Markets have been volatile lately, with the tech-heavy Nasdaq in the midst of a bear market (26% down from November highs) and the broader S&P 500 in the middle of a deep correction (as much as 18% off its own recent highs).
While most investors are turning over every stone they can find in the hopes of uncovering evidence that we may have put in a bottom or that the Fed can effectively engineer a “soft landing” for stocks, the better course of action is to spend the downturn looking for future leaders.
So, with that in mind, I’ve sought out a handful of mid-cap stocks from varying sectors, all with the hope of identifying oversold companies with high potential. Think of the depressed share prices as coiled springs ready pop during the next leg higher.
Silvergate Capital (SI)
Silvergate Capital (SI) is a commercial bank with a market cap of $2.4 billion that serves the digital currency industry with financial infrastructure, including a global payments platform (the Silvergate Exchange Network) and collateralized loans backed by bitcoin. The bank is also working on a stablecoin offering, which includes Diem assets purchased from Meta Platforms (FB) in January.
Management is working with regulators to try to launch the stablecoin later this year. That said, with a murky regulatory environment and quite a bit of work to be done to shore up the business model underlying the stablecoin, investors should keep an open mind regarding launch timing.
Big picture, Silvergate stock offers investors a way to gain leverage to both rising interest rates and expected growth in the crypto economy. This is because 90% of assets are in securities and/or cash that can be redeployed quickly as rates rise. At the same time, nearly all deposits are in non-interest bearing accounts as crypto customers use deposits for trading, not earning income.
In other words, almost the entire benefit of rising rates should flow to Silvergate’s bottom line.
Management reported Q1 2022 results on April 19 that surpassed expectations. While crypto markets were terrible the company’s digital currency customers grew by 122 (76 added in the previous quarter) to 1,503.
Net income of $27.4 million was up 116% from a year ago while adjusted EPS of $0.79 was up 44% from a year ago. EPS was way above consensus estimates of $0.45.
With an interest income lift-off cycle likely upon it Silvergate’s 2022 EPS is now seen around $3.75, well ahead of prior full-year consensus estimates of $3.33.
GitLab (GTLB)
GitLab (GTLB) provides an end-to-end DevOps platform that functions as a system of records for source code. The platform has tools that software developers across all industries can use to develop and deploy applications quickly, efficiently and at scale.
Over time, GitLab’s strategic importance to its users has been growing. This is happening for a few reasons. For starters, as developers create and manage more code on GitLab’s platform their reliance on the company grows and their incentive to use disparate solutions from other providers decreases. It’s far easier to use one platform that does everything they need.
Moreover, as the market evolves, GitLab is creating more DevOps tools to meet the needs of its growing user base.
In the source code management (SCM) market, the stakes are high. The quality and stability of an organization’s/application’s source code is everything in the digital economy. No application exists without source code. And having a platform that permits near-instantaneous changes can mean success or failure for users that rely on that application.
While there are other solutions out there, including GitHub from Microsoft (MSFT) and BitBucket from Atlassian (TEAM), GitLab is seen as being led by a visionary management team, having a great culture and having the best platform in the SCM industry, which is growing toward $50 billion by 2025.
In short, while it is in the early days, GitLab has the potential to be the “winner” in this market.
Revenue grew by 69% to $77.8 million in Q4 fiscal 2022 while EPS came in at -$0.32.
GitLab has a market cap of $6.6 billion. In fiscal 2023, revenue is seen up 54% to $390 million while EPS is seen near -$0.97, a roughly 11% improvement over fiscal 2022.
Petco Health & Wellness (WOOF)
Petco Health & Wellness (WOOF) sells pet-related products and small animals, including birds, reptiles, fish and rodents. It also provides health and wellness services for pets, including training, grooming, in-store vaccination clinics and it even has some full-service vet hospitals.
The company has a market cap of $6.7 billion and has been around since 1965. It has had stints as both a private and public company. Petco rejoined the public market in January 2021 after spending six years owned by a private equity firm.
During that time the company was a slow grower, and the pandemic created more challenges while giving online specialist Chewy (CHWY) a big boost (we owned CHWY in our Cabot Early Opportunities investment advisory, ultimately selling half our position for 89% and the other half for 149%).
However, more recently shares of CHWY have been heading south while WOOF has been gaining. Management recently upgraded its growth outlook to “high single digits’’ from “mid-single digits.”
There’s enough here to keep the stock moving higher. The company’s large footprint of almost 1,500 physical stores coupled with all the services it provides give Petco access to aspects of the growing pet market that online-only competitors simply can’t reach. This means Petco should be one of the faster-growing, high-quality retail stocks out there.
Bigger picture, the pet specialty retail space is one of the most resilient areas of consumer spending. That’s not to say pet owners won’t pull back if there’s a recession, but historical data has shown that people tend to slash spending on things like transportation and their own food before curbing spending on their pets.
In 2022 Petco management sees revenue growing by roughly 7% to a range of $6.15 – $6.25 billion. Adjusted EBITDA is seen growing more quickly while adjusted EPS should be up 9%, to almost $1.00.
Do you own any mid-cap stocks not on this list? How have they performed? Tell us about them in the comments below.