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5 Affordable Mid-Caps to Gain From a Likely Year-End Rally

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U.S. stock markets have maintained their impressive bull run with just 15 days of trading left to complete 2021. The resurgence of coronavirus in the form of either Delta or Omicron variant and high inflation resulting from prolonged global supply-chain disruptions, labor shortage and massive pent-up demand failed to deter markets’ northbound journey. Moreover, it seems that a shift in the Fed’s  monetary policies toward a likely hawkish stance has already been incorporated in U.S. stock markets’ valuation.

At this stage, it will be fruitful to invest in mid-cap stocks with a favorable Zacks Rank that are available at attractive valuations. While several such stocks are available, we have selected Kohl's Corp. (KSS - Free Report) , Texas Pacific Land Corp. (TPL - Free Report) , Dillard's Inc. (DDS - Free Report) , Harley-Davidson Inc. (HOG - Free Report) and HollyFrontier Corp. .

A Solid 2021 So Far for Mid Caps

Year to date, the mid-cap-centric S&P 400 Index has climbed 20.4%. The large-cap-specific Dow, S&P 500 and Nasdaq Composite – have rallied 16.8%, 24.3% and 20.4%, respectively. The small-cap-specific Russell 2000 and the S&P 600 have advanced 12.4% and 23.1%, respectively. Clearly, mid-cap stocks are star performers in 2021.

Investment in mid-cap stocks is often recognized as a good portfolio diversification strategy. These stocks combine the attractive attributes of both small and large-cap stocks. Top-ranked mid-cap stocks have a high potential to enhance their profitability, productivity and market share.

If the economic impacts of coronavirus are more severe ahead, mid-cap stocks will be less susceptible to losses than their large-cap counterparts owing to less international exposure. On the other hand, if the crisis doesn’t worsen due to vaccination, these stocks will gain more than small caps due to established management teams, a broad distribution network, brand recognition and ready access to the capital markets.

Future Catalysts

On Nov 30, in his testimony before a Senate committee, Fed Chairman Jerome Powell said  “At this point, the economy is very strong and inflationary pressures are higher, and it is therefore appropriate in my view to consider wrapping up the taper of our asset purchases, which we actually announced at the November meeting, perhaps a few months sooner.”

This means that the Fed strongly believes that the fundamentals of the U.S. economy are robust. Both consumer spending and business spending are strong despite mounting inflation and supply-chain disruptions. Manufacturing and services PMIs have stayed elevated. The struggling labor market is also showing a systematic recovery.

In its latest projection on Dec 9, the Atlanta Fed reported that the U.S. economy would grow by 8.7% in fourth-quarter 2021. U.S. GDP grew 6.4%, 6.7% and 2%, in the first, second and third quarters of this year, respectively.

On Nov 15, President Joe Biden signed a bipartisan infrastructure bill of $550 billion in addition to the previously approved funds of $450 billion for five years. Total spending may go up to $1.2 trillion if the plan is extended to eight years. The infrastructure development project will be a major catalyst for the U.S. stock markets in 2022.

On Nov 19, the House of Representatives passed a massive $1.75 trillion social safety net and climate bill proposed by the Biden administration. The bill will now head toward the Senate.

Moreover, the White House has put pressure on Congress to quickly pass legislation providing $52 billion to help computer chip manufacturers and ease the shortage of components vital to many industries.

Our Top Picks

We have narrowed our search to five mid-cap (market capital > $5 billion < $10 billion) stocks that are currently available at deep discount. These stocks have strong growth potential for the rest of 2021 and witnessed positive earnings estimate revisions in the last 30 days. Each of our picks carries a Zacks Rank #1 (Strong Buy). You can see the complete list of today’s Zacks #1 Rank stocks here.

The chart below shows the price performance of our five picks year to date.

Zacks Investment ResearchImage Source: Zacks Investment Research

Kohl's is benefiting from its growing digital business amid pandemic-led customers’ increased shift to online shopping. KSS is also benefiting from its strategic framework, which focuses on driving top-line growth, expanding operating margin, implementing disciplined capital management as well as undertaking an agile, accountable and inclusive culture. Kohl’s strong brand portfolio and partnerships are driving growth.

Kohl’s is emphasizing strategic efforts to transform it into a leading destination for active and casual lifestyle items. KSS has raised its view for the current fiscal year and expects sales to increase in the in the mid-twenties percentage range compared with the earlier anticipation of growth in the low-twenties percentage rate.

Kohl’s has an expected earnings growth rate of more than 100% for the current year (ending January 2022). The Zacks Consensus Estimate for current-year earnings improved 21.1% over the last 30 days. KSS is currently trading at a discount of 21.8% from its 52-week high.

Texas Pacific Land is engaged in land and resource management, and water services and operations businesses. TPL’s Land and Resource Management segment manages approximately 880,000 acres of land in the State of Texas.

Texas Pacific Land also generates revenue from pipeline, power line and utility easements, commercial leases, material sales and seismic and temporary permits related to land uses including midstream infrastructure projects and hydrocarbon processing facilities.

TPL has an expected earnings growth rate of 58.4% for the current year. The Zacks Consensus Estimate for current-year earnings improved 4.5% over the last 30 days. Texas Pacific Land is currently trading at a discount of 28.6% from its 52-week high.

Harley-Davidson is focusing on motorcycle models and technologies that better align with market trends. HOG’s turnaround plan, dubbed as ‘Rewire’, and the five-year strategic plan ‘Hardwire’ boosts optimism. Harley-Davidson's new operating model and organizational structure have improved effectiveness across all functions.

HOG’s decision to evolve its original LiveWire motorcycle into a dedicated electric vehicle brand is set to bolster prospects. The popularity of Grand American Touring motorcycles and successful launches of Pan American and Sportster S. augurs well for the company’s top-line growth.

Harley-Davidson has an expected earnings growth rate of more than 100% for the current year. The Zacks Consensus Estimate for current-year earnings improved 0.6% over the last 30 days. HOG is currently trading at a discount of 28.9% from its 52-week high.

Dillard's operates retail department stores in the southeast, southwest and Midwest areas of the United States. DDS gained from the continued momentum in consumer demand, which somewhat offset global supply-chain issues, including shipping delays and disruptions in the transportation network.

Strength in children's apparel as well as men's wear and accessories bode well for Dillard’s. Improved consumer demand and better inventory management by DDS led to lower markdowns, which boosted gross margin. Lower payroll expenses resulted in operating expense deleverage.

Dillard's has expected earnings growth of more than 100% for the current year (ending January 2022). The Zacks Consensus Estimate for current-year earnings improved 20% over the last 30 days. DDS is currently trading at a discount of 36.5% from its 52-week high.

HollyFrontier is one of the largest oil refiners in the United States. HollyFrontier's capability to process a wide mix of crude and its access to some of the fastest growing domestic markets is a real strength. HFC’s exposure to the more stable cash flows from logistics segment diversifies earnings stream and offers a buffer against the volatile refining business.

Ample cash, an undrawn $1.35 billion revolving credit facility and an attractive debt profile are other positives in the HollyFrontier story. Consequently, HFC is poised for significant capital appreciation and is viewed a preferred downstream energy operator to own now.

HollyFrontier has expected earnings growth of more than 100% for the current year. The Zacks Consensus Estimate for current-year earnings improved 3.7% over the last 30 days. HFC is currently trading at a discount of 23.3% from its 52-week high.