Mid-Cap Stocks to Watch

Last week, fund analyst Todd Trubey used this column to highlight mid-cap funds that can help diversify a large-cap-heavy portfolio. So we'll follow in his footsteps by scoping out some interesting mid-cap stocks for this week's edition.

The mid-cap arena--which Morningstar officially defines by taking the top 70% of the market's value to define large-cap stocks, and then homing in on the next 20% for the mid-cap range--is fertile ground for stock ideas, because these companies are generally well-established enough to be profitable, but still young enough that they haven't hit the mature, slow-growth phase of their life cycle. Currently, 886 stocks fall into the mid-cap range (from roughly $890 million in market cap on the smallest end of the range to approximately $9.7 billion at the high end).

But only a few of those stocks have what we would consider a durable competitive advantage, or economic moat. After adding a filter for wide economic moats to the screen, we were left with a much smaller group--44 companies. We then further narrowed down the list to focus on companies with solid financial health and decent free cash flows, ending up with about 20 names.

Here are some of the highlights:

 Valassis Communications 
Market Capitalization: $1.76 billion
Business Risk: Below Average
Morningstar Rating: 5 Stars
From the  Analyst Report: "Valassis Communications is a finely tuned moneymaking machine....Valassis has produced returns on invested capital (ROICs) in excess of 85% since 1995--incredible compared with the ROICs at most publicly traded firms."

 Weight Watchers Intl (WTW)
Market Capitalization: $3.78 billion
Business Risk: Average
Morningstar Rating: 5 Stars
From the  Analyst Report: "Weight Watchers continues to suffer from the popularity of low-carbohydrate diets. Our fair value estimate is unchanged, though, because the firm should be able to adapt its program to these diets if they turn out not to be fads."

 Jack Henry & Associates (JKHY)
Market Capitalization: $1.68 billion
Business Risk: Below Average
Morningstar Rating: 4 Stars
From the  Analyst Report: "Even though it is smaller than main rival Fiserv (FISV), Jack Henry has the scale required to compete--nearly 2,500 banks and credit unions use its technology for the account processing needed to run their businesses. Such scale allows Jack Henry to spread the fixed costs associated with running its infrastructure (network hardware, technology maintenance, and so on) across a large revenue base, giving it cost advantages over smaller rivals or in-house solutions."

 Cintas (CTAS)
Market Capitalization: $7.42 billion
Business Risk: Below Average
Morningstar Rating: 3 Stars
From the  Analyst Report: "Our recent trip to Cintas' corporate headquarters in Mason, Ohio, reaffirmed our already positive view of the firm....Overall, we were impressed with Cintas during our visit, and we maintain that it would be a great company to own, should the shares ever provide a reasonable margin of safety to our fair value estimate."

To run this screen yourself and see all the stocks that pass, click  here. (The stocks mentioned above passed our screen as of Oct. 28. The results of the screen may change due to daily price fluctuations or other factors.) After clicking, you can save the search for later use by clicking the "Save Criteria" button in the bottom right-hand corner of the screen. (Note: You will need to be a Premium Member to view and save the complete screen.)