Many mid-cap stocks have slightly outperformed the S&P 500 index year-to-date. In fact, the iShares Core S&P Mid-Cap ETF is up 4.1% YTD versus the S&P 500 being up 2%. I believe that it is now worth taking a deeper look into these mid-cap stocks as there has been a divergence between mid-cap stocks and their larger-cap peers. If the stars line up, this year could see that gap being closed.
An increasing number of investors believe that the rally we’ve had in the past two years has taken most bigger companies into overvalued levels. On the other hand, mid-cap stocks are changing hands at a more reasonable valuation. This makes me think there’s a good chance that a lot of these investors are going to rotate some of their gains into stocks in the mid-cap range.
These stocks have much more upside potential and are safer than those in the small-cap range. However, mid-caps can be defined as stocks that trade with a valuation of anywhere from $2 billion to $10 billion. You can find both volatile and low-beta names here.
I will be focusing more on the volatile chunk of this market. I think there are many stocks here capable of delivering multibagger gains down the line. Here are three:
Applied Digital (APLD)
Applied Digital (NASDAQ:APLD) is a Bitcoin (BTC-USD) mining company but it is increasingly shifting toward AI and cloud computing systems. The latter segment is growing very fast and Cloud Services revenue grew 523% year-over-year to $27.7 million in Q2 FY2025.
It still makes most of its money through crypto, but one look at the company’s filings should make it clear that management is putting more and more emphasis on the AI and cloud computing market. I believe this sort of growth should quickly turn Applied Digital into a cloud computing business instead of a crypto one. Once the company gets rid of its reputation of being a “crypto miner,” investors will likely slap a higher premium on APLD stock.
It is currently building a 100MW data center in Ellendale, ND. More recently, Macquarie Asset Management (MAM) has agreed to provide “up to $5 billion in funding” to Applied Digital’s High Performance Computing (HPC) business. You should keep in mind that the market capitalization of Applied Capital is currently $1.98 billion as of writing.
Applied Digital will receive some $900 million as an initial investment, but that investment alone should quickly turn it into a high-growth cloud computing company, as long as we see the cloud computing sector perform well. The company is very optimistic about demand:
And the stock itself is up 56.7% in the past six months.
Tidewater (TDW)
Tidewater (NYSE:TDW) operates the largest fleet of Offshore Support Vessels (OSVs) and these ships serve as a link between land and offshore installations. These vessels can supply crew on offshore rigs with necessities and equipment. In essence, it is an offshoot of the oil and gas industry.
I have generally been quite skeptical of where oil and gas companies are at now. These companies are at the mercy of the broader economy and even a small recession could easily crash these stocks. That said, I think TDW stock is an exception, and this is mostly due to the Trump Administration coming to power.
It still has to be seen whether or not we’re going to see a significant increase in drilling, but just the chance of it happening could drive up Tidewater. Moreover, even a dip in demand shouldn’t make TDW decline too much. It is already down 46% from its peak and the downside risk remains low. I believe there’s a good chance it is bottoming out right now.
Tidewater posted Q3 2024 revenue of $340.4 million, up 13.7% year-over-year.
The growth so far looks pretty healthy.
Docebo (DCBO)
Docebo (NASDAQ:DCBO) is a learning platform for organizations. It can automate tasks to enroll learners and also has services to make employee onboarding easier. DCBO stock is up 288% since April 2020, but this is mostly due to the boom in 2021. The stock has mostly traded sideways since the start of 2024. However, I believe that there’s a good chance that it can perform well in 2025. It operates in the Corporate Learning Management System (LMS) and in the enterprise learning platform industry. This market is expected to grow from $24 billion in 2024 to $70.8 billion in 2030.
We’re already seeing a lot of that growth in the company’s financials. Docebo reported a 21% increase in subscription revenue (contributes to 95% of total revenue) and a 19% increase in gross profit. EPS is expected to grow by almost 60% for all of 2024 to $1 and then grow another 30% this year.
The stock is not “cheap” by any means, but I do think that it is trading with a more humble premium than what many other software companies are valued at. Analysts think the same and have a consensus price target of $59.6, which implies a 41% upside potential from here in the next 12 months.
— Omor Ibne Ehsan
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Source: Money Morning