(By Tim - iStockAnalyst Writer) It is my belief that the world of mid cap stocks should be prime hunting ground for fundamental stock investors. I will be using the S&P Mid Cap 400 for my data, but there are other mid cap indexes available for investors that desire a different view on this space. First, let us take a look at what the mid cap universe entails.
The S&P Mid Cap is the next 400 largest stocks by market capitalization after the widely followed S&P 500 (SPX). While the SPX covers about 75% of the value of the U.S. stock markets, the MID's valuation comes in at only 7%. S&P uses a market cap range of $1.0 billion to $4.5 billion to give the range for mid cap stocks. Below the mid caps are thousands of small and micro cap stocks completing the universe of over 4,000 publicly traded companies in the U.S.
So why do I like the Mid Caps? Let us look at the stocks on either end of these stocks. The large cap stocks are too well known and covered. They are in the news regularly and followed by numerous analysts. Surprises are rare, and when they occur the market reacts before the individual investor can take advantage of the new news. These are the stocks held by the large institutional investors because they can buy and sell large positions without materially affecting the stock price. Conversely, many investors like small cap stocks with the hope they can find the next Google, Apple or Wal-Mart. I think too many companies in the small cap world are struggling to just survive and make a profit. Many have small customer bases that can make or break their business. Small cap stock prices are much easier to manipulate and take advantage of unsuspecting investors.
To me when a company passes that $1 billion market cap number they have moved to a level where they are a well established business and have the financial resources to maintain and grow their business. At this point these are businesses with decent revenues and hopefully decent profits. The positive for individual investors is that the companies are not yet big enough for the large players to have a lot of interest. Many of these companies are only followed by 1, 2 or 3 analysts. And it seems these analysts are also in training for the bigger stocks because they often know very little about the companies and just reiterate company guidance. News on the mid cap companies can be rare and the investor only finds out how they are doing at the quarterly earning's release. For the 90 days in between it seems the market forgets about these companies and their share prices rise and fall with the general market and sectors with little effect from the individual company's prospects.
My theory here is that individual investors have a tremendous opportunity in mid cap stocks to find hidden gems. This group of established but lightly followed companies is where the future new members of the large cap club will come from. It would be nice to own a few stocks whose values grow by multiples instead of percentages.
