Why Peter Hodson Is Betting Big on Mid-Caps This Month

Peter Hodson, the Chief Investment Officer at i2i Capital Management, is a respected voice in investment circles, particularly for his expertise in North American mid-cap stocks. On November 18, 2024, he shared his latest market outlook and revealed three top picks: Shift4 Payments, Cellebrite DI, and Construction Partners. Hodson’s insights underscore the potential of mid-cap stocks, which he believes are on the brink of a significant rally.

Market Outlook: A Bright Horizon for Mid-Caps

High market valuations are a common topic among investors, but Hodson views this as an opportunity rather than a cause for concern. According to him, the prevailing skepticism in the market is a healthy sign, paving the way for cautious optimism. He stresses that interest rates and corporate earnings are the two factors investors should focus on. With inflation cooling, interest rates are beginning to trend lower, creating a favorable environment for businesses. Meanwhile, corporate earnings remain robust, with the S&P 500 Index reporting an 8.8% growth in the third quarter of 2024.

Hodson is particularly bullish on the small and mid-cap sectors. Historically, these stocks command a premium because of their high growth potential. However, this premium has shrunk significantly in recent years. The Russell 2000 Index has gained 13% this year, lagging behind the S&P 500’s 23% rise, which highlights the untapped potential of smaller companies. Hodson believes the stage is set for mid-cap stocks to shine, making this an opportune moment for investors to explore this market segment.

Top Picks: Hodson’s Standout Selections

Shift4 Payments (FOUR NYSE)

Shift4 Payments is a leader in the payment processing industry, with a strong focus on serving restaurants and the hospitality sector. With a market cap of $9 billion and a price-to-earnings ratio of 26, the company has demonstrated impressive growth and resilience in a competitive market.

What makes Shift4 particularly interesting is its potential as a takeover target. The company has already been approached twice—once by Global Payments last year and earlier this year by an undisclosed firm. Such acquisition interest underscores its value proposition in the industry. Shift4’s growth story is equally compelling. The company is projected to achieve 30% growth next year, further solidifying its position as a market leader. For investors seeking a blend of steady performance and acquisition potential, Shift4 stands out as a top choice.

Cellebrite DI (CLBT NASD)

Cellebrite DI is revolutionizing the field of digital intelligence. Its platform enables users to collect, analyze, and manage digital information, primarily for legally sanctioned investigations. The company’s clientele includes police departments, military organizations, and government agencies, making its services indispensable in today’s data-driven world.

One of Cellebrite’s key strengths is its integration of artificial intelligence into its offerings. The company’s partnerships with Amazon Web Services and Axon Enterprises have enhanced its capabilities, allowing it to process and interpret complex data efficiently. A notable case highlighted Cellebrite’s prowess when it accessed the phone data of a would-be Trump assassin in just 40 minutes.

Financially, Cellebrite is on solid footing, with a market cap of $3.6 billion and $400 million in cash reserves. While it trades at a high earnings multiple of 41 times, its 30% growth trajectory justifies this valuation. As digital security concerns continue to rise, Cellebrite’s position in the market is only expected to strengthen.

Construction Partners (ROAD NASD)

Construction Partners represents a shift back to basics, focusing on infrastructure development. The company provides construction services for highways, bridges, airports, and commercial sites. Its recent acquisition of Lone Star Paving, a Texas-based firm, has significantly boosted its growth prospects.

The company’s earnings growth has been remarkable, with earnings per share rising from $0.35 in 2022 to an expected $1.98 next year. This growth reflects the strong demand for infrastructure projects, driven by increased government spending and the trend toward onshoring. Construction Partners also benefits from insider confidence, as evidenced by recent insider buying activity. With a market cap of $5 billion and strong momentum in its stock performance, the company is well-positioned to capitalize on the growing infrastructure needs across North America.

The Mid-Cap Advantage

Hodson’s selections highlight the diverse opportunities within the mid-cap sector. Mid-cap stocks offer a unique combination of growth potential and relatively low valuations, making them an attractive choice for investors. With a favorable mergers and acquisitions environment anticipated next year, mid-cap companies are likely to see increased interest from larger firms looking to expand.

Hodson’s picks also reflect broader market trends. Shift4 Payments aligns with the ongoing digital transformation in the payment industry. Cellebrite DI caters to the rising demand for digital intelligence and security solutions. Construction Partners taps into the robust infrastructure development market, driven by government initiatives and economic shifts. Together, these companies represent a compelling case for the potential of mid-cap stocks in today’s market.

Conclusion

Peter Hodson’s top picks—Shift4 Payments, Cellebrite DI, and Construction Partners—underscore the potential of mid-cap stocks to deliver strong returns in a favorable market environment. Each company brings unique strengths, from Shift4’s growth in payment processing to Cellebrite’s innovation in digital intelligence and Construction Partners’ robust position in infrastructure development. As small and mid-caps remain undervalued, investors have a golden opportunity to capitalize on these promising trends.