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. That said, here are three mid-cap stocks to avoid and some other investments you should consider instead.
Somnigroup (SGI)
Market Cap: $12.88 billion
Established through the merger of Tempur-Pedic and Sealy in 2012, Somnigroup (NYSE: SGI) is a bedding manufacturer known for its innovative memory foam mattresses and sleep products
Why Are We Cautious About SGI?
- Flat sales over the last two years suggest it must innovate and find new ways to grow
- Free cash flow margin is forecasted to shrink by 4.6 percentage points in the coming year, suggesting the company will consume more capital to keep up with its competitors
- Shrinking returns on capital suggest that increasing competition is eating into the company’s profitability
Somnigroup is trading at $61.86 per share, or 10.7x forward EV-to-EBITDA. If you’re considering SGI for your portfolio, see our FREE research report to learn more.
Packaging Corporation of America (PKG)
Market Cap: $18.04 billion
Founded in 1959, Packaging Corporation of America (NYSE: PKG) produces containerboard and corrugated packaging products as well as displays and package protection.
Why Should You Dump PKG?
- Disappointing unit sales over the past two years show it’s struggled to increase its sales volumes and had to rely on price increases
- Earnings per share have contracted by 9.9% annually over the last two years, a headwind for returns as stock prices often echo long-term EPS performance
- Free cash flow margin shrank by 3 percentage points over the last five years, suggesting the company is consuming more capital to stay competitive
Packaging Corporation of America’s stock price of $202.27 implies a valuation ratio of 17.7x forward price-to-earnings. Dive into our free research report to see why there are better opportunities than PKG.
NetApp (NTAP)
Market Cap: $19.03 billion
Founded in 1992 when the digital storage industry was still in its infancy, NetApp (NASDAQ: NTAP) provides data storage and management solutions that help organizations store, protect, and optimize their data across on-premises data centers and public clouds.
Why Does NTAP Worry Us?
- Sales stagnated over the last two years and signal the need for new growth strategies
- Flat billings over the past two years suggest it may need to improve its products, pricing, or go-to-market strategy to reinvigorate demand
- Anticipated sales growth of 4% for the next year implies demand will be shaky
At $93.56 per share, NetApp trades at 12.1x forward price-to-earnings. Check out our free in-depth research report to learn more about why NTAP doesn’t pass our bar.
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