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.
These dynamics can rattle even the most seasoned professionals, which is why we started StockStory - to help you separate the good companies from the bad. That said, here are three mid-cap stocks to avoid and some other investments you should consider instead.
Okta (OKTA)
Market Cap: $16.35 billion
Named after the meteorological measurement for cloud cover, Okta (NASDAQ:OKTA) provides cloud-based identity management solutions that help organizations securely connect their employees, partners, and customers to the right applications and services.
Why Are We Wary of OKTA?
- 20% annual revenue growth over the last three years was slower than its software peers
- Estimated sales growth of 8.7% for the next 12 months implies demand will slow from its three-year trend
- Capital intensity will likely ramp up in the next year as its free cash flow margin is expected to contract by 3.8 percentage points
Okta is trading at $92.60 per share, or 5.6x forward price-to-sales. If you’re considering OKTA for your portfolio, see our FREE research report to learn more.
Warner Music Group (WMG)
Market Cap: $17.38 billion
Launching the careers of legendary artists like Frank Sinatra, Warner Music Group (NASDAQ:WMG) is a music company managing a diverse portfolio of artists, recordings, and music publishing services worldwide.
Why Does WMG Give Us Pause?
- 4.3% annual revenue growth over the last two years was slower than its consumer discretionary peers
- Anticipated sales growth of 4.9% for the next year implies demand will be shaky
- Underwhelming 14.1% return on capital reflects management’s difficulties in finding profitable growth opportunities
At $32.84 per share, Warner Music Group trades at 26.2x forward P/E. Dive into our free research report to see why there are better opportunities than WMG.
West Pharmaceutical Services (WST)
Market Cap: $17.76 billion
Founded in 1923 and serving as a critical link in the pharmaceutical supply chain, West Pharmaceutical Services (NYSE:WST) manufactures specialized packaging, containment systems, and delivery devices for injectable drugs and healthcare products.
Why Are We Cautious About WST?
- 1.6% annual revenue growth over the last two years was slower than its healthcare peers
- Day-to-day expenses have swelled relative to revenue over the last five years as its adjusted operating margin fell by 3.9 percentage points
- Shrinking returns on capital suggest that increasing competition is eating into the company’s profitability
West Pharmaceutical Services’s stock price of $246.95 implies a valuation ratio of 36.8x forward P/E. Check out our free in-depth research report to learn more about why WST doesn’t pass our bar.
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