Mid-Cap Stocks: Is 2024 The Right Time to Trade in Mid-Cap Companies?

Financial stability. Growth potential. Industry  Diversification- financial advocates suggest that mid-cap stocks, despite their moderate performance in 2023, could fetch great results in 2024. Mid-cap stocks are often ignored by investors who prefer to dedicate their resources to large-cap and small-cap stocks. However, if analysts and experts were to believe mid-cap stocks should not be overlooked in the long run.

Mid-cap companies have a market capitalization between $2 billion and $10 billion. Market capitalization is the company’s market value calculated by multiplying its outstanding number of shares with its stock price. Mid-cap companies fall between the large-cap and small-cap companies.  Individuals who understand the market mechanism prefer to invest in mid-cap stocks as they are promising and can potentially increase profit, market share, return, and productivity.

Another reason for mid-cap stocks to be favoured by investors is their low volatility compared to small-cap stocks. Hence, if the economic decline is to arrive, the chances of bankruptcy of mid-cap companies are quite unlikely.

Features of mid-cap stocks:

• Diversified: Mid-cap stocks line both large and small-cap stocks. They are pretty diverse in terms of returns and risks. Some mid-cap companies have reached the development and hence offer excellent stability. On the other hand, some companies have graduated from the small gap and have the potential to provide greater returns than stability.
• Growth Potential: Another feature of such stocks owned by mid-cap companies is their potential to increase profitability, productivity, and market share. In a bullish market, these companies can shine as overnight successes and fetch significant returns for investors.
• Risk involved: in comparison to stocks owned by small-cap companies, mid-cap stocks respond with less intensity to volatile situations. However, compared to large-cap stocks, they offer less stability during bearish markets.
• Liquidity: Mid-cap stocks offer more liquidity in comparison to small-cap stocks. They are recognised stocks, and investors trust their potential. 

What are the risks involved with investing in mid-cap stocks?

No matter the profitability and market expansion that mid-cap stocks offer, there are several risks involved with investing in mid-cap stocks. A few risks mentioned below are the most relevant ones.:

• Value trap: A value trap is a situation in which a company continues to function with low profits with limited cash flow over a prolonged period of time without being able to break free from this phase. Some stocks in the mid-cap list are prone to a value trap and  might go non-existent if this phase continues.
• Insufficient resources: Mid-cap and small-cap stocks are less efficient in their managerial and organizational infrastructure than large-cap stocks. So, the profitability and productivity cannot be put to optimum use despite the value appreciation.
• Presence of financial bubble: Most mid-cap companies offer exceptionally well because of a financial bubble. However, these companies do not have the economic stature to hold their ground when the bubble pops. So, when going through the mid-cap stocks list, make sure to determine the financial fortitude of the stock to check their financial history. 

Difference between large-cap, mid-cap, and small-cap stocks?

Each category of stock comes with its market capitalization limit, growth potential, risk, and volatility levels. Consider these distinctions before moving ahead in your investment venture:

• Market Capitalization Limit: Market capitalization is the main factor in categorizing equities into small–, mid-, and large-cap groups. The market capitalization of small-cap stocks usually ranges from a few million to several billion dollars. Mid-cap equities are more widely distributed, with values between a few billion and 10 billion dollars. Large-cap stocks have a market capitalization of more than ten billion dollars. These cutoff points offer a foundation for comprehending the size and reach of businesses in each category.
• Risk and volatility level: Their comparatively smaller size and increased sensitivity to changes in the market, small-cap stocks are sometimes linked to increased risk and volatility. A greater vulnerability to market movements tempers the possibility of quick expansion. Mid-cap companies offer an intermediary position between small and large-cap firms, providing growth potential and a degree of stability in between. Large-cap stocks are known for their stability and lower risk when compared to their smaller counterparts—a more predictable success trajectory results from their established presence and diverse operations.
• Investment Returns: Small-cap stocks show excellent growth potential as they function in dynamic sectors and have sufficient small for innovation and expansion. However, these growth potentials often bring anticipated downsides and greater uncertainty. Mid-cap stocks offer a balance between growth and stability, appealing to investors looking for expansion with less volatility. Large-cap stocks can provide stability and dividends but slower growth due to their size and market maturity. 

How to invest in Mid- cap stocks as a beginner?

