Coming off a rough year, mid-cap stocks have roared back in 2019, outperforming their large- and small-cap counterparts. Here are three key factors driving this performance.
- Best of both worlds Mid-cap stocks tend to offer stronger earnings growth than large caps, but with less volatility than small caps. The S&P Mid Cap 400 has had positive sales and earnings growth in almost every one of the last 10 years. Sales in 2018 grew 13%—nearly double the S&P 500’s 7.7%. Further, the S&P 400 is coming off a year of more than 25% earnings-per-share (EPS) growth, its highest rate since 2010. This potential for higher earnings growth is part of the reason mid-caps have outperformed the S&P 500 by roughly four percentage points per year over the last two decades. Small caps have had similar success, of course, but mid-sized companies often have better drawdown characteristics relative to small caps. For example, during the fourth-quarter sell-off, the S&P 400 fell 23.5% from its high for the year to its December low, whereas the S&P Small Cap 600 dropped 27.7%.
- Attractive valuations Even with high growth rates, many mid-cap companies have been trading at a valuation discount to their large and small brethren. As of Friday, the S&P 400 had a forward P/E multiple of 15.6 relative to estimated 2019 earnings, while the comparable S&P 500 and 600 multiples were 16.3 and 16.9, respectively.
- Shedding excess weight Mid-cap funds can offer greater diversification than their large-cap peers because most major indexes are weighted according to market capitalization. Rather than being stuck with a few mega corporations such as Apple, Amazon and Microsoft, mid-cap holdings usually are spread much more evenly and wider across various constituents.