Mid-caps: The Goldilocks asset class? Mid-caps: The Goldilocks asset class? http://www.federatedinvestors.com/static/images/fed-logo-amp.png June 6 2019

Mid-caps: The Goldilocks asset class?

When it comes to stocks, the "middle ground'' doesn't have to mean ho-hum.
Published May 21 2019
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While the idea of “taking the middle ground” can imply ho-hum mediocrity, investing in mid-cap stocks is anything but. Portfolio manager John Ettinger explains why investing in mid-caps can be a solid component of any portfolio strategy. 

Q: How do you define mid-cap?

These stocks are traditionally companies with market capitalizations of $4 billion to $18 billion, although the delineation among small-, mid- and large-caps can vary. For comparison, the average market cap of the 30 stocks that comprise the Dow Jones Industrial Average is nearly $218 billion while that of the Russell 2000 Index, representing small-caps, is about $2.3 billion.

Q: What’s the appeal of investing in mid-caps?

Most investors readily see the diversification benefit of including both small- and established large-cap stocks in portfolios. Often overlooked, mid-caps offer some of the best attributes of each. Consider that mid-sized companies have survived their launch phase. Their managements are that much more experienced and have prevailed through many of the early challenges that small companies confront. As a result, they are generally less risky while still offering long-term growth potential. They also have better access to capital, so their financial resources may be greater.

Compared to their larger counterparts, mid-sized companies often have more attractive valuations and less coverage by Wall Street analysts, presenting an advantage for active managers. Their growth rates also are typically higher and they are more flexible and better able to adjust to changing market conditions. In addition, mid-sized companies are more likely than large companies to be acquisition targets, presenting additional opportunities.

Q: What are important elements when it comes to evaluating mid-caps?

Important factors to consider are the price-earnings ratio and free-cash-flow yield compared to a company’s own history and to its competitors. At Federated Kaufmann, we like companies with strong balance sheets, excellent managements, potential for establishing a wide competitive moat and overall performance that supersedes constantly shifting macro environments. Many of the stocks in our mid-cap portfolio were purchased at their initial public offering or when they were small-caps and subsequently grew to their current size, so we know their quality and potential.

Q: How are mid-cap stocks faring in the current environment amid slowing global growth and trade tensions?

Mid-cap stocks tend to have less international exposure compared to large-caps and an overall lower risk profile relative to small-caps, which makes the asset class particularly attractive in this environment. Because they tend to have more domestic revenue compared to large-caps, mid-caps are supported by a more robust U.S. economy and stronger U.S. dollar. And while not totally insulated from global events, mid-cap companies are more nimble than large companies and have greater flexibility to adjust their supply chains and other operations in response to situations such as the uncertainty surrounding the U.S.-China trade policy.

Tags Equity . Markets/Economy .
DISCLOSURES

Views are as of the date above and are subject to change based on market conditions and other factors. These views should not be construed as a recommendation for any specific security or sector.

Past performance is no guarantee of future results.

Diversification does not assure a profit nor protect against loss.

Dow Jones Industrial Average ("DJIA"): An unmanaged index which represents share prices of selected blue chip industrial corporations as well as public utility and transportation companies. The DJIA indicates daily changes in the average price of stocks in any of its categories. It also reports total sales for each group of industries. Because it represents the top corporations of America, the DJIA's index movements are leading economic indicators for the stock market as a whole. Indexes are unmanaged and investments cannot be made in an index.

Free cash flow is a measure of a company's financial performance calculated by subtracting capital expenditures from operating cash flow.

Investing in IPOs involves special risks such as limited liquidity and increased volatility.

Mid-capitalization companies often have narrower markets and limited managerial and financial resources compared to larger and more established companies.

Price-Earnings Ratio is a valuation ratio of a company's current share price compared to its per-share earnings.

Russell 2000® Index: Measures the performance of the 2,000 smallest companies in the Russell 3000 Index, which represents approximately 8% of the total market capitalization of the Russell 3000 Index. Investments cannot be made directly in an index.

Federated Global Investment Management Corp.

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