Could Mid-Cap Serve as the Goldilocks Asset Category?

Sheaff Brock | Mid-Cap stocks may be just right asset category; just like Goldilocks' chair

Could Mid-Cap Serve as the Goldilocks Asset Category?

Remember the story of Goldilocks and how the little girl tried sitting in each of the Three Bears’ chairs? After rejecting the first two chairs because they were the wrong size, she tries the third: “Ahhh, this chair is just right,” she sighs.

Most investors look at small stocks (they’re exciting) or large cap stocks (they’re familiar). But midcap stocks can be the “forgotten” asset class that may turns out to be “just right,” points out Sheaff Brock portfolio manager Paul Coan. Generally speaking, (with the necessary caveat that past performance is no guarantee of future results), midcap stocks tend to be more stable than smallcaps while offering a better return potential than their larger cousins.

Clarification: Whereas in earlier eras stocks were classified into the three categories of small, midcap, and large), today there are five categories: (micro, small, mid-cap, large, and mega).

The Sheaff Brock Mid-Cap 10 is described as “an aggressive growth portfolio of up to ten mid-cap stocks trading on the NASDAQ exchange and powered by a momentum algorithm.”

Translation, please? Paul Coan, portfolio manager for the Mid-Cap 10 for the past three years, breaks down the proprietary process of choosing “the” ten stocks out of the hundreds of stocks on the NASDAQ.

There are twelve equity sectors:

  1. consumer discretionary
  2. consumer staples
  3. energy
  4. financials
  5. healthcare
  6. industrials
  7. information technology
  8. materials
  9. telecommunications
  10. utilities
  11. capital goods
  12. miscellaneous

As Step One in the process, the “best” stock is selected from each NASDAQ sector (based on quantitative measures, PE, earnings, etc.).

As Step Two, the next best 110 stocks, regardless of sector, are selected.

In Step Three, stocks are sorted by a specialized computer program “algorithm” for momentum, and narrowed down to ten stocks total.

This is a high turnover portfolio, Coan explained in an interview with our Sheaff Brock editor, with a 400% annual turnover, managed through a unique combination of research and automation (read combined human and computer power).

Asked to provide examples of stocks that used to be midcap, but which have since moved on to become large or mega cap, Coan named Tesla and Netflix. Stocks that were once smallcap which have become midcap? Advanced Micro Devices and Spirit Airlines.

Micro and small stocks may seem more exciting; large and mega stocks may be more familiar. But could midcaps turn out to be the “forgotten” asset class that turns out to be, like the chair Goldilocks chose, “just right”?

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