3 Undervalued Mid-Cap Stocks With Big Upside

The small- and mid-cap sectors are often ignored by investors who prefer to just go with large-cap names. The problem is that this limits diversification and doesn’t spread the risk and reward around in a portfolio.
With that in mind, here are three undervalued mid-cap stocks for your consideration, all of which I believe carry below-average risk with above-average reward.

An Extended-Stay Stock

Of all the hotel REITs available, there is one you may not have heard of, because others tend to overshadow it. Ashford Hospitality Trust (NYSE: AHT) is distinguished by its CEO having 25 years of experience in hotels. The metrics are incredible on this company.
Total shareholder returns have beaten peer averages across the three-, five-, seven- and 10-year periods, with returns of 87%, 112%, 272% and 226%, respectively. Over that 10-year period, Ashford’s peers only returned an average of 25%.
Ashford has 15% insider ownership, whereas the next closest competitor has only 5%. Its 5.9% dividend yield is higher than almost every other hotel REIT and it has a coverage ratio of 2.3. Fiscal year 2014 revenue per available room growth was 9.9%, placing it fourth among its peers. This year’s RevPAR is 8.5%, placing it third.
Finally, for the purpose of this article, management says it all in its recent earnings press release:

“The Company’s common stock is currently trading at a trailing 12-month NOI (net operating income) cap rate of approximately 8.4%.  Based on deals the Company has seen trade and other market information from industry consultants, the Company believes similar assets to those in its portfolio are trading in the private market at an approximate average trailing 12-month NOI cap rate of 7.0% which would imply a share price for Ashford Trust common stock of $15.85, which is approximately 91% higher than the current trading price of Ashford Trust common stock.”

The stock currently trades at a cheap $8.05.

A Debt Collector Worth Collecting

PRA Group (NASDAQ: PRAA) is one of my favorite stocks of the past few years. This is a classic Peter Lynch play in that it deals in a distasteful business to many – debt collection. I have no problem with chasing people to pay their debts, so I don’t find it distasteful. But I’m glad the market does.
Prior to this past year – for the previous three years or so – this stock was up 500%. Now it’s in a trading range. The market seems to fear that the Consumer Financial Protection Bureau has been scrutinizing how debt gets sold to companies like PRA Group, and that this would curtail purchases of bad debt.
With no bad debt to buy, there’s no bad debt to collect on, besides the company’s receivable backlog of $2 billion. The CFPB came after PRA Group for violating certain debt collection practices.
These issues soured investors on PRA Group. I think the worst the CFPB will do is hit PRA Group with a fine. The bureau may curtail certain collection practices, but PRA Group has been making these changes itself already.
Meanwhile, the company is organically growing earnings per share at a rate of 37%. If you accept even a forward price-earnings multiple of 15, then on fiscal year 2015 earnings it should be trading at $75, instead of $58 where it is now, which is about 11 times earnings.

A Healthy Choice

Organic grocer Whole Foods Market (NASDAQ: WFM) could be a value, but it depends on how you think about its situation. The market’s sentiment has really soured on it, as it perceives that increasing competition is harming its bottom line.
Whole Foods is trading at 20 times fiscal year 2015 EPS, although if you back out net cash it is closer to 18. Yet the company generated $900 million of free cash flow in the trailing 12 months. Even though its EPS growth is slowing to about 12%, there are some who opine that Whole Foods is merely undergoing a sluggish period it will rebound from.
While this is perhaps the most speculative stock in my list as far as “value,” sentiment could turn on a dime if the company beats estimates going forward.

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