When investing as a beginner or a pro, investors employ a number of strategies and tactics to maximize their profit while enduring an acceptable level of risk. The market is as dynamic as it gets, and investors are looking to buy stocks of companies that meet their metrics, reduce their company-specific risks, and buy into funds that track broad sectors and markets. In this section, we’ll discuss certain strategies, mistakes, and tips suggested by experts that beginners can use when investing in mid-cap companies. 

Understanding the market segment:

The mid-cap market segment is considered a ‘sweet spot’ by investors for all the right reasons. Mid-cap companies are medium-sized and are found in the middle of the business cycle, meaning they are no longer prone to the same level of survival risk that they did when they were small. Although mid-cap companies are not as well established as the companies belonging to the large-cap segment, (most) companies that trade within mid-cap are positioned well for the future. 

Despite good levels of relative performance, institutional and retail investors prefer to follow the mid-cap market relatively less. From December 1994 to May 2019, the S&P MidCap 400 outperformed the S&P 500 and the S&P SmallCap 600 by an annualized rate of 2.03% and 0.92%, respectively, according to S&P Dow Jones Indices.1 Dow Jones S&P Indices. “The S&P MidCap 400: Outperformance and Potential Applications.” Given the good relative performance, it is possible that passive investors would like to have wide exposure to the mid-cap market.

• Mid-cap ETFs

Many investors use a passive buy-and-hold strategy to gain broad exposure to the mid-cap segment. This type of strategy is best carried out using exchange-traded funds (ETFs) such as a blended mid-cap ETF that carries low fees and is designed to track a well-known mid-cap benchmark such as the S&P 400, CRSP U.S. Mid Cap Index, or Russell MidCap Index.

Some common mid-cap focused ETFs based on total net assets are the iShares Core S&P Mid-Cap ETF, Vanguard Mid-Cap ETF, iShares Russell Mid-Cap ETF, and SPDR S&P MIDCAP 400 ETF Trust.

• Mid-cap Value stocks:

Companies whose share prices are trading below their intrinsic worth are the target of value investors. To put it another way, value investors look for businesses whose share prices are low or on sale compared to what they think to be the company’s underlying value. Value investors frequently use financial criteria like price-to-book, price-to-earnings, free cash flow, and a host of others to identify when a stock is on sale.

• Mid-cap Growth stocks & ETFs:

Investing in companies that are anticipated to grow their earnings at a pace higher than average compared to the rest of the market or industry is the focus of another popular investment strategy utilized in the mid-cap segment. A mid-cap company may be headed toward large-cap status if its profit growth is robust and steady, and investors may be able to enter the market early enough to profit handsomely. 

Mistakes to avoid when investing in Mid-cap stocks:

Investment is not a cakewalk, and profits are unpredictable. There are countless books on investment, and every investor has a unique experience. The tricks that work are different for every individual. The risk tolerance and level of knowledge also vary. However, there are a series of mistakes that all investors should avoid, irrespective of their experience and investment style.

• Not understanding the company: The legends of investment often caution beginners to never invest in companies whose business model appears vague. Building a diversified ETF and mutual funds portfolio is always a good call.
• Getting emotional about the company: It is often observed by beginners that once they notice that the company they have invested in is performing well, they forget about the goal of their investment. If the fundamentals of your investment change regarding the company, it’s time to sell that stock.
• Be patient: Expect your portfolio to grow at a steady rate. Being realistic in the long run will yield better results and higher returns.
• Avoid frequent turnover: Jumping in and out of positions can also hamper your return. If you are not an institutional investor, you should remain static with your investment.

Why Mid-cap stock should not be ignored in 2024?

Investors that prioritize prospects in large-cap and small-cap stocks occasionally overlook midcap stocks.

Despite having more substantial balance sheets and higher levels of stability, large-cap corporations are frequently hampered by their slow growth. On the other hand, small-cap firms could provide appealing returns but also have a high degree of volatility. Mid-cap firms occupy a midway ground, offering less volatility than small-caps and more enticing growth prospects than many large-caps.

As smaller than large caps, mid-cap companies may be more agile. This suggests that mid-cap companies might be better positioned to swiftly modify their strategy to seize fresh or evolving market possibilities.

Furthermore, compared to large-cap firms, stock analysts tend to cover mid-cap names less actively. This allows talented, knowledgeable, proactive portfolio managers to find possibilities the market has overlooked.

How to find the best Mid-cap stocks to invest in?

