Midcaps can provide the best of both worlds

| June 16, 2023

My family was at a school gathering when we introduced ourselves to another family. The family’s teenage girl told us her name, following up with a sarcastic (I think), “I’m the troubled middle child.”

The Middle-Child Syndrome is a term used by some experts who believe that birth order plays an important role in your personality. Middle children, it is said, get less attention from their parents, leading to behavioral issues.

I don’t know whether Middle-Child Syndrome is scientifically valid, but I do know there’s no such problem with stocks of midsize companies. In fact, historically they’ve thrived, even though they might not get the same attention at large companies or hot, fast-growing small companies. “Sixty-four percent of the time, midcaps outperformed small- and large-cap stocks over any 10-year rolling period in the last 20 years,” Hennessy Funds said recently.

Market researchers often attribute to midcap stocks’ relatively strong long-term performance to being in the “sweet spot” of the market. They generally aren’t as volatile and risky as small-cap stocks, nor has their growth slowed to pedestrian levels, as with many large-caps. As a result, midcap stocks as a category combine the best of both worlds. Yet when market experts talk about stock performance by category, they often discuss it in terms of large vs. small, with the humble midcap ignored.

Here are some midsize companies that had long-term sales and earnings growth of at least 8% annually and displayed consistent growth over the long term, with a recent history of maintaining or growing pre-tax profitability and return on equity:

  • Charles River Labs (CRL) (diagnostics/research)
  • Deckers Outdoor (DECK) (footwear/accessories)
  • Installed Building Products (IBP) (residential construction)
  • KLA Corp. (KLAC) (semiconductor equipment/materials)
  • Malibu Boats (MBUU) (recreational vehicles)
  • Simpson Manufacturing (SSD) (lumber/wood production)

I also used a valuation criterion in my screening tool to weed out some stocks that might be more expensive, and chose the stocks above to display a range of industries. In reality, there were quite a few stocks in residential construction.

You’ll have to do your own research on any companies of interest, and I’d suggest talking to your financial advisor to see what they think and whether they can share any research on these companies.

This is particularly important when you’re looking at companies you haven’t heard of. Look at the list—how many have you heard of? Probably not more than a couple. But they’re all pretty large, steady companies with a history of successful operations.

So open your horizons when you’re looking for new investments. There’s nothing inherently wrong with small or large companies. But the ones in the middle, often overlooked by Main Street investors, can provide some of the most rewarding returns.

Sources:

I used the BetterInvesting stock screening tool, which employs data from Morningstar.

https://www.hennessyfunds.com/insights/midcap-investment-idea#:~:text=Mid%20Caps%20Dominate%20in%20Long,the%20more%20often%20they%20outperformed.



Evan R. Guido is the Founder of Aksala Wealth Advisors LLC, a 2018 Forbes Next-Gen Advisors List Member, and Financial Professional at Avantax Investment ServicesSM. Evan heads a team of retirement transition strategists for clients who consider themselves the “Millionaire Next Door.” He can be reached at 941-500-5122 or eguido@aksalawealth.com.   Read more of his insights at https://finance.heraldtribune.com/category/ask-guido/. Securities offered through Avantax Investment ServicesSM, Member FINRA, SIPC.  Investment advisory services offered through Avantax Advisory ServicesSM, Insurance services offered through  an Avantax affiliated insurance agency.  6260 Lake Osprey Dr. Lakewood Ranch, FL 34240.  The views and opinions presented in this article are those of Evan R. Guido and not of Avantax Wealth Management® or its subsidiaries.  Past performance does not guarantee future results. The S&P 500 is an index of 500 major, large-cap U.S. corporations.  The securities of smaller, less-known companies may be more volatile than those of larger companies