Mark Schultz, portfolio manager for the $246 million MTB Midcap Growth A (MUTF: AMCRX), mutual fund believes midcap stocks are going to have strong returns in 2011. He’s betting that CBS Corp. (NYSE: CBS), Raymond James Financial (NYSE: RJF) and Joy Global Inc. (NASDAQ:JOYG) are three midcap gems with superior business models that can flourish in any market conditions.
“Midcaps represent an attractive area of the market,” says Schultz. “They’ve got their products proven in the marketplace and have superior access to money in the markets, so they are financially more secure than most companies. Generally they have proven management teams and a little more diversification domestically and internationally.
Midcap companies have had time to perfect their business models, and Schultz carefully examines each company’s business model, trying to determine what each company’s growth opportunities look like and what each company’s sustainable advantage in the marketplace looks like. The advantages from its business model plus more fundamental indicators like strong earnings growth, good cash flow and low debt on the balance sheet that make a stock most attractive.
CBS is the top holding in Schultz’s portfolio. He likes it most because advertising is on the upswing, and since CBS is a ratings leader in a number of areas, revenues should rise correspondingly over the next year.
Schultz is also betting that CBS will be one of the first major networks to monetize and generate revenue from its content in a big way. He expects the network will begin taking a more aggressive approach to finding ways to get consumers to pay for its content online, which will deliver positive returns.
“Their deal with Netflix (NASDAQ: NFLX), we think, will demonstrate CBS has the ability to get paid by a distribution channel for its content,” Shultz says. Analyst project that CBS deal with Netflix to provide on-demand streaming of its shows could be worth $200 million and may lead to new streams of income in the future.
Shultz also says CBS’s cash flow is much stronger than it appears which should allow it to keep earnings increasing. CBS stock closed at $24.60 on Tuesday and it is up 29.4% for the year.
Regional brokerage and investment bank Raymond James Financial (NYSE: RJF) is expected to capitalize on retail investors getting back into the market since the market crash in 2008. As investors have seen their cash gain next-to-nothing from low-interest bank accounts, they’ve begun shifting money into riskier assets. Raymond James will benefit from generate fees from handling those assets. Additionally, Shultz believes Raymond James will see an influx of investors leaving big firms for independent brokers.
“Raymond James’ growth does not depend on adding expenses or more advisors,” says Schultz. “With new accounts, productivity should improve, and with that, revenues and profits.”
The stock has done well – it closed at $36.94 on Wednesday, up 13.3% for the year, and Schultz expects further upside.
Joy Global manufactures and services mining equipment, and is expected to benefit from the increasing worldwide demand for minerals and metals. The mining industry is enjoying a strong recovery as demand for coal, copper, iron ore, oil sands and other mineral resources increases as economies in emerging market nations continue to strengthen after the recent world economic downturn.
Schultz says both surface and underground mining are on the upswing and more orders for maintenance equipment and equipment to expand mining operations bode well for Joy Global. Green mining will also be a source of future growth for the company.
“Joy Global is a good play on energy materials as the emerging markets are consuming more coal for energy consumption,” says Schultz.
Joy Global closed at $96.84 on Wednesday and is up 11.8% for the year.