These 8 Ignored Mid-Cap Stocks Could Be Tomorrow's Mega-Caps

Includes: UVV, WLTW
by: StreetAuthority

By Michael Vodicka

Most people think being ignored or unpopular is a bad thing. But when it comes to stocks, it's a blessing in disguise.

There are about 63,000 publicly-traded companies in the world, according to data from Bloomberg. Of these 63,000, about 15,000 are based in the United States, with about 5,000 being traded on public exchanges and the other 10,000 traded in various over-the-counter (OTC) markets.

But while many large, well-known companies such as Apple Inc. (NASDAQ:AAPL), Google (GOOG and Amazon (NASDAQ:AMZN) have more than 30 analysts providing coverage, the majority of public companies are being almost totally ignored by the analyst community, with little to no coverage at all.

And like I said before, that's a good thing for investors.

That's because stocks with high analyst coverage have usually already cycled through the early stages of rapid growth that produce big gains for early investors. These high levels of growth and big gains frequently trigger more interest from investors, which in turn makes it much more profitable for investment research companies to create and sell research reports in high demand.

On the institutional side, stocks with high analyst coverage also tend to get pitched more often to big mutual- and hedge-fund managers. If the biggest players on the Street have already initiated big positions, then that leaves less capital on the sidelines to push shares higher.

Stocks with lots of analyst coverage also suffer from more pricing efficiency. With more than 30 analysts covering the most popular stocks, the river of information makes it difficult to shock the market with an earnings surprise or hot new product.

Stocks with little analyst coverage are the exact opposite. These ignored stocks benefit from little information flow that frequently leads to shares being mispriced before a groundbreaking product or quarter is announced.

When you add it all together, it's easy to see why stocks with little analyst coverage are golden opportunities waiting to be discovered.

Here are eight stocks from the MidCap 400 Index with the least analyst coverage, providing investors with an opportunity to get in before the masses and score outsized gains:

Out of the eight, I particularly like Universal Corp. (NYSE:UVV) and Towers Watson (TW) because both stocks look extremely undervalued relative to their peers and the market.

1. Universal Corp.

Universal Corp is a global leaf tobacco processor and merchant with a market cap of just $1.3 billion and just one analyst providing coverage. That's a far cry from industry mega-giant Phillip Morris (NYSE:PM), which has 13 covering analysts and a huge cap of $147 billion.

The company has performed well in the past 12 months, climbing more than 18% and recently hitting a new all-time high. But in spite of these gains, Universal still remains a mystery to most investors, on display with a highly discounted valuation. As it stands, Universal trades with a forward price-to-earnings (P/E) ratio of 11, a sharp discount to its peer average of 14.

If the stock traded in line with its peers, then Universal would jump to $68, a 32% premium from current levels. And when you add in an outsized 3.8% yield, then this mid-cap with little analyst coverage offers a nice combination of value and income.

2. Towers Watson & Co.

Towers Watson & Co. is a professional services company specializing in human capital and financial consulting services. With a market cap of $4.3 billion, Towers Watson is on the high end of the mid-cap range.

The Street isn't paying much attention to the stock, with only two analysts providing coverage. Shares are down about 3% in the past year, underperforming the market as large-cap dividend stocks fell into favor with investors.

Looking forward, the two analysts who do cover this stock are projecting earnings of $4.97 per share in 2013. This has shares trading at just 10 times forward earnings, a sharp discount to its 10-year and peer average of 15 times.

Risks to Consider: Stocks with less analyst coverage can frequently be mispriced due to a lack of information and earnings transparency. This can also drive volatility under weaker or uncertain economic conditions.

Savvy investors who want to beat the crowd are set to make big gains from any of the eight stocks mentioned above, particularly Universal Corp. and Towers Watson.

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Disclosure: I have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours. I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it. I have no business relationship with any company whose stock is mentioned in this article.