Top mid-cap stocks poised for market performance this cycle

When the economy enters a new cycle, investors must rotate their portfolios accordingly, otherwise they live with leaving money on the table. Mid-cap stocks outperform all others during an expansionary cycle, like the one the U.S. is about to witness, so they could bounce back before the next quarter.

However, not all actions are created equal; specific names in the consumer discretionary sector, the basic materials sector and even a mix of technology beyond consumer staples could be the perfect mix to deal with what’s coming. For these trends, consider stocks like Foot Locker Inc. NYSE:FL, FMC Co. NYSE:FMCand even Chewy Inc. NYSE: WH.

The Federal Reserve (Fed) is looking to cut interest rates this year. While the timing and size of these cuts are still a matter of speculation, traders are pricing in May or June 2024. Investors can watch trader sentiment and bets through the FedWatch tool on the site CME Group Inc. NASDAQ: ECM and notice that a window is rapidly closing before potential cuts occur.

Foot Locker has become a target

Analysts at Evercore and Guggenheim both raised their price targets for Foot Locker shares in March 2024, the former pushing for $32 per share and the latter for $30. Both of these targets suggest a double-digit upside of between 12% and 19%.

From there, it’s easier for investors to understand how lower interest rates could facilitate consumer financing. Credit cards can offer lower rates on their balances, potentially making consumers more confident in their purchases.

Knowing that history tends to repeat itself at consumer names like Foot Locker, analysts are confident in forecasting earnings per share (EPS) growth of 46.8% over the next 12 months. The apparel and shoe industry expects to grow its EPS by 18%, giving Foot Locker more than double the edge.

Investors can compare Foot Locker’s valuation to that of the industry and see that, based on price to sell (P/S) and price to book (P/B), there is a discount of about 50%. Since Foot Locker is only a $2.5 billion company, its industry-leading growth at discount prices could help push its valuation much higher.

A Super Cycle for FMC

According to the Q4 2023 earnings presentation hosted by CF Industries Holdings NYSE:CF, the current stock-to-use ratio relative to crop futures is at a cyclical inflection point. Now that futures are falling to 2020 levels, there is a bet that crop inventories could soon rise.

Farmers need FMC products to protect their crops and meet the needs of the underlying economy. Knowing that these crop cycles are not easy to obtain, the analysts of UBS Group New York Stock Exchange: UBS they raised their ratings for FMC up to $84 per share. These targets require a rally of up to 34% from today’s stock price.

Others on Wall Street, like The Goldman Sachs Group Inc. NYSE:GS, see also trend. The investment bank increased its position in FMC by 62.8% last quarter, a transaction worth about $20 million.

Furthermore, analysts agree that EPS is set to rise 31% over the next 12 months. Foot Locker isn’t the only one offering above-average growth at a discount, as FMC’s 6x P/E ratio is 76% lower than the chemical industry’s 26x valuation.

FMC management knows that the cycle could be unpredictable at times, so today it is offering shareholders an annual dividend yield of 3.7%. This dividend allows investors to keep pace with inflation and track the 10-year “risk-free” government yield of 4.2%. At the same time, they wait for the harvest cycle to bring potential FMC profits.

Unexpected safety in the gummy broth

Part of the low-beta group of stocks, Chewy’s business model is expected to keep its shareholders on a relatively smooth path while continuing to grow. Whether the economy is booming or in recession, pet owners still need to take care of their pets’ needs.

But the advantages don’t stop there. Also considered one of the tech names, Chewy stock has yet to feel the contagion of the all-time highs reached at Nvidia Co. NASDAQ:NVDA. However, a 162% increase in EPS could be enough for a potential recovery.

Goldman analysts raised their price targets in March 2024, this time seeing a valuation as high as $32 for Chewy. If these predictions are correct, it would mean a 109% rally for the stock. Unsurprisingly, Vanguard Group also increased its stake by 13.5% last quarter, with a $30 million purchase.

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