William Blair's 2014 Top Midcap Picks

In addition to releasing its 2014 Top Small-Cap list Wednesday, William Blair released its 2014 Top Midcap list, or companies with a market cap between $1.5-$10 billion.

Below are some of the stocks on the list and some of their thinking about the stocks:

LKQ Corporation (NYSE: LKQ) - LKQ offers a compelling value proposition (20% to 50% cost savings compared with OEM products) that we believe is helping drive the use of alternative automotive parts. As insurance carriers have increasingly looked for ways to cut costs, the adoption of alternative parts has grown steadily from about 24% in 2001 to more than 38% currently. We expect this trend to continue as additional alternative parts are certified and a greater percentage of repairs are directed to direct repair shops, which should help the company increase revenue regardless of the economic environment.

Pharmacyclics, Inc. (NASDAQ: PCYC) - Pharmacyclics's lead product, Imbruvica (ibrutinib), was recently approved by the Food and Drug Administration (FDA) for the treatment of relapsed/refractory mantle cell lymphoma (MCL). Imbruvica’s new drug application (NDA) for the treatment of relapsed/refractory chronic lymphocytic leukemia (CLL) remains under review, and we continue to expect approval in this indication ahead of the drug’s Prescription Drug User Fee Act (PDUFA) date of February 28, 2014. We believe that over the next year, Pharmacyclics stock could continue to appreciate as Imbruvica is poised to be the first of a new wave of agents ready to transform the treatment of B-cell malignancies.

Garmin Ltd. (NASDAQ: GRMN) - Garmin has four growth-oriented businesses offsetting the decline in its core PND (automotive/mobile) business: aviation, outdoor, fitness, and marine

Catamaran Corporation (NASDAQ: CTRX) - The stock has experienced multiple compression over the past few months because of concerns related to public and private exchanges as well as lack of clarity into 2014 EBITDA guidance. Despite the stock’s underperformance, we believe that Catamaran is well positioned for 20% to 25% earnings growth over the next few years, driven by the company’s ability to gain market share through new business wins and continued roll-up of the middle-market space through M&A activity. We project 17% earnings growth in 2014 and 22% in 2015.

Church & Dwight Co., Inc. (NYSE: CHD) - Leading brands across a balanced portfolio. Church & Dwight’s portfolio consists of a unique collection of products and price points—40% value and 60% premium—that serve a broad range of consumer needs and carry weight in recessionary and expansionary periods

Pall Corporation (NYSE: PLL) - We expect Pall to deliver dependable earnings growth relative to industrial peers. The filtration industry, on average, grows at about 5% per year. We believe that Pall will outgrow the filtration market over the next several years based on a superior product portfolio (high-growth biopharmaceutical markets represent about one-third of Pall’s total sales).

J.B. Hunt Transport Services, Inc. (NASDAQ: JBHT) - J.B. Hunt has extended its position as one of the premier intermodal providers and has benefited from a gradual modal shift away from truckload. It has a unique contractual relationship with Burlington Northern that provides favorable pricing and loading. In addition, it has the ability to source much of its own local drayage needs, which helps preserve margin and service levels. We believe the intermodal secular shift has room to run because of market share gains on West Coast routes, improved local East Coast and Mexico traffic, and greater penetration within the medium-size shipper niche.

The ADT Corporation (NYSE: ADT) - We believe attrition will decrease sequentially over the next several quarters from ADT’s newly implemented programs to reduce voluntary and nonpayment disconnections while, simultaneously, attrition from relocations is set to fall as the housing market slows, as evidenced by slowing new and existing-home sales.

Chicago Bridge & Iron Company N.V. (NYSE: CBI) - Chicago Bridge & Iron, with its complete offering of engineering-and-construction solutions (technology, fabrication, and EPC services), is one of the best-positioned companies in our coverage universe to take advantage of growing energy infrastructure investment in both the United States and internationally over the next several years.

