How to Buy

Should you buy mid-cap stocks or mutual funds? If you purchase individual stocks, you must research each firm to decide which are good picks. It requires time and expertise. The trade-off is that you might find something the stock analysts have overlooked. It’s much easier to select mid-cap mutual funds. These funds are led by managers who know the mid-cap business inside and out. You still have to research them, but that reduces your risk. That’s because funds provide diversification. They give you the best return for the least risk over time. You could also decide to go with exchange-traded funds that focus on mid-cap stocks. They have lower fees than mutual funds. On the downside, you will never outperform the market with an ETF. That’s because their goal is to track the market.

4 Reasons to Buy

Every well-diversified portfolio should have some percentage of mid-cap stocks or mutual funds. The amount depends on your specific investment goals and asset allocation. It also depends on the current phase of the business cycle. Here are four reasons to buy mid-cap stocks.

1. Business Cycle Expansion

Mid-cap companies do well in the expansion phase of the business cycle. Growth is stable while interest rates are still low and capital is cheap. As a result, mid-cap managers can get the low-cost loans they need to meet rising demand. They grow either through investment in capital equipment, mergers, or acquisitions. 

2. Mid Cap Versus Small-Cap

Mid-cap companies are not as risky as small-cap businesses. In an economic downturn, they will be less likely to go bankrupt as a small-cap company. Mid-caps have been around longer than smaller companies so you can get more information about them through research. They have more of a track record and are a bit more stable. In fact, you must research before purchasing mid-cap stocks. These companies have different earnings and growth potential. Some of these companies may remain with mid-cap stock indefinitely. Their business model may not allow them to grow any larger. They may be meeting all the demand for their product that exists. In another case, their management may not want to become a large-cap company. They may enjoy running a mid-size firm.  There are some with solid earnings but are in an unattractive segment of the stock market. As a result, they have a low price-to-earnings ratio. Even though their sales are strong, investors don’t like their industry. Without that penalty, these mid-caps could otherwise become large-cap. Other mid-cap companies may be poised to be the next big breakout. They may be on the verge of announcing a new product or acquiring a competitor. In these cases, a mid-cap can provide the same growth potential as a smaller firm with less risk. Another way a mid-cap could pay off is if a large-cap company decides to buy it. In that case, your stock might get converted to large-cap stock. If the switch is generous, you could gain a lot. 

3. Mid Cap Versus Large-Cap

A mid-cap company will not be as stable as a large-cap company. First, they don’t have as much capital to last through a downturn. Therefore, they will be riskier in the contraction phase of the business cycle. Second, they are usually focused on one type of business or market. If that market disappears, they will too. 

4. Mid Caps Usually Outperform Both Large and Small-Cap

Historically, mid-caps have outperformed small and large-caps. However, the last few years have been very volatile, resulting in large-caps outperforming small and mid-caps in a 10 year measure. The S&P MidCap Index returned about $2,719 for every $1,000 invested in 2012 through 2022. The Russell 2000® Index, which measures small-caps, returned about $2,896. The S&P 500, which is mostly large-cap, returned about $3,187. Often, in normal economic conditions, mid-caps have a lower risk than the small-caps, but a higher return than the large-caps.

Examples 

Many mid-cap companies are well known. They have been around long enough to secure their market niche. Many mid-cap companies are in the finance, real estate, or transportation industries. Here’s a list of some well-known mid-cap corporations (as of March 2022):

3D Systems Corp: Market cap of $1.91 billion. Manufacturer of 3D printers. Dollar Tree Inc.: Market cap of $31.86 billion. Discount retailer. Nu Skin Enterprises: Market cap of $2.36 billion. Multilevel marketing personal care products. Pitney Bowes: Market cap of $861 million. The technology company is most known for its postage meters.

This list is just to show the wide variety of mid-cap companies. It does not recommend these stocks or even guarantees that these are safe investments. That’s why you need a good financial adviser. He or she will find the best stocks for your asset allocation. You will find out if mid-cap stocks are even a good fit for your personal investment goals.