Anthony Ménard, CFA, is vice-president of data management at Inovestor.
What are we looking for?
Mid-cap U.S. companies that exhibit low valuation based on our proprietary research.
As of Aug. 9, we estimate that the S&P 500 Index, which represents large-cap companies, has a price-to-earnings ratio of 23.2, while the S&P 400, representing mid-cap companies, stands at 17.8.
This disparity indicates that mid-cap stocks in the S&P 400 could present a more attractive investment opportunity compared to their larger counterparts.
Today, we will explore the often-overlooked mid-cap segment using the economic value added (EVA) approach.
The screen
We screened U.S. stocks using the following criteria:
- market capitalization between US$2-billion and US$10-billion;
- price-to-intrinsic-value (P/IV) ratio lower than 0.9. The intrinsic value is derived from a discounted cash flow model. The inputs are automatically selected by our algorithms. A value lower than 1 suggests an undervalued stock;
- StockPointer score (SP) greater than 70. The score mainly considers risk-adjusted return on capital (ROC), earnings-per-share growth and free cash flow per share. It also integrates the P/IV ratio. The score varies between zero and 100. A score of 70 or more implies a top-performing company;
- one-year EVA-to-market-value (EVA/MV) greater than zero. The ratio reflects the increase in EVA over the past year relative to the market value. A positive value implies that the company improved its operations in the past year;
- five-year average ROC above 15 per cent, but lower than 100 per cent. We believe that companies with a value greater than 100 per cent are outliers.
For informational purposes, we have also included price-to-earnings ratio (P/E), one-year price return and dividend yield.
More about Inovestor
Inovestor is a Canadian fintech company with more than 20 years of experience that has partnered with Morningstar in an alliance, solidifying Inovestor’s position as the industry’s leading alternative analysis tool. To learn more visit our website.
What we found
Overlooked mid-cap U.S. stocks
SLM Corp. SLM-Q, known as Sallie Mae, is a major provider of private student loans and related financial products in the United States. It stands out with the highest SP score, at 84, and the highest one-year EVA/MV ratio, at 8.4 per cent. Despite these strong performance metrics, the stock appears reasonably valued, featuring the lowest P/E ratio at 6.3 and a P/IV ratio of 0.54, placing it in the middle of the list for this metric.
Vector Group Ltd. VGR-N operates primarily in cigarette manufacturing. According to the company’s website and filings, it also operates in the real estate segment. However, in 2023, the company reported no revenue or cost of sales from real estate activities. While Vector holds US$131.5-million in real estate ventures, this is a relatively minor asset compared to its US$268.6-million cash balance and US$110.9-million in investment securities. The company boasts the third-highest five-year ROC at 27.2 per cent, along with the second-highest dividend yield at 7.6 per cent. The stock has a P/IV of 0.52, the fourth-lowest on our list.
NewMarket Corp. NEU-N is a prominent producer of petroleum additives for the automotive and industrial markets. These additives improve the performance of lubricating oils and fuels in machinery, vehicles and other equipment. Although the company has the lowest ROC at 15 per cent, our software highlights its other strengths with an SP score of 79 and a P/IV ratio of 0.41, the second lowest on our list.
Investors are advised to do further research before investing in any of the companies listed in the accompanying table.
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