5 Mid-Cap Stocks Poised to Benefit from Falling Interest Rates

Key Concepts

• Quant System: A systematic investment approach that uses algorithms and data analysis to identify investment opportunities.
• Mid-Cap Stocks: Companies with market capitalizations typically between $2 billion and $10 billion, offering a balance between the stability of large-caps and the growth potential of small-caps.
• Growth At a Reasonable Price (GARP) Plus: A strategy that combines growth, value, momentum, and earnings per share (EPS) revision factors.
• Factor Grades: Seeking Alpha's proprietary grading system that assesses stocks across various financial metrics (valuation, growth, profitability, momentum, EPS revisions).
• Buy on the Dip: An investment strategy of purchasing assets when their prices have fallen, anticipating a subsequent recovery.
• Safe Haven Assets: Investments that are expected to retain or increase their value during periods of market turbulence, such as cash, consumer staples, and utilities.
• Rate Cut Cycle: A period when a central bank lowers interest rates to stimulate economic activity.
• Government Shutdown: A situation where non-essential government functions cease due to a lack of appropriations.
• Short Interest: The number of shares of a security that have been sold short but have not yet been covered.
• Alpha Picks & PRO Quant Portfolio: Seeking Alpha's subscription services offering curated stock recommendations and model portfolios.

Quant System and Market Backdrop

The webinar introduces Seeking Alpha's Quant system, which functions similarly to a traditional investment analyst but with the ability to analyze thousands of stocks daily. The system evaluates stocks based on collective strength in growth, value, profitability, consensus upward EPS revisions, and momentum. This daily analysis of financial statements and hundreds of metrics allows for a Buy, Sell, or Hold recommendation refreshed daily. The Quant system has demonstrated a strong track record, with Quant Strong Buys up 240% over the last five years, significantly outperforming Wall Street analyst Strong Buys (49%) and the S&P 500 (77%).

The current market environment is characterized by uncertainty, with the Nasdaq down nearly 2% and choppy trading. Despite the market being near all-time highs, there's a rotation towards safe-haven assets like cash and consumer staples, even away from mega-cap tech stocks. Interest rate traders are pricing in a 70% chance of a rate cut in December, a decrease from previous expectations, attributed to sticky inflation and concerns about the labor market. The longest-ever U.S. government shutdown is creating a void in economic data and negatively impacting the economy. The labor market presents a mixed picture, with the ADP report showing private sector hiring growth, while the Challenger report indicated the highest October job cuts since 2003. This volatility is reflected in sector performance, with consumer discretionary, technology, and communication services being the worst performers today, a reversal from their recent strong performance.

Risks and Mid-Cap Opportunities

Several risks are lurking beneath the surface of the current market:

• Stretched Valuations: Equity valuations are elevated compared to historical averages, suggesting vulnerability to corrections.
• Priced-in Rate Cuts: Markets may have already fully accounted for anticipated rate cuts. A lack of further rate cuts or positive economic news could trigger a correction.
• Tariff Uncertainty: Ongoing trade disputes and the Supreme Court's review of the legality of White House-imposed tariffs add to market uncertainty.
• Government Shutdown: The prolonged shutdown continues to negatively impact the economy by reducing consumer spending.

Mid-cap stocks, defined as companies with market caps between $2 billion and $10 billion, are presented as a potential sweet spot for investors. They offer a balance between the resilience of larger firms and the upside potential of smaller stocks. Historically, mid-cap stocks have outperformed both large and small-cap stocks, with a hypothetical $10,000 investment in the Russell mid-cap index growing to $2.6 million since 1978, compared to $1.85 million for the Russell Top 200 and $1.21 million for the Russell 2,000. Mid-caps are also often more domestically focused, making them more insulated from tariff shocks and overlooked by investors focusing on mega-cap names.

Top Five Mid-Cap Stock Recommendations

The webinar highlights five mid-cap stocks identified by the Quant team as "Quant Strong Buys," with a focus on those that have already experienced a dip, presenting a "buy on the dip" opportunity.

1. SSR Mining (SSRM)

• Market Cap: $3.96 billion
• Sector: Materials (Ranked #1 in sector out of 277)
• Industry: Gold Sector (Ranked #47 in industry)
• Business: Mid-tier precious metal producer with gold and silver mines in North and South America.
• Key Metrics:
  • Year-to-date return: 175% (as of the webinar date).
  • Valuation: A grade, Forward P/E of 10.14x (44% discount to sector 18x), EV-to-EBIT of 7.8x (discount to sector 15.4x).
  • Growth: Forward revenue growth of 14.85% (420% premium to sector 2.8%), Forward EPS growth of 38% (vs. sector 8.3%), Long-term growth (3-5 year CAGR) of 114%.
• Recent Performance: Experienced a pullback in recent days due to rotation out of the sector, despite fighting the tape today (up 1.54% on a down market day). Reported an earnings miss on November 4th, leading to a ~5% stock pullback. The Quant system's valuation grade has improved due to this pullback.

2. TTM Technologies (TTMI)

• Market Cap: $7.24 billion
• Sector: Information Technology (Ranked #11 out of 540)
• Industry: Electronic Manufacturing Services (Ranked #1 out of 18)
• Business: Manufactures printed circuit boards and RF components.
• Key Metrics:
  • Year-to-date return: 175%.
  • Growth: Forward EPS growth of 29%, Year-over-year EPS growth of 90% (vs. sector 13%). Forward revenue growth of 12% (vs. sector 7.64%).
  • Profitability: Cash per share of $4.75, ROE of 8.12% (48% premium to sector).
  • Valuation: PEG ratio at a 49% discount to the sector. Valuation grade has become more expensive compared to six months ago, but growth grade improved from D+ to B.
• Recent Performance: Continued upward trajectory with strong momentum.

