Many investors pay attention to mid-cap stocks because they have established business models and expansive market opportunities. However, their paths to becoming $100 billion corporations are ripe with competition, ranging from giants with vast resources to agile upstarts eager to disrupt the status quo.
This is precisely where StockStory comes in - we do the heavy lifting to identify companies with solid fundamentals so you can invest with confidence. Keeping that in mind, here are three mid-cap stocks to avoid and some other investments you should consider instead.
Dollar General (DG)
Market Cap: $25.22 billion
Appealing to the budget-conscious consumer, Dollar General (NYSE: DG) is a discount retailer that sells a wide range of household essentials, groceries, apparel/beauty products, and seasonal merchandise.
Why Does DG Fall Short?
- Large revenue base makes it harder to increase sales quickly, and its annual revenue growth of 3.9% over the last three years was below our standards for the consumer retail sector
- Widely-available products (and therefore stiff competition) result in an inferior gross margin of 30.3% that must be offset through higher volumes
- Earnings per share have dipped by 12.6% annually over the past three years, which is concerning because stock prices follow EPS over the long term
Dollar General’s stock price of $114.61 implies a valuation ratio of 15.2x forward P/E. To fully understand why you should be careful with DG, check out our full research report (it’s free).
International Paper (IP)
Market Cap: $18.51 billion
Established in 1898, International Paper (NYSE: IP) produces containerboard, pulp, paper, and materials used in packaging and printing applications.
Why Do We Pass on IP?
- Scale is a double-edged sword because it limits the company’s growth potential compared to its smaller competitors, as reflected in its below-average annual revenue increases of 3.9% for the last five years
- Performance over the past five years shows its incremental sales were much less profitable, as its earnings per share fell by 15.5% annually
- Eroding returns on capital from an already low base indicate that management’s recent investments are destroying value
At $35.67 per share, International Paper trades at 20.3x forward P/E. Dive into our free research report to see why there are better opportunities than IP.
Reinsurance Group of America (RGA)
Market Cap: $13.51 billion
Operating behind the scenes of the insurance industry since 1973, Reinsurance Group of America (NYSE: RGA) provides life and health reinsurance services to insurance companies, helping them manage risk and meet regulatory requirements.
Why Does RGA Worry Us?
- Scale presents growth limitations compared to smaller competitors, evidenced by its below-average 2.1% annualized growth in net premiums earned for the last two years
- Annual earnings per share growth of 7.8% underperformed its revenue over the last two years, showing its incremental sales were less profitable
- Projected book value per share decline of 3.3% for the next 12 months points to tough credit quality challenges ahead
Reinsurance Group of America is trading at $210.48 per share, or 0.9x forward P/B. Check out our free in-depth research report to learn more about why RGA doesn’t pass our bar.
Stocks We Like More
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