Hi everyone, thank you for returning to my blog. Hope you found my last blog interesting and useful, which was about ‘How to Profit From Falling Stocks’.
In this blog, I’m going to cover the key characteristics of mid-cap stocks, how to analyze them, and why you should definitely consider these often-ignored investments for your investment portfolio.
Mid-cap stocks are categorized as companies with a market cap between $ 2 billion and $ 10 billion. Usually they are well-established companies somewhere between the slower growing large caps and the fast growing small caps. Recently, mid-cap stocks have outperformed both large-cap and small-cap competition with very little additional risk.
Better historical performance isn’t the only reason you should consider mid-caps as part of your portfolio. Some additional properties are also valuable:
- The majority of mid-caps are simply small-caps that have grown larger over time. Additional growth will give them the opportunity to eventually become large cap companies.
- Part of the expansion is the ability to get additional funding to support that growth. This is much more difficult for small-cap companies.
- The main advantage over large caps is earnings growth. Mid-cap companies have not yet reached the stage where earnings are falling and dividends have become a significant part of a stock’s total return.
- Perhaps the most overlooked reason to invest money in mid-caps is that they get less analyst coverage than the large-caps. Many of the top performing stocks have been ignored by companies that suddenly became popular creating the institutional buyers essential for the price hike.
Ultimately, it makes sense to invest in mid-caps because they offer investors the best of both worlds: small-cap growth and large-cap stability.
One of the great things about mid-cap stocks is that companies are generally profitable and have been for some time.
Consider these advantages:
- Medium-sized companies usually have experienced management teams.
- On average, a mid-cap company’s profits grow faster than the average small-cap company’s, and they do so with less volatility and risk.
- Coupled with profit growth, the midsize company is well positioned to hold profits for the foreseeable future. This ultimately turns a mid-cap into a large-cap.
- Some of the clues that suggest a company’s profits are going in the right direction include increasing gross and operating margins combined with lower inventories and accounts receivable. Faster inventory and receivables turnover usually translates into higher cash flow and higher profits.
All of these features also help reduce the risk. Mid-caps tend to have these attributes more often than small or large caps.
Sales and earnings growth are two of the most important drivers of long-term returns.
Recently, mid-cap stocks have outperformed both large-cap and small-cap stocks due to their higher sales and earnings growth. It is likely that mid-caps’ ability to react faster than large-caps and their greater financial stability compared to small-caps are their greatest assets.
When researching a medium-sized company, pay attention to the quality of its sales growth:
- When gross margins, operating margins, and revenue increase, this is an excellent indicator that the company is developing greater economies of scale, leading to higher profits for shareholders.
- Another good indicator of healthy sales growth is when lower total debt improves cash flow.