Mid-cap stocks often strike the right balance between having proven business models and market opportunities that can support $100 billion corporations. However, they face intense competition from scaled industry giants and can be disrupted by new innovative players vying for a slice of the pie.
These dynamics can rattle even the most seasoned professionals, which is why we started StockStory - to help you separate the good companies from the bad. Keeping that in mind, here are three mid-cap stocks to avoid and some other investments you should consider instead.
GoDaddy (GDDY)
Market Cap: $12.44 billion
Known for its memorable Super Bowl commercials that put it on the map, GoDaddy (NYSE: GDDY) is a domain registrar and web services provider that helps entrepreneurs establish an online presence through domain registration, website building, hosting, and e-commerce tools.
Why Do We Think GDDY Will Underperform?
- Products, pricing, or go-to-market strategy may need some adjustments as its 6.2% average billings growth over the last year was weak
- Estimated sales growth of 5.3% for the next 12 months implies demand will slow from its two-year trend
- High servicing costs result in a relatively inferior gross margin of 63.8% that must be offset through increased usage
At $99.75 per share, GoDaddy trades at 2.4x forward price-to-sales. Check out our free in-depth research report to learn more about why GDDY doesn’t pass our bar.
Packaging Corporation of America (PKG)
Market Cap: $22.1 billion
Founded in 1959, Packaging Corporation of America (NYSE: PKG) produces containerboard and corrugated packaging products as well as displays and package protection.
Why Is PKG Not Exciting?
- Underwhelming unit sales over the past two years suggest it might have to lower prices to accelerate growth
- Earnings per share have dipped by 1.8% annually over the past two years, which is concerning because stock prices follow EPS over the long term
- Shrinking returns on capital suggest that increasing competition is eating into the company’s profitability
Packaging Corporation of America is trading at $249.69 per share, or 21.6x forward P/E. Read our free research report to see why you should think twice about including PKG in your portfolio.
Align Technology (ALGN)
Market Cap: $11.29 billion
Pioneering an alternative to traditional metal braces with nearly invisible plastic aligners, Align Technology (NASDAQ: ALGN) designs and manufactures Invisalign clear aligners, iTero intraoral scanners, and dental CAD/CAM software for orthodontic and restorative treatments.
Why Are We Cautious About ALGN?
- Muted 2.5% annual revenue growth over the last two years shows its demand lagged behind its healthcare peers
- Earnings growth underperformed the sector average over the last five years as its EPS grew by just 1.4% annually
- Eroding returns on capital suggest its historical profit centers are aging
Align Technology’s stock price of $160.62 implies a valuation ratio of 13.8x forward P/E. To fully understand why you should be careful with ALGN, check out our full research report (it’s free).
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