Market Sell-Off: 3 Mid-Cap Stocks to Buy Hand Over Fist

Market sell-offs usually create buying opportunities, and the current situation is no different. Suppose you are looking to buy some stocks with good long-term growth potential. In that case, I think locks and security door company Allegion ( ALLE 0.30% ), electrical connection and protection product company nVent ( NVT 0.79% ), and advanced materials company Hexcel ( HXL 2.90% ) are excellent companies to add to a portfolio.

Allegion moves into the electronic age

The case for buying the stock rests on the company's ability to benefit from the shift toward electronic security from purely mechanical. The addition of internet of things (IoT) capability to locks and doors significantly enhances the "value add" of Allegion's solutions. For example, connected locks and doors mean building owners can better monitor and control who is moving within their facilities. As such, owners can remotely control who has access to which area of their facility. In doing so, they can improve work productivity and lower the potential for theft.

In common with many other industrial companies, Allegion sees cost pressures from rising raw material costs and a shortfall in component availability. However, management expects pricing actions to more than offset inflation in 2022, and profit margins are expected to make a sequential improvement through the year.

All told, management expects organic revenue growth of 7% to 8.5% in 2022, leading to adjusted earnings per share (EPS} of $5.55 to $5.75 and free cash flow (FCF) $465 million to $485 million. The midpoint of these figures puts Allegion on a forward price-to-earnings ratio of 20 times and a forward price-to-FCF multiple of 21 times. Those are good multiples for a company with mid-single-digit revenue growth prospects and double-digit earnings growth potential.

Market Sell-Off: 3 Mid-Cap Stocks to Buy Hand Over Fist

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nVent Electric

This company is an exciting way to play the trend toward electrification in the economy. Electrical enclosures, electrical and fastening solutions, and thermal management solutions may not sound as exciting as investing in electric charging networks, smart buildings, 5G, or renewable energy. Still, all of these industries need nVent's solutions.

If you are going to invest in electrification, you will need to connect and protect electrical infrastructure. That's where nVent comes in. The company's primary industry vertical is the general industrial sector, encompassing many industries investing in automation such as aerospace, automotive, and food and beverage.

The second key vertical is the commercial and residential building sector, where the move toward smart connected buildings is another growth driver. The third meaningful end market is infrastructure, including datacom, telcos, power utilities, etc.

As you can see nVent has a broad range of end markets, and the company is firing on all cylinders right now. The latest fourth-quarter earnings report saw nVent generate a whopping 24% increase in organic sales on a year-over-year basis. In addition, management expects organic sales growth of 6% to 9% for 2022, with adjusted EPS of $2.10 to $2.20, while Wall Street analysts have FCF of $360 million penciled in for 2022. These multiples put nVent on a forward price-to-earnings multiple of just 16, and a price-to-FCF multiple of less than 16. All told, nVent is my favorite mid-cap stock to buy right now.

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Hexcel is the future of aviation

The company's advanced carbon fiber composites make airplanes and other bulky industrial products lighter and stronger. As such, they help reduce costs and improve efficiency. Hexcel's key end market is commercial aviation, and as the industry trend is toward more composite material usage in aircraft, Hexcel generates more revenue per plane from newer planes.

All of this means Hexcel is a play on a multiyear increase in aircraft production and a shift toward the production of newer-generation aircraft like the Airbus A320 NEO, Boeing 737 MAX, and Boeing 777X. A ramp-up to 2019 volume levels implies a significant increase in revenue for Hexcel since the newer planes will contain more advanced composites per plane.

Leading industry observers expect narrowbody flight departures to return to 2019 levels by 2023 and widebody departures by 2024. That implies a multiyear recovery in the industry. As such, Boeing and Airbus are ramping up production as the market recovers. Consequently, Wall Street analysts have FCF of $206 million and $236 million penciled in for Hexcel in 2023 and 2024, putting the stock on 22.6 times and less than 20 times 2023 and 2024 FCF multiples. While these may appear to be heady valuations, Hexcel has very strong long-term growth prospects.