Airgas, Inc. (NYSE: ARG) - Airgas is a high-conviction “self-help” story with exposure to a recovery in nonresidential construction activity.

ManpowerGroup Inc. (NYSE: MAN) - Demand for staffing services in Europe appears to be rebounding, and our revenue estimates for the company in the region could be conservative. We assume growth of 0%, 1%, 2%, 3%, and 4% over the next five quarters, but a few competitors (Adecco and Randstad) said that growth turned positive in the region in fourth quarter 2013 (while we have assumed flat
revenue for Manpower).

WABCO Holdings Inc. (NYSE: WBC) - Investment thesis based on long-term EPS growth opportunities with the possibility of multiple expansion. We view Wabco as a premium story driven by content and market outgrowth amid an overall challenging period for capital goods stocks. The principal reasons for our positive investment thesis on Wabco are based on the longer-term content and market outgrowth-driven growth story and the assumption that Wabco will grow EPS as it adds content to commercial vehicle around the world and from share repurchases that will accelerate, which will allow the company to grow EPS at a double-digit rate next year and beyond.

DSW Inc. (NYSE: DSW) - With a No. 1 market share positioning of 4.5%, we believe that DSW is poised to increase its market share given 1) its differentiated model, 2) growing brand awareness, 3) systems initiatives, 4) product category expansion, 5) store growth including small-market opportunity and Canada, and 6) e-commerce.

Sirona Dental Systems, Inc. (NASDAQ: SIRO) - Sirona is the technology leader in the global dental market, with 25 new product introductions in 2013 alone. This constant innovation should drive growth in 2014. We believe that Sirona, as the technology leader, has the best CAD/CAM and imaging equipment on the market today. High-tech equipment is still in the early stages of adoption, which should allow growth to outpace the market over time. Because of its innovation in CAD/CAM across multiple price points, Sirona has essentially double the available market opportunity, since the vast majority of dentists do not own scanning equipment. Also, these products will drive a positive shift mix in margins since the profitability of equipment is higher than other product offerings.

The Babcock & Wilcox Company (NYSE: BWC) - Babcock & Wilcox has one of the highest quality business models in our engineering and construction universe, with 55%-60% of revenue and over 70% of operating income from what we consider to be recurring-revenue businesses.

MRC Global Inc. (NYSE: MRC) - We expect a recovery in customer capital spending to drive 2014 results versus easy comparisons. Valuation is attractive for an asset that is positioned to benefit from a North American oil and gas infrastructure buildout, continue to sign global supply agreements, and expand its international footprint.

AmTrust Financial Services, Inc. (NASDAQ: AFSI) - Workers' comp market heating up. AmTrust is achieving 18% renewal rate increases on its Majestic book in California and has also seen high-single-digit rate increases in other key states such as New York and Florida. Profitability in the workers' compensation market tends to be highly cyclical. The industry is at the beginning of an upcycle where profitability will improve over the next several years as rate increases exceed loss trend. AmTrust, an insurer more efficient at writing small workers’ compensation policies than the industry, has been benefiting from this cycle turn with strong growth across the country.

Cornerstone OnDemand, Inc. (NASDAQ: CSOD) - Cornerstone OnDemand has the most complete, integrated suite of SaaS talent management applications in the market, in our view. Whereas other competitors have largely focused on one primary area of the talent management stack (e.g., learning, performance management, succession planning) and have added other application areas either through acquisition or with less development focus, Cornerstone has internally developed a suite of best-of-breed SaaS talent management applications. Customers we speak with consistently cite Cornerstone’s organically built offering and its ease-of-use as differentiators against other vendors in the marketplace.

The Corporate Executive Board Company (NYSE: CEB) - The company’s legacy operations continue to perform well; Steady contract value growth provides solid visibility into double-digit profit growth for the legacy CEB business.