3. Power Solutions International (PSIX)

• Market Cap: $2 billion
• Sector: Industrials (Ranked #7 out of 620)
• Industry: Heavy Electrical Equipment (Ranked #1 out of 13)
• Business: Designs and manufactures emission-certified power systems for data centers, industrial, and transportation companies. Beneficiary of data center and AI emergence.
• Key Metrics:
  • Year-to-date return: 173%. One-year return: 239%.
  • Growth: Forward revenue growth of 13.91% (vs. sector 4%), Forward EPS growth of 51% (vs. sector 10%). Stellar year-over-year revenue growth of 40%.
  • Profitability: Net income margin A, Return on Equity of 138% (vs. sector 12%), Return on Capital A+, Return on Total Assets A+. Net income per employee $158,000 (vs. sector $22,000).
  • Valuation: Valuation grade C- (vs. B+ six months ago), but stock has pulled back significantly.
• Recent Performance: Experienced a significant pullback from $110 to $81 due to fears of an AI bubble and market rotation. Announced earnings after the call, beating top and bottom line expectations, with the stock up nearly 5% in after-hours trading. This beat is seen as validation of real growth driven by AI.

4. Jackson Financial (JXN)

• Market Cap: $6.3 billion
• Sector: Financials (Ranked #29 out of 684)
• Industry: Diversified Financial Services (Ranked #1 out of 8)
• Business: Diversified financial company providing retirement planning solutions and annuity services, with a strong presence in Florida.
• Key Metrics:
  • Valuation: Steady.
  • Growth: Steady.
  • Profitability: Improved dramatically to an A grade (from F six months ago).
  • Momentum: Improved relative to the sector.
  • Analyst Revisions: B+ grade (from D six months ago).
  • Valuation: Trailing P/E of 4.5x, Dividend Yield of 3.42%.
  • Growth: EPS growth of 23% (premium to sector).
  • Cash per Share: $66 (tremendous vs. sector).
• Recent Performance: Showing strong improvement across multiple fronts. Three analysts have revised earnings estimates up in the last 90 days.

5. Upwork (UPWK)

• Market Cap: $2 billion
• Sector: Human Resource and Employment Services (Ranked #1 out of 29)
• Business: Online platform connecting businesses with freelancers for various professional services. Freelancers are becoming more efficient with AI.
• Key Metrics:
  • Growth: Forward EPS growth rate of 157% (vs. sector 10%), Year-over-year EPS growth of 179% (vs. sector 6%). Free cash flow per share growth rate of 66% (vs. sector 8.7%). Return on equity growth of 108% (vs. sector -3.8%).
  • Profitability: Gross profit margins of 77%, EBIT margin of 17%, EBITDA margin of 19%, Return on Common Equity of 47%.
  • Valuation: Forward P/E of 18.3x (vs. sector 23x), Trailing P/E of 9x (vs. sector 25x). PEG ratio of 0.05 (95% discount to sector 1.22).
• Recent Performance: Stock has pulled back sharply from $20 to $16. Year-to-date performance is flat (-1.2%). The pullback is attributed to nervousness around AI's impact on labor and rotation into safe-haven stocks. High short interest (over 8%) is seen as a potential catalyst for a short squeeze given the company's strong fundamentals.

Seeking Alpha Services

The webinar also briefly touches upon Seeking Alpha's premium services:

• Alpha Picks: Provides two stock picks per month, delivered to the inbox. It has a track record of being up 273% over 3.5 years, compared to the S&P 500's 80%. The annual cost is $499.
• PRO Quant Portfolio: Offers weekly stock ideas through an equal-weighted portfolio of 30 stocks rebalanced weekly. This portfolio is up 37% since its June launch, compared to the equal-weighted S&P 500's 6.4%. The initial cost is $99 for the first month, with an annual renewal of $2799.

Q&A and Conclusion

The Q&A session addressed several points:

• Quant System Update Speed: The Quant system factors in earnings announcements the morning after they are released.
• Commodity-Tied Stocks (SSRM): The Quant model is sector-agnostic and focuses on bottom-up company fundamentals (value, growth, profitability).
• Most Important Quant Factors: The system uses a "GARP Plus" approach (Growth At a Reasonable Price plus momentum and EPS revisions). Not all underlying metrics are equally weighted; some have higher predictive power based on backtesting.
• PSIX Earnings Beat: The recent earnings beat for PSIX, with the stock up 5% in after-hours trading on a down market day, reinforces the importance of earnings.
• PRO Quant Portfolio Trades: The PRO Quant Portfolio averages two to three trades per week due to its weekly rebalancing.
• Short Interest: High short interest on stocks with solid fundamentals, like Upwork, can indicate a potential for a short squeeze.

The webinar concludes by reiterating the five recommended mid-cap stocks (SSRM, TTMI, PSIX, Jackson Financial, and Upwork) and encouraging viewers to follow Steve Cress on Seeking Alpha for more research. The importance of removing human bias and emotions from investing through systematic, Quant-based approaches is emphasized.