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With the first two quarters of 2015 now in the rear-view mirror, it's time for a half-time report.

Let's identify mid-cap stocks that have not only enjoyed robust returns in the first half of this year, but could keep delivering gains in the months ahead. I screened for Canadian-listed stocks with a market capitalization between $2-billion and $10-billion that have provided at least a 10-per-cent return year to date. Plus, they must have at least a 10-per-cent return forecast by analysts, on average, for the next 12 months.

Today, I'll take a look at one of the stocks that made the list – Stella-Jones Inc. – and next week I'll take a closer examination of two more.

Stella-Jones: the business

The Saint-Laurent, Que.-based company has core operations in two main industries: railway ties and utility poles. In 2014, 82 per cent of Stella-Jones's sales were from the United States, the balance from Canada.

Railway ties represented 42 per cent of 2014 sales and grew 34.5 per cent year-over-year. Excluding acquisitions and currency effects, sales increased at just more than half that rate, at 18.1 per cent.

Utility poles, used primarily by telecommunications and electrical utilities companies, accounted for 38 per cent of 2014 sales and increased 16 per cent compared to the prior year. Excluding acquisitions and currency effects, sales increased just 4 per cent.

Stella has solid fundamentals. Total sales in 2014 cracked the $1-billion dollar mark to a record level of $1.25-billion, up 23.6 per cent from 2013. Again, excluding acquisitions and currency effects, sales increased by a more moderate but respectable 10 per cent.

First-quarter 2015 sales were also solid. Excluding acquisitions and currency moves, sales climbed 12.7 per cent over the prior year due to strong demand and higher pricing with railway ties.

Industry

Stella-Jones operates in a relatively defensive industry serving the railroad and utility industries. Railroad operators need to perform regular maintenance and upgrades to railway ties, and railroad traffic has increased with improving economic conditions. Meanwhile, utility poles have to be maintained, replaced and installed in new development projects.

According to the Railway Tie Association, railway tie purchases totalled 22.9 million in 2014, down from 24.7 million reported in 2013, yet still impressive considering that 2013 sales reached their highest level in the past 25 years.

Railway tie sales should remain strong; however, rail traffic is moderating. According to the Association of American Railroads, North American rail volume during the first half of 2015 declined 0.1 per cent compared to last year.

Acquisition growth

Management has a two-pronged growth strategy: internal growth combined with acquisition growth. Management sees additional strategic acquisition opportunities and will only make an acquisition if it is immediately accretive to earnings. In April, the company announced its intention to acquire Ram Forest Group – involved in the manufacturing of pressure-treated wood products – and lumber purchaser Ramfor Lumber Inc.

Dividend yield

In 2015, the quarterly dividend was increased to 8 cents per share from 7 cents per share, equating to a yield of 0.8 per cent. Currently, management is focused on growing through acquisitions, but in the future, there could be a meaningful increase to its dividend.

Valuation

The valuation appears reasonable given its solid performance. The stock trades at a price-to-earnings multiple of 19.5 times the next 12 months consensus earnings estimate, above its historical averages. Its one-year and three-year historical averages are 18 and 16.4 times, respectively. The stock peaked at a multiple of over 22 times in May.

Chart watch

The stock has been in a multiyear uptrend and has corrected approximately 13 per cent in the past five weeks. On June 29, the stock approached oversold levels, with a relative strength index (RSI) reading of 35. An RSI at or below 30 is generally considered an oversold condition. There is upside resistance at $43.25, $44.50, and $47, and downside support at $40, then $39.

Analysts' recommendations

There are four buy recommendations and three hold ratings. No analyst is recommending to sell. The average one-year price target is $47.51, representing a potential price return of more than 14 per cent. One-year target prices range from $44 to $51. The consensus earnings estimates for 2015 and 2016 are $2.06 and $2.39, respectfully.

The bottom line

The company is a market leader with a proven management team, and operates in defensive industries. Stella-Jones is a solid operator with a double-digit return on average equity: 16.4 per cent in 2014. However, the stock price may need to consolidate and digest its stellar 27 per cent year-to-date price return. Furthermore, the company's organic growth rate may moderate in upcoming quarters. Overall, Stella-Jones is a solid company and I recommend accumulating shares on weakness.

Jennifer Dowty, CFA, Globe Investor's in-house equities analyst, writes exclusively for our subscribers at Inside the Market.

Canadian mid-cap leaders

CompanyTickerRecent Price
(June 30) $
1-yr return
potential
Air CanadaAC-T13.2145%
Amaya Inc.AYA-T34.2235%
Whitecap ResourcesWCP-T13.1833%
Agnico Eagle MiningAEM-T35.4631%
Hudson's Bay Co.HBC-T27.7526%
WSP Global Inc.WSP-T39.3122%
Element FinancialEFN-T19.7521%
Detour Gold Corp.DGC-T14.3719%
DH Corp.DH-T39.9217%
Precision DrillingPD-T8.4117%
Methanex Corp.MX-T69.7216%
CCL Industries BCCL.B-T153.2015%
Winpak Ltd.WPK-T37.8815%
Stella-Jones Inc.SJ-T41.5214%
Concordia HealthCXR-T90.2514%
Linamar Corp.LNR-T81.1213%
TransAlta RenewablesRNW-T12.3610%
Turquoise Hill Res.TRQ-T4.7510%