Forum Energy Technologies, Inc. (NYSE: FET) - Forum is the most-diversified company on our list from a North America versus international revenue mix perspective, as well as offshore versus onshore. Therefore, we view Forum as a more-versatile play on the oilfield services names, but it has less upside potential with a North American recovery. While we believe a recovery in North American land markets pricing is several quarters away, we believe expectations and sentiment are aligned with this view, and that the stocks will likely be a couple of quarters ahead of a recovery in rigs and/or pressure pumping pricing.

Ciena Corporation (NASDAQ: CIEN) - Ciena is benefiting from a multiyear optical upgrade cycle involving simultaneous capacity upgrade from 10G to 100G coherent WDM transport, OTN switching, and packet-based technology (Ethernet/MPLS)

Qlik Technologies Inc. (NASDAQ: QLIK) - Disruptive market leader. Qlik Technologies has established itself as a leading provider of business intelligence 2.0 solutions, which we suspect will continue to disrupt legacy providers. These solutions are characterized by their ease-of-use, broad visualization capabilities, and low cost of implementation. These attributes serve as the foundation of solutions that allow business users at organizations of all sizes to conduct ad-hoc data discovery and analysis activities with minimal input and support from IT personnel, which equates to more relevant conclusions and much lower costs. This compares favorably with legacy solutions that require substantial up-front implementation costs and ongoing administration costs. We therefore expect the recent adoption trend to gain momentum over the next 12 to 18 months as market awareness grows.

HMS Holdings Corp. (NASDAQ: HMSY) - We view HMS Holdings as a direct beneficiary of Medicaid expansion and expect momentum from this driver to increase toward the second half of 2014. This should deliver acceleration in coordination of benefit (COB) revenue and profitability growth as the year progresses, in our view.

Aruba Networks, Inc. (NASDAQ: ARUN) - We believe that Aruba is the premier, best-of-breed player in the WLAN market and expect continued strong revenue and earnings growth for the company, driven by the strong BYOD trend, the new 802.11ac standard upgrade cycle, and increasing opportunities in public-facing enterprise Wi-Fi.

Cavium, Inc. (NASDAQ: CAVM) - Cavium is a direct beneficiary of one of the most attractive secular growth opportunities in our space: multicore programmable processors, or MCPUs. We believe industry trends will support strong growth for specialists such as Cavium

Cogent Communications Group, Inc. (NASDAQ: CCOI) -Cogent has one of the highest-quality global IP backbones. Cogent's network was constructed from the compilation of distressed assets with an estimated $14 billion of original investments that were acquired for about $60 million. During the economic downturn, the company accelerated the buildout of its network while competitors conserved cash to take advantage of favorable pricing.

U.S. Silica Holdings, Inc. (NASDAQ: SLCA) - We believe the outlook for sand as part of the well completion thesis in the United States remains quite strong (particularly relative to other components of the well completion process), given the high barriers to entry and the increasing need for multibasin scale and logistics. We believe U.S. Silica is well positioned to drive strong volume and contribution margin growth

On Assignment, Inc. (NASDAQ: ASGN) - We believe that the strength of the IT staffing sector will drive above-average growth and upside to estimates. We assume 10%-11% growth for On Assignment’s IT staffing (83% of company revenue, including CyberCoders) in 2014, compared with 19% year-over-year growth in the third quarter and 15% year-over-year growth in the fourth quarter, even with
weakness in the Oxford business.

RealPage, Inc. (NASDAQ: RP) - RealPage is a dominant provider in a large, fragmented market that, in our view, is relatively unsophisticated in its use of technology. The company’s customers include property managers and owners that can materially improve their operating costs while increasing average rents through higher occupancy rates by using RealPage’s products and solutions.

Interxion Holding N.V. (NASDAQ: INXN) - Attractive market. Networks were not designed to handle the data traffic we see today with cloud, video, mobile, and applications surging. Carrier-neutral data center providers are able to connect customers more efficiently to other networks and businesses, thereby reducing lag time and costs and improving response time of applications. Cloud services in Europe are forecast to grow at nearly double the rate in the United States.

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