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The 5 Best Mid-Cap Stocks to Buy Now, According to this Winning Formula

One mutual fund uses the following four criteria to identify the best mid-cap stocks on the market. Here are five that meet the criteria now.

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The Hennessy Cornerstone Midcap 30 Fund (HFMDX) had a very good third quarter. Thanks to its unique, specific strategy for identifying the best mid-cap stocks on the market, the mutual fund (which received praise from The New York Times as being one of the top performers in Q3) earned an average return of 22.2% from July through September.

Hennessy Cornerstone’s stock-picking formula is four-pronged. For a mid-cap stock to pass its screen, it must meet the following qualifications:

  1. A price-to-sales ratio below 1.5
  2. Annual revenue between $1 billion and $10 billion
  3. Earnings must exceed the previous year’s
  4. The stock must have appreciated in the last three to six months

The Hennessy fund strictly adheres to these four criteria. And it’s worked well for them, not only in the third quarter but in the last decade, producing positive returns every year but 2018 (when it lost 22.4%).

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So, let’s use Hennessy’s formula to identify the five best mid-cap stocks on the market currently – three weeks into the fourth quarter. Remember: mid-caps are companies with market caps between $2 billion and $10 billion, an attractive mid-point in the growth cycle of company because, as fund CEO Neil Hennessy told the Times, “They’re large enough to withstand an economic tsunami and to acquire smaller companies, but they’re small enough to be acquired themselves.”

On other note: although I used the Hennessy fund’s screening criteria, I did not actually look up what stocks they hold in their portfolio – in part because many of the names in the listing are a quarter old, which these days is a long time.

Let’s get to the stocks.

5 Best Mid-Cap Stocks to Buy Now

Williams-Sonoma (WSM)

Market cap: $8.2 billion

Price-to-sales ratio: 1.38

Revenue (trailing twelve month): $6 billion

Quarterly earnings growth: 114.8%

3-month stock return: 25.7%

6-month stock return: 104%

Casey’s General Stores (CASY)

Market cap: $6.8 billion

Price-to-sales ratio: 0.91

Revenue: $7.6 billion

Quarterly earnings growth: 40.5%

3-month stock return: 13.5%

6-month stock return: 20.3%

Hanesbrands (HBI)

Market cap: $6 billion

Price-to-sales ratio: 0.94

Revenue: $6.7 billion

Quarterly earnings growth: 7.8%

3-month stock return: 22.8%

6-month stock return: 96%

Dick’s Sporting Goods (DKS)

Market cap: $5.5 billion

Price-to-sales ratio: 0.62

Revenue: $8.6 billion

Quarterly earnings growth: 146%

3-month stock return: 51.8%

6-month stock return: 134%

Flowers Foods (FLO)

Market cap: $5.2 billion

Price-to-sales ratio: 1.24

Revenue: $4.3 billion

Quarterly earnings growth: 9.1%

3-month stock return: 12.8%

6-month stock return: 6.2%

Tallying it all up, that’s an average three-month return of 25.3% and an average six-month return of 76.1% among those five mid-cap stocks. That’s some pretty good momentum!

Also, notice the companies: they’re all either food or retail related. Dick’s Sporting Goods and Williams-Sonoma have certainly benefited as American brick-and-mortar retail stores re-opening from Covid-19 lockdowns over the summer, as the earnings growth indicates.

Hanesbrands, which makes Hanes underwear, Champion athletic gear and Playtex women’s undergarments, among other recognizable brands, is getting a similar bump from all the retail re-openings.

Casey’s General Store is a midwestern convenience store chain, with 2,146 stores in 16 states. Convenience stores, along with grocery stores, have been one of the few constants this year.

Finally, Flowers Foods is a Georgia-based producer and distributor of packed bakery foods, whose brands include Nature’s Own bread, Wonder Bread and Tastykake. People certainly didn’t stop eating bread, pastries and snack cakes in the last seven months.

If these five stocks follow the Hennessy fund’s third-quarter pattern, they could be among the best-performing mid-cap stocks in the fourth quarter. Any one of them could make a good addition to your portfolio.

If you want even more ideas for high-growth stocks with small market caps, I recommend taking a subscription to either our small-cap stock advisory Cabot Small-Cap Confidential or our micro-cap stock advisory, Cabot Micro-Cap Insider. The former, run by small-cap investing expert Tyler Laundon, has an average return of 187% (!). The latter, run by micro-cap investing expert Rich Howe, boasts an average return of 34% since launching in late April.

To learn more, click here.


Chris Preston is Cabot Wealth Network’s Vice President of Content and Chief Analyst of Cabot Stock of the Week and Cabot Value Investor .