Investing in the best mid-cap stocks can present possibilities that ordinary investors frequently miss. In the equity markets, large-cap stocks are always the center of attention. However, small-cap stocks often take center stage as a counterbalance to what is, for most investors, an ongoing exposure to large-cap stocks. However, ignoring mid-cap companies means ignoring a significant portion of the market, which can provide a unique set of opportunities in addition to some of the benefits of both large and small-cap stocks. 

Now that we have understood the significance of mid-cap stocks, here are two ways to help you find the best mid-cap stocks to invest in:

• Use a stock screener:

You can analyze the stocks- both global and US ones of all sizes with the help of stock screeners. These paid or free stock screeners provide market cap screening so that you can narrow your choices of stock.

• Google keyword strings:

The easiest search term is “best mid-cap stocks to buy.” There were almost 30 million results for this search. Generative AI (artificial intelligence) is quickly becoming the norm. Microsoft’s Edge browser also offers AI-powered search with Bing integrated into the search function.

Top Mid-cap stocks to invest in 2024

• Carvana (NYSE: CVNA):

Considering Carvana’s recent price behavior (NYSE: CVNA), more investors might consider purchasing CVNA stock as a contrarian bet. A lot of people might be jumping back in with the hope that it will survive the current industry crisis, even though some might be viewing it as a short-term, short-squeeze move. If so, the theory goes, it will spur a drive toward significantly higher prices. Carvana’s sales might drop to the low end of analyst expectations ($10.95 billion) in 2024 and remain there through 2025 if the used car market recovers slowly.

Peers such as AutoNation (NYSE: AN) and CarMax (NYSE: KMX) had EBITDA margins in the 6%–7% range prior to the used vehicle bubble. With this, Carvana’s EBITDA can potentially reach $766.55 million at most.

Carvana’s stock trades 13 times its potential 2025 EBITDA, based on its current enterprise value of $9.95 billion. This valuation may be sustainable given that it is comparable to peers. The stock will probably remain stable at about $1 per share, even with potential dilution.

• Gaming and leisure properties (GLPI):

With GLPI at its core, the gaming sector is experiencing tremendous growth. The business manages the facilities and offers other services to its tenants in addition to owning, financing, and leasing the real estate used to run casinos.

After splitting off from Penn Gaming in 2013, GLPI has emerged as a major force in this developing industry. The future looks bright with more states adopting gaming and GLPI’s established presence in 18 states with 61 properties. The stock is more expensive than the other two on the list, but given the development potential of the gaming sector in the United States over the next few years, I somewhat disregard that. Given the risk, its dividend yield of 6.4%

• Invesco:

Invesco has contributed to its expansion almost as old as the mutual fund business. This 88-year-old business offers institutional, sovereign wealth funds, and retail clients investment services.

With a long history, Invesco has integrated into several top investing organizations. Its dominance in the exchange-traded fund (ETF) market, where its Nasdaq 100 product (QQQQQQ +1.5%) has become iconic, is expected to contribute to its future growth. This is a recognized, seasoned operator in a growing area. The dividend yield of about 5% supports the investment argument.

• Mosaic Company:

MOS is a prominent global manufacturer and distributor of potash crop nutrients in North America. It sells to farmers, retail chains, wholesalers, distributors, and other parties. The conflict in Ukraine disrupted grain markets, and prices have since skyrocketed.

This indicates that planting occurs elsewhere, and MOS is well-positioned to benefit from this. In a show of confidence, MOS has also repurchased a large portion of its stock in recent years and is now trading below revenues.

• Chesapeake Energy (CHK):

U.S. natural gas producer Chesapeake Energy (CHK) and defense contractor Mercury Systems (MRCY) would be included in the S&P index revisions that took effect in the later month of 2023. As MRCY gained ground, CHK also took advantage of the news. According to the ratings agency, Chesapeake will be replaced and added to the S&P MidCap 400. Mercury Systems is scheduled to transition from the S&P SmallCap 600 to the midcap index. Both adjustments had taken effect at the opening of trading.

The metals processing and fabrication company Arconic (ARNC) is leaving the S&P SmallCap 600 index. It is anticipated that fund manager Apollo Global Management (APO) will soon finalize the $5.2 billion acquisition of ARNC.

Final Thoughts:

Mid-cap stocks’ difficulties today stem from investor preferences, contemporary investment market realities, and perceptions. Ultimately, though, the market is a “weighing machine,” as legendary value investor Benjamin Graham once observed. 

Therefore, mid-caps have the potential to be a very profitable hunting ground, provided you conduct thorough research, look past short-term obstacles, and diversify your holdings.