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Three new mid-cap stocks on Goldman Sach’s “best buy” list

Animal spirits are back – at least for today with the market rallying harder than what traders were expecting this morning.

We have recovered most of yesterday’s 1.6% loss as investors pounce on beaten-down blue chips like the big banks and BHP Billiton Limited (ASX: BHP).

But there are three smaller company stocks investors should be putting on their shopping list as well after Goldman Sachs added them to its small & mid cap “focus list”, which showcases the brokers best picks in the sector.

The three new entries are vitamin suppler Blackmores Ltd (ASX: BKL), fresh fruit and vegetable seller Costa Group Holdings Ltd (ASX: CGC) and telecommunications and utilities reseller M2 Group Ltd (ASX: MTU).

Blackmores

The rise of cross-border e-commerce in China is breaking down traditional trade barriers providing a much anticipated multi-year growth opportunity for foreign brands like Blackmores, according to the broker.

Australia’s leading vitamins and health supplements brand has grown from strength to strength with its recent full year result recording a net profit after tax of $46.6 million, up 83% on the previous year.

You shouldn’t be too concerned that you may have missed the boat with the stock surging 326% over the past year to a record high of $131.96 in after lunch trade when the S&P/ASX 200 (Index: ^AXJO) (ASX: XJO) has slumped 8% over the same period.

Goldman Sachs thinks the stock is still underpriced given its growth profile and comparative valuation to other high-growth stocks.

The company paid investors a final dividend of $1.35 per share, taking its total full year fully franked dividend payout to $2.03 a share – a 60% increase over the previous year.

Costa Group Holdings

Another high growth rising star to watch is Costa Group, which listed in July but hasn’t enjoyed a good market debut with the stock dipping as low as $1.835 earlier this month before recovering to its current price of $2.16.

That’s below its initial public offer price $2.25 a share but Goldman Sachs sees the price weakness as a buying opportunity because it expects management to produce around a 17% earnings per share (EPS) compound annual growth rate (CAGR) until 2017-18.

The growth drivers for the group include a strong increase in demand for blueberries globally, Australian berry expansions, capacity additions in tomatoes, product mix shift in mushrooms, and a falling Australian dollar.

The group is also well placed to benefit from the consumer trend to eat more healthily, which will sustain earnings growth over the longer term, and Goldman Sachs tipping a healthy increase to dividends over the next few years with the stock set to yield around 6% in 2017-18.

M2 Group

Another stock that investors should be buying on weakness is M2 Group, which has shed nearly 20% of its value in the past three months.

But there are a number of reasons to be bullish on the stock. Firstly, M2 is seen as a quality company with a strong track record of delivering earnings growth and has an improving cash return on capital invested (CROCI).

In addition, M2 has secured an internet backhaul agreement with Telstra Corporation Ltd (ASX: TLS) that will sustain solid growth in the fixed-line broadband market.

Goldman Sachs believes the recent pullback in M2’s share price provides an attractive entry point with MTU’s valuation now supportive.  The broker forecasts strong growth for the company with sales and EPS tipped to expand 12% and 15% a year on a compounded basis, respectively.

M2 shares are trading 0.7% higher in late afternoon trade at $8.56.

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Motley Fool contributor Brendon Lau owns shares of M2 Group Ltd. Follow me on Twitter - https://twitter.com/brenlau

Unless otherwise noted, the author does not have a position in any stocks mentioned by the author in the comments below. The Motley Fool Australia has no position in any of the stocks mentioned. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy. This article contains general investment advice only (under AFSL 400691). Authorised by Bruce Jackson.

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