Three mid-cap stocks with high yields and room to grow

Professional investor Mark Wright of Seneca Investment Managers picks three of his favourite mid-cap stocks to buy now.

Each week, a professional investor tells us where he'd put his money. This week: Mark Wright of Seneca Investment Managers picks his three favourites.

Two crucial observations shape our approach to UK equity investing. Firstly, mid-caps have outperformed both large and small-caps over the long run. Secondly, both high-yield and high-quality stocks outperform mid-caps. So we focus on high-quality and high-yielding mid-caps.

High dividend yields reflect negative sentiment towards a stock and a potential opportunity for contrarian investors. Contrarian investments typically perform well because investors suffer from loss aversion and therefore often ditch promising stocks in a panic. As Warren Buffett says, be "greedy when others are fearful".

A star in a troubled sector

Babcock International (LSE: BAB)

We believe the company is fundamentally different to others in its sector. It has a very skilled workforce, and these workers are in short supply. The company operates in complex, highly-regulated and often secretive industries (such as nuclear submarines), so it would be hard for potential competitors to gain a foothold in Babcock's markets.

Contracts are long-term in nature. And unlike many peers, Babcock does not depend on cost-plus contracts with the hope of additional work to earn a decent overall return.

A bank with room to grow

OneSavings Bank (LSE: OSB)

Asset growth has been strong, despite negative press about the buy-to-let sector, whereas assets have been shrinking at bigger banks. This is exactly why we invest in mid-caps: they have much greater growth potential. OSB does not need the UK economy to expand in order for it to grow its business, but Lloyds does.

A European leader

Phoenix Group (LSE: PHNX)

The acquisition of Standard Life Aberdeen's insurance business will make the dividend more sustainable by bolstering assets under management. Regulatory costs are steadily increasing, as is the appetite of insurance firms to release capital from their closed life businesses. The acquisition environment is therefore positive, which is why we think more dividend increases are on the cards over the next few years.

Recommended

Share tips of the week
Share tips

Share tips of the week

MoneyWeek’s comprehensive guide to the best of this week’s share tips from the rest of the UK's financial pages.
19 Feb 2021
Share tips of the week
Share tips

Share tips of the week

MoneyWeek’s comprehensive guide to the best of this week’s share tips from the rest of the UK's financial pages.
16 Apr 2021
Four investment trusts for income investors to buy now
Investment trusts

Four investment trusts for income investors to buy now

Some high-yielding listed lending funds have come through the crisis with flying colours. David Stevenson picks four of the best.
12 Apr 2021
Three of corporate Japan’s hidden gems to buy now
Share tips

Three of corporate Japan’s hidden gems to buy now

Professional investor Nicholas Price of the Fidelity Japan Trust picks three of his favourite Japanese stocks that he thinks the market has overlooke…
12 Apr 2021

Most Popular

The bitcoin bubble will burst: here’s how to play it
Bitcoin

The bitcoin bubble will burst: here’s how to play it

The cryptocurrency’s price has soared far beyond its fundamentals, says Matthew Partridge. Here, he looks at how to short bitcoin.
12 Apr 2021
What does the Coinbase listing mean for bitcoin and other cryptocurrencies?
Bitcoin

What does the Coinbase listing mean for bitcoin and other cryptocurrencies?

As the bitcoin price hit new highs, the world's biggest cryptocurrency exchange, Coinbase, listed on the stockmarket. John Stepek looks at what that m…
15 Apr 2021
Properties for sale for around £400,000
Houses for sale

Properties for sale for around £400,000

From a converted church in Banffshire with views towards the Cairngorms National Park, to a period property in the Georgian market town of Beverley, e…
2 Apr 2021