America’s Top 100 Midcap Stocks, Including An Undervalued Coal Stock With An 18% Yield

This year has been a rude awakening for investors accustomed to 13-years of gains wherever they looked. Year-to-date, the S&P 500 is down 18% and the technology stock-heavy Nasdaq Composite is off 31%. But there have been areas of refuge, and a few noted stock-pickers are getting back to basics and hunting for overlooked mid-cap companies in defensive industries, which have fared relatively better during the selloff.

Forbes’ annual list of America’s Best Mid-Sized Companies is flush with dozens of underappreciated companies in areas like energy or metals and mining that have benefited from high commodity prices and rewarded investors who have long been punished for shunning growth stocks trading at high multiples. Energy has been the S&P’s top performing sector for two years running now, and many value investors expect more gains to come if companies use their earnings from this year’s high oil prices responsibly.

“Energy stocks are very, very cheap at what they’re currently earning,” says Hunter Noble, portfolio manager of Hotchkis & Wiley’s $509 million Mid-Cap Value fund, which is up 7% this year through November. “Perhaps most attractively, we have management teams that for the first time in the history of the industry are really focused on returning capital to shareholders through buybacks and dividends, as opposed to attempting to utilize all the cash flow to go out and develop additional resources.”

This Christmas, you would be lucky to get a lump of coal, or rather coal stocks, in your stocking from Santa. The No. 1 stock on Forbes’ mid-cap list is an old-fashioned coal mining company, St. Louis-based Arch Resources
ARCH
, which operates four mines in West Virginia and three thermal mines in Wyoming’s Powder River Basin and Colorado. Founded in 1969, Arch Resources was responsible for 12.4% of U.S. coal production in 2021, according to the U.S. Energy Information Administration, second only to competitor Peabody EnergyBTU
.

The International Energy Agency expects global coal demand to reach a record high this year, with half the world’s demand coming from China, raising concerns for environmentalists but minting profits for coal miners. Newcastle coal futures, the benchmark for the commodity based on the price of coal loaded at the Newcastle Coal Terminal in Australia, have doubled this year to all-time highs at more than $400 per ton.

Arch Resources generated $3.4 billion in revenue in the 12 months ending June 30, a 108% year over year increase. It approved a $500 million share buyback program this spring and paid out half of its discretionary cash flow in dividends in the first three quarters of the year, amounting to $24.86 per share. Its stock is up 55% this year to $142 per share, yielding an eye-popping 18% over the last year.

“We view this substantial dividend – the first under our relaunched capital return program – as powerful evidence of Arch’s extraordinary cash-generating potential, which in turn sets the stage for further significant payments in coming quarters,” CEO Paul Lang said in announcing the first quarter dividend, pushing shares up by 21% in one day on April 26.

A boom year for commodities also helped gas station chain Murphy USA
MUSA
rise to third on our list, up from 52nd last year. The business, which operates 1,679 gas stations and convenience stores, mostly next to Walmarts in 27 states, was spun off from Murphy OilMUR
in 2013. It takes a lower margin on gas than competitors, betting its consistent traffic and sales of higher-margin alcohol and cigarettes will more than make up for it, and more cost-conscious customers have driven higher volume this year. Its revenue is up 48% in the last 12 months to $22.8 billion.

“What they try to do is offer lower prices and do more volume,” says Raymond James analyst Bobby Griffin. “It’s hard to go from high-price to low-price because you have to give up the margin and hope the volume comes, so it’s a very tough model for competitors to replicate.”

One notable stock near the top of the list is No. 14 World Wrestling Entertainment
WWE
, which made headlines this year when the Wall Street Journal reported famed chairman and CEO Vince McMahon paid $12 million to four women in nondisclosure agreements to silence allegations of sexual misconduct. McMahon resigned in the wake of the report, prompting some speculation the company would be sold.

The scandal hasn’t made the company skip a beat as it generates record revenues and profits leading up to the renegotiation of its TV rights deals next year. Investors expect the deal terms to increase by more than 70% for the next five-year cycle after its current agreements with USA Network and Fox Sports expire in 2024, according to Cannonball Research analyst Vasily Karasyov. More than 4 million people still watch WWE’s three regular weekly programs, a far cry from 20 million in 2000 but still a lot more than most network scripted content gets in an era of cord-cutting, and networks are paying a premium for those eyeballs.

WWE’s stock has always been more volatile during media rights negotiations, and it quadrupled during the last cycle between late 2017 and late 2018 before falling by more than half in the ensuing two years. Now, it’s inching closer to its 2018 highs with a 48% gain this year.

“Excitement tends to build until the announcement,” Karasyov says. “The company will have to manage the excitement, because the negotiations haven’t even started.”

The rest of the list includes stocks like Skechers (SKX), Dillard’s (DDS), Harley-Davidson
HOG
and Coca-Cola Consolidated (COKE)–Coca-Cola’s bottling company. Forbes screened more than 1,000 companies with a market value between $2 billion and $10 billion using data from Factset to rank the 100 best performers. The ranking is based on earnings growth, sales growth, return on equity and total stock return over the last five years, with more weight given to the last 12 months of data.

Click here to see the full list of America’s Best Mid-Sized Companies.