The S&P 500 is up 17% in 2023, but the lion’s share of that increase is due to the surging prices of a few of the largest companies. Without the combined gains of Apple (+42% YTD), Microsoft (+39% YTD), Alphabet (+52% YTD), Amazon (+65%) and Nvidia (+216%), the overall market would be up just 2.5% this year, according to data provided by Howard Silverblatt, senior index analyst at S&P Dow Jones Indices. Amid a more challenging outlook for large-caps, several experts point to mid-caps as the sweet spot for the rest of the year.
For innovation-focused investors, the potential of mid-cap tech stocks should not be ignored. While small-cap stocks are often fast-growing but volatile, and large-cap stocks tend to be slow-growing and relatively stable, the best mid-caps tend to fall in between – less volatile than fast-moving small caps but with more growth potential than mammoth large-cap companies. Top-ranked mid-cap stocks have a high potential to enhance their profitability, productivity, and market share.
Our research team has a few recommendations for mid-cap stocks that are poised to take off in the second half of the year…
Microstrategy (MSTR)
Bitcoin is up 56% since the start of the year, and it may be just getting started as the highly anticipated 2024 “bitcoin halving” draws near. Cloud-based service provider Microstrategy has been gaining attention from institutional investors who cannot invest directly in cryptocurrencies.
The Bitcoin halving, which occurs every four years, reduces rewards for successfully mining new Bitcoin by 50%. The aim is to reduce the supply of Bitcoin over time. Before the last halving, on May 11, 2020, the price of Bitcoin increased by 19% from the same day a year earlier. Bitcoin’s price reached record highs after each of the last three halvings; its price has tended to bottom out and start to rally 15 months prior to each halving. The next halving event is slated for April 2024.
With a correlation of 0.90 to the crypto asset, mid-cap Microstrategy offers the most attractive means through which equity investors can take advantage of the event.
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DexCom (DXCM)
Diabetes is increasing at an alarming rate in the United States. According to the CDC’s National Diabetes Statistics Report, for 2022, cases of diabetes have risen to an estimated 37.3 million – about 1 in 10 people. Mid-cap medical device manufacturer DexCom is responding with innovative solutions that are gaining popularity among the masses, so much so that the company has recently reconsidered and raised its outlook.
In April, Medicare officials expanded reimbursement for continuous glucose monitors or CGMs to all patients who require insulin to manage their diabetes. It is the biggest expansion ever in the history of the CGM category, providing access to a number of people who will benefit greatly. And it’s the tailwind leading CGM manufacturer DexCom has been waiting for.
Management now expects to reach $4.6 billion to $5.1 billion by 2023. That’s an increase of $600 million from the previous range for the year. DexCom’s sales last year rose 19% to $2.91 billion. Analysts polled by FactSet predict sales will rise 20% to $3.5 billion in 2023.
DexCom stock is highly rated across the board. According to Investor’s Business Daily, DexCom’s fundamental and technical measures warrant a place in the top 3% of all stocks. The 22 analysts covering the stock resoundingly agree, giving it a Strong Buy recommendation.
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Fasty Inc. (FSLY)
Cloud-computing platform provider Fastly has been getting a lot of attention this year, and this may be just the beginning. Despite an astonishing 183% increase already this year, FSLY’s share price remains significantly (81%) below its October 2020 ATH of $126.58.
The company has yet to turn a profit. Nevertheless, over the past three years, revenue increased at an average rate of 23% per year. That’s well above most other pre-profit companies. Interestingly, the share price has fallen an average of 9% each year over the same period. This disconnect between valuation and revenue growth forms the foundation for an intriguing investment, especially for growth-oriented investors.
Management’s efforts to cultivate the conditions for long-term success were evidenced during its most recent earnings call by a year-over-year gain in new customers and decreased capital expenditures, which has allowed for enhancements to the company’s technology and its business model. Customer acquisition and growth across the platform should be supported as it rolls out simpler product packaging and pricing tiers. Based on current free cash flows, the mighty mid-cap company has sufficient cash runway for more than three years. Its debt is well covered by its earnings, and management forecasts a reduction in losses over the next twelve months.
Strong execution and favorable underlying fundamentals seem likely to continue to support this turnaround story. At less than $25 per share, FSLY seems worthy of consideration.
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