in the communities it serves and has been the bank of choice for multiple generations. Deposits have grown 9% annually over the last five years and the loan book has grown 6% annually. Both trends should persist with the addition of Sterling.
Management anticipates that loan growth will accelerate from 8% to 10% over the next couple of years as the U.S. economy continues to rebound alongside consumer and business confidence. And with the Fed expected to enact the first of several interest rate hikes this week, the banking industry may be on the cusp of a long-awaited recovery from historically low rates.
Webster Financial stock is up approximately 3% this year after bouncing 32% last year. The forward dividend yield is 2.8% and the valuation is reasonable if not inexpensive given the bank’s above-industry 14% return on equity (ROE). As far as conservative mid-caps go, the stock would be a nice portfolio addition in the current market environment.