Mid-cap stocks are often seen as a balanced investment option. They offer a mix of growth potential and financial stability, and have historically outperformed large-cap and small-cap stocks over longer periods for this reason, as mentioned earlier in February by Simeon Hyman, Global Investment Strategist at ProShares Advisors. We covered his detailed sentiment in our 10 Best Performing Mid Cap Stocks to Buy According to Analysts article. Mid-caps are considered undervalued in some cases and provide opportunities for investors seeking quality at a discount. Their domestic focus and higher earnings quality compared to small caps make them an attractive choice for stable growth.
This sentiment was covered earlier on January 25 by Jill Carey Hall, BofA global research head of US small and mid cap strategy. She appeared on CNBC's 'Closing Bell' to discuss small cap headwinds and the opportunity in domestic mid caps due to a tough backdrop for the Russell 2000. The profits growth recovery story for small caps, which many investors were optimistic about last year, has continued to be revised downward and pushed further into 2025. As a result, small-cap profits have continued to disappoint, with negative year-over-year earnings growth still prevalent. In contrast, mid-caps have shown better fundamentals. Hall emphasized that if the market broadens out, mid-caps could offer the best risk-reward, especially in an environment where multiple rate cuts have been priced out of the market. Her economists at BofA expect the Fed to remain on hold without further cuts. This scenario poses refinancing risks for small caps, which have reemerged as rate risks have increased. Mid-caps, however, have better balance sheets and fundamental trends, making them a preferable choice within the small and mid-cap space.
Interest rates also influence small-cap performance. Despite optimism around the economy and potential policies from Trump 2.0, small caps have struggled to achieve sustained gains after brief rallies. Historically, small caps have underperformed for over a decade. While relative valuations suggest they could outperform over the next decade, near-term challenges persist. Investors are cautious due to high expectations and ongoing profit disappointments. Hall noted that rate stabilization or potential rate cuts could support small caps, but Fed policy has been a major driver of recent volatility in this segment. For instance, December marked the worst month for small-cap performance relative to large caps in over 25 years following a hawkish Fed meeting. This year, Hall recommended focusing on companies with strong profits, lower leverage, reduced refinancing risks, or economic sensitivity. Financials appear well-positioned to benefit from potential deregulation or an uptick in M&A. Additionally, stocks with upward earnings revisions have outperformed recently and remain attractive targets.
Methodology
We used the Finviz stock screener to compile a list of the top mid-cap stocks that were trading between $2 billion and $10 billion, and had a forward P/E ratio under 15 each. We then selected the 10 stocks that were the most popular among elite hedge funds and that analysts were bullish on. The stocks are ranked in ascending order of the number of hedge funds that have stakes in them, as of Q4 2024. The hedge fund data was sourced from Insider Monkey’s database which tracks the moves of over 900 elite money managers.
Why are we interested in the stocks that hedge funds pile into? The reason is simple: our research has shown that we can outperform the market by imitating the top stock picks of the best hedge funds. Our quarterly newsletter's strategy selects 14 small-cap and large-cap stocks every quarter and has returned 373.4% since May 2014, beating its benchmark by 218 percentage points (see more details here).
Norwegian Cruise Line Holdings Ltd. (NCLH): Jim Cramer Breaks Down Its Record Growth
A luxurious cruise ship overlooking a stunning horizon, highlighting the variety of its itineraries.
Norwegian Cruise Line Holdings Ltd. (NYSE:NCLH) is a global cruise company that offers a range of vacation experiences through its Norwegian Cruise Line, Oceania Cruises, and Regent Seven Seas Cruises brands. It provides passengers with exceptional itineraries and onboard amenities across numerous international destinations.
The company's onboard revenue segment achieved a record 10% net yield growth in 2024. Onboard revenue includes all spending by cruise passengers during their voyage, beyond the initial ticket price. This includes dining, beverages, retail, and entertainment purchases. This growth exceeded initial forecasts by 4.5%. Enhancements to the onboard guest experience, which include improved Wi-Fi and entertainment, have fueled this growth. Strategic partnerships, such as those with the NHL and Aston Martin, have also contributed.
Norwegian Cruise Line Holdings Ltd. (NYSE:NCLH) continues to enhance onboard experiences through development at Great Stirrup Cay, with a new pier designed to increase passenger capacity and onboard spending. Great Stirrup Cay is the company's private island destination in the Bahamas for exclusive beach experiences and onboard-like amenities to its passengers. Further technological advancements and the development of premium onboard offerings within luxury brands are also increasing revenue from this segment.
Ariel Small Cap Value Strategy stated the following regarding Norwegian Cruise Line Holdings Ltd. (NYSE:NCLH) in its Q4 2024 investor letter:
“Norwegian Cruise Line Holdings Ltd. (NYSE:NCLH) advanced over the period following a top- and bottom-line earnings beat and subsequent raise in full-year guidance. Stronger than anticipated consumer demand, healthy onboard spending, robust pricing, solid cost containment and continued progress on leverage reduction boosted results. Looking ahead, NCLH remains focused on right sizing its cost base and improving margins to further strengthen its foundation for sustainable and profitable growth. With a young average fleet and solid liquidity position, we remain enthusiastic about the name.”
Overall NCLH ranks 2nd on our list of the most undervalued mid cap stocks to buy according to hedge funds. While we acknowledge the potential of NCLH as an investment, our conviction lies in the belief that AI stocks hold great promise for delivering high returns and doing so within a shorter time frame. If you are looking for an AI stock that is more promising than NCLH but that trades at less than 5 times its earnings, check out our report about the cheapest AI stock.
