The One-Two Punch Potential of Mid-Cap StocksSheaff Briefs Editor
Market capitalization? Just a fancy name for a straightforward concept, says Investopedia.com. The market value of a company’s outstanding shares is calculated by taking the stock price and multiplying it by the total number of shares outstanding. (It’s a misconception that the higher the stock price, the larger the company, Investopedia goes on to explain; the true value is affected by the number of outstanding shares each company has in addition to its price.)
Used to be, stocks fell into one of only three categories: small, medium, and large. Today, analysts refer to companies (from smallest to biggest) as:
- Micro cap—$50–300 million
- Small cap—$300 million–$2 billion
- Mid cap—$2 billion–$10 billion
- Large cap—$10 billion to $200 billion
- Mega cap—$200 billion and up
The size categories continue to evolve over time. In the early 1980s, Investopedia notes, if a company had a market capitalization of $1 billion, it would have been considered large; today it’s counted as a small cap.
While reminding investors that past performance is no guarantee of future results, the past performance of midcap stocks deserves our attention, says Sheaff Brock Director Jim Murphy. Why?
Midcaps have outperformed both their smaller and bigger cousins, and with less risk.¹ Yet, Murphy explained to our SheaffBriefs editor, only a little over half of midcap stocks are represented today in exchange-traded funds (ETFs) and mutual funds—which hold 25% of the overall world capitalization.
Murphy considers midcaps as having potential to deliver a “one-two punch.” What does he mean by that? Midcaps have:
- Potential for growth and nimbleness of small caps
- The ease of access to capital (plus the mature management teams) of large caps
Have those factors proven advantageous over time? Looking at the twenty-year timeframe from 1995 to 2015, we can see, as Murphy points out:
- Midcaps outperformed both large and small caps¹
- Midcaps had a better risk-adjusted return than large and small caps (measured using the Sharpe Ratio to divide average return by standard deviation)²
Should our new U.S. administration’s policies result in rising interest rates, inflation, and a stronger U.S. dollar, Murphy notes, midcaps could be ideally positioned to benefit.
- Historically higher interest rates have tended to hurt small cap stocks hardest
- Large caps tend to be multi-national and may be hurt most by a strengthening dollar (midcaps are largely domestic, with more options to obtain funding)
Sharing the advantages of both larger and smaller stocks, midcaps may be poised to deliver a true one-two punch!
¹ Performance Return; FTSE Russell: last 10 years’ performance ending Dec 2016, Russell 2000 Small Cap Index, Russell Mid Cap Index, and Russell Mega Cap Index.
² Sharpe Ratio; Morningstar: last 10 years ending Dec 2016, Russell 2000 Small Cap, Russell Mid Cap Index, and Russell Mega Cap Index.