3 mid-cap stocks I’d buy in March

These three small caps have been left behind by the market’s recent rally.

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Over the past 12 months, UK mid-cap stocks have produced some of the best equity returns in the world thanks to improving investor sentiment and the health of the UK economy. Indeed, the FTSE 250 hit a record high earlier this week and year-to-date the index is outperforming the more international FTSE 100 by approximately 3%. 

However, some UK mid-caps have not benefited from investors’ renewed optimism towards the sector despite the fact that their underlying business performance continues to meet expectations. 

Here are three of these unloved UK champions with a promising outlook. 

Sell, sell, sell

When car dealer Pendragon (LSE: PDG) reported its full-year 2016 results earlier this week, investors rushed to sell the company’s shares, despite management’s positive outlook. For 2017, management expects car sales to remain flat, compared to industry projections of a 5% fall, and the firm is looking to double its share of the UK used car market to 10%. Underlying pre-tax profit for 2016 rose 7.6% although reported profit before tax fell 7.6% year-on-year as last year the company benefitted from some one-off items, which weren’t repeated. 

Alongside the results the company announced it’s increasing its dividend payout by 10% and based on January trading, is optimistic for the year ahead. City analysts are expecting the company to report no earnings growth for 2017 and based on this forecast the market has marked down the shares to just 9.1 times forward earnings. 

If management is right and trading does prove to be better than City expectations for the year, the shares could quickly re-rate higher. 

Troubled turnaround 

Shares in SIG (LSE: SHI) have been on a rocky ride over the past five years falling from a high of 216p to a low of 89p as the building products specialist has struggled to achieve steady earnings growth.  

Nonetheless, the company’s turnaround seems to be gaining traction with analysts expecting pre-tax profits to come in at £76m for 2016, up from £51m for 2015. Further profitability growth is forecast for the next two years with analysts targeting a group pre-tax profit of £86m for 2017. 

Even with this steady growth outlook on the cards, shares in SIG only trade at a forward P/E of 11.4. They also support a dividend yield of 3.9%. The payout is covered two-and-a-half times by earnings per share. 

Sudden fall

Shares in Berendsen (LSE: BRSN) took a dive during October after the company issued a profit warning. The root of this warning was the group’s UK Flat Linen business where costs jumped more than expected. 

Management has promised to remedy the Flat Linen issues, and I believe they will stick to their word. After all, the company has grown earnings per share at an average annual rate of 32% over the last six years, while revenue has ticked higher by only 0.4% per annum. Shares in the company currently trade at a forward P/E of 13.5 and could offer significant long term growth potential based on past trends. The dividend yield is 3.8%. 

Should you invest, the value of your investment may rise or fall and your capital is at risk. Before investing, your individual circumstances should be assessed. Consider taking independent financial advice.

Rupert Hargreaves owns shares in Pendragon. The Motley Fool UK has recommended Berendsen and Pendragon. We Fools don't all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors.

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