Mid-cap stocks are getting some love, finally

Published on NewsOK Modified: April 17, 2014 at 1:10 pm •  Published: April 17, 2014
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NEW YORK (AP) — Maybe the middle child really should be the favorite.

Just like families sometimes overlook the middle kid, investors all too often pay attention to just the smallest and largest stocks. Managers of mid-cap stock mutual funds say they've experienced the middle-child syndrome for years: Small-caps are young companies that offer the thrill of big growth, the thinking goes, while large-cap companies have well-established brands and can be more dependable.

But it's the middle ones that have delivered the best results over the last generation, at least when it comes to stocks. Managers say that's because the stocks of mid-cap companies can offer the best attributes of both larger and smaller ones. Investors are now noticing the strong performance, and they poured more money into mid-cap stock funds last year than either large- or small-cap funds. The trend weakened early this year, but mid-cap stock funds again attracted the most money last month, according to data from Morningstar.

"It really does represent the sweet spot," says Mariana Connelly, a client portfolio manager at J.P. Morgan Asset Management. "Unlike small caps, these companies are a little more seasoned and not quite as volatile. Unlike large caps, they have a lot of room to grow."

Different indexes vary on what defines a mid-cap company, but they generally have market values closer to $4 billion than the $467 billion value of Apple.

The biggest stocks in the S&P 400 MidCap index include $8.8 billion Advance Auto Parts and $9.5 billion Church & Dwight, which sells Arm & Hammer baking soda and Trojan condoms. The Russell Midcap index includes larger companies, such as $28.5 billion Delta Air Lines. The average company in the large-cap Standard & Poor's 500 index is worth $35.4 billion.

Over the last 20 years, mid-cap stocks in the S&P 400 have returned 12.4 percent annually, including dividends. That beats the 11.2 percent annual return of the S&P 600 SmallCap index and the 9.5 percent annual return of the large-cap S&P 500 index.

Investors may already own mid-cap stocks without knowing it, particularly if they have a broad-market stock fund. The largest fund, Vanguard's Total Stock Market Index fund, owns stocks of every size in its attempt to match the entire market's performance, for example. Some funds dedicated to large-cap stocks, also "reach down" and own mid-cap stocks, while some small-cap stock funds "reach up."

To be sure, the rising popularity of mid-cap stocks has helped make them more expensive than they used to be. Stocks in the S&P 400 trade at 19.7 times their earnings per share over the last 12 months. That's well above the average price-earnings ratio of the index over the last 10 years of 16.4. Fund managers agree that mid-cap stocks are no longer cheap -- the S&P 400's price-earnings ratio dropped close to 8 during the financial crisis -- but they say more gains are still possible.

Among the attributes they cite are:

— STRONGER EARNINGS GROWTH THAN LARGE CAPS.