While the FTSE 100 may grab most of the headlines, there are a number of mid-cap shares which could deliver strong returns in 2017. Part of the reason for this is valuation. The FTSE 100 has risen by 21% in the last year, while the FTSE 250‘s price level is only 15% higher. This indicates there may be better value opportunities on offer within mid-caps. And since the FTSE 250 has historically outperformed the FTSE 100 in the long run, now could be the right time to buy these two mid-cap stocks.
A return to growth
The resources sector has endured a challenging few years. Lower commodity prices have caused profitability across the sector to decline, with miners and oil & gas companies investing less in developing new assets. This has impacted engineering stocks such as Weir Group (LSE: WEIR), which is expected to report its fourth consecutive fall in earnings when it releases its results for the 2016 financial year.
However, Weir could have a much better future than past. It is expected to record a rise in its bottom line of 34% this year, followed by growth of 23% next year. While its shares are 28% higher than they were six months ago, the market does not yet appear to have priced-in the company’s improving outlook. Weir trades on a price-to-earnings growth (PEG) ratio of only 0.8, which indicates that there is significantly more share price growth ahead.
Certainly, commodity price performance will have a major impact on demand for Weir’s services. But with such a wide margin of safety and the potential for price rises, particularly in the oil & gas sector, now could be an excellent opportunity to buy the company.
While Weir offers turnaround potential, fellow mid-cap Investec (LSE: INVP) has a track record of stable performance. It has recorded a rising bottom line in each of the last four years, and is expected to do likewise over the next couple of years. For example, earnings are due to increase by 15% next year, followed by 7% the year after.
This consistent performance is perhaps surprising given the challenges faced in South Africa. Its economic performance has been somewhat disappointing in recent years and since it is a key market for Investec, it may have acted as a drag on its overall performance. However, the country also offers long-term growth potential and with Investec having a PEG ratio of 1.4, it seems to offer capital gain prospects.
In addition, Investec may be of interest to income-seeking investors. It currently yields 4.4% from a dividend which is covered twice by profit. This indicates that there is scope for a rapid rise in dividends. Given that inflation could reach 3% or more this year, Investec could become increasingly sought-after during the course of the year.
Peter Stephens has no position in any shares mentioned. The Motley Fool UK has recommended Weir. We Fools don't all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors.