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.
Luckily for you, our mission at StockStory is to help you make money and avoid losses by sorting the winners from the losers. That said, here are three mid-cap stocks to avoid and some other investments you should consider instead.
Toll Brothers (TOL)
Market Cap: $14.02 billion
Started by two brothers who started by building and selling just one home in Pennsylvania, today Toll Brothers (NYSE:TOL) is a luxury homebuilder across the United States.
Why Does TOL Worry Us?
- Sales pipeline suggests its future revenue growth won’t meet our standards as its backlog averaged 9.4% declines over the past two years
- Sales are projected to tank by 6.7% over the next 12 months as demand evaporates
- Earnings growth over the last two years fell short of the peer group average as its EPS only increased by 3.6% annually
At $147.09 per share, Toll Brothers trades at 11.9x forward P/E. Check out our free in-depth research report to learn more about why TOL doesn’t pass our bar.
Zimmer Biomet (ZBH)
Market Cap: $18.01 billion
With a history dating back to 1927 and a presence in over 100 countries worldwide, Zimmer Biomet (NYSE:ZBH) designs and manufactures orthopedic products including knee and hip replacements, surgical tools, and robotic technologies for joint reconstruction and spine surgeries.
Why Are We Cautious About ZBH?
- 4.5% annual revenue growth over the last five years was slower than its healthcare peers
- Estimated sales growth of 3.9% for the next 12 months implies demand will slow from its two-year trend
- Underwhelming 4.1% return on capital reflects management’s difficulties in finding profitable growth opportunities
Zimmer Biomet is trading at $93.30 per share, or 11x forward P/E. To fully understand why you should be careful with ZBH, check out our full research report (it’s free).
CNA Financial (CNA)
Market Cap: $12.97 billion
With roots dating back to 1853 and majority ownership by Loews Corporation, CNA Financial (NYSE:CNA) is a commercial property and casualty insurance provider offering coverage for businesses, including professional liability, surety bonds, and specialized risk management services.
Why Do We Think CNA Will Underperform?
- Scale presents growth limitations compared to smaller competitors, evidenced by its below-average 7.2% annualized growth in net premiums earned for the last two years
- Annual earnings per share growth of 2.2% underperformed its revenue over the last two years, showing its incremental sales were less profitable
- Book value per share tumbled by 1.7% annually over the last five years, showing insurance sector trends are working against its favor during this cycle
CNA Financial’s stock price of $48.08 implies a valuation ratio of 10.4x forward P/E. Read our free research report to see why you should think twice about including CNA in your portfolio.
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