3 Mid-Cap Stocks to Buy in February

By Sean Williams, Jason Hall, and Timothy Green Markets Fool.com

Image source: Getty Images.

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Sometimes the stock market's top bargains are hiding in plain sight. Mid-cap stocks, or those with market caps between $2 billion and $10 billion, tend to be particularly attractive to growth and value investors since they usually have established and profitable business models, along with plenty of room for business development.

With this in mind, we asked three of our Foolish contributors what mid-cap stock they'd suggest investors consider buying in February. Making the list were Nordstrom (NYSE: JWN) and Best Buy (NYSE: BBY) in the retail sector, as well as offshore drillerTransocean (NYSE: RIG).

A mid-cap clearance sale

Sean Williams (Nordstrom): Sometimes mid-cap stocks can offer the most intriguing opportunities for value-seeking investors. One good example would be high-end retailer Nordstrom, which has fallen 16% over the past quarter and more than 8% over the trailing-12-month period.

The big issue with Nordstrom, and retailers as a whole, is that consumers simply haven't been spending much in recent quarters. U.S. GDP growth has been subpar through the third quarter, which may have coaxed consumers to holster their spending. Credit card interest rates are also at an all-time high, which could be playing into purchasing decisions.

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Image source: Nordstrom.

While these are genuine concerns for most retailers, including Nordstrom to some extent, Nordstrom has factors that allow it to stand out from the retail pack. To begin with, the retailer's pricing tends to attract a more affluent clientele. Well-to-do individuals and families are likely to be more resistant to economic hiccups and rising credit card interest rates than the average American, meaning Nordstrom shouldn't be as adversely impacted by downswings in the retail industry.

Nordstrom is also building quite a loyal customer base. Aside from offering a twice-yearly sale to reward its customers, Nordstrom offers a Rewards loyalty program, which has attracted more than 7 million active customers.The move to allow members to join regardless of how they choose to pay could be a critical tactic to keeping its consumers loyal. In all, Nordstrom Rewards membership grew by more than 40% on a year-over-year basis following this decision.

Given the prudent spending patterns and strong leadership exhibited by Nordstrom's management team, as well as the fact that the company is paying out a market-topping 3.4% dividend yield, this is the mid-cap stock I'd suggest investors give strong consideration to buying this February.

Buy this retailer before earnings

Tim Green (Best Buy): Investing in retail may seem daunting after the holiday sales reports we've seen so far, but consumer electronics retailer Best Buy is in a unique position. Under CEO Hubert Joly, who took the helm in late 2012 when the company was in turmoil, Best Buy has slashed unnecessary costs, made its prices more competitive, and invested heavily in e-commerce. The result has been consistent market share gains, an accelerating e-commerce business, and rising profits.

Image source: Best Buy.

Best Buy will report its fourth-quarter results on March 1. The company expects the recall of the Samsung Galaxy Note 7 to have a negative effect on its results, but it should put up solid numbers nonetheless. Best Buy's results have been positive in recent quarters, even as smaller competitors like Conn'sand hhgregghave begun to implode. During the third quarter, comparable sales rose 1.8%, e-commerce sales rose 24.1%, and adjusted EPS jumped 51%.

There has been no shortage of doubt over the years about Best Buy's chance at making a comeback, but the company has proven again and again that it's up to the task. I doubt margins will ever be as high as they were in years past, given the competition from online retailers. But Best Buy has shown that it can be profitable while going toe-to-toe with Amazon.

If you can take on some risk, this offshore driller is worth a close look

Jason Hall(Transocean): It may sound nuts to offer up a company that will probably do less business this year than last, and that's almost certainly the case with Transocean. Oil and gas producers have generally all announced their 2017 spending plans, and it's clear that fewer dollars will be spent offshore than in 2016, and that's after seeing 20%-plus spending cuts in both 2016 and 2015.

Image source: Getty Images.

So why is Transocean worth buying now? In short, because management has made big strides throughout the downturn to prepare the company to ride things out, and Transocean is positioned to be a great investment when offshore recovers. Since oil prices started falling in 2014, the company has reduced its long-term debt by nearly $3 billion, has been successful at refinancing much of its other debt as maturities approach, and ended its last-reported quarter with over $2.5 billion in cash on hand.

The balance sheet improvement is only part of what management has done. Last quarter, operating expense was down nearly 20% from the year before, largely the result of retiring rigs that were no longer economically competitive and stacking rigs that are still viable but don't have active contracts.

Combined, these things have the company operating leaner as the downturn persists, yet ready to bring more assets back online quickly when spending does recover, probably starting in early 2017.

Why now?

In short, I think it's worth taking on the risk because Transocean is trading far below the value of its assets right now, at about one-third book value. It may take some time for offshore activity to recover, but this is a quality business.

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Jason Hall owns shares of Amazon.com and Transocean. Sean Williams has no position in any stocks mentioned. Timothy Green owns shares of Best Buy. The Motley Fool owns shares of and recommends Amazon.com. It also recommends Nordstrom. The Motley Fool has a disclosure policy.