What Are Mid

If you ask the American Psychological Association, middle-child syndrome is a hypothetical condition where, to invoke comedian Rodney Dangerfield, you don't get no respect, no respect at all.

In a way, mid-cap stocks, stuck between large-caps and small-caps, can seem that way. But they can be an excellent addition to an investment portfolio. Read on for more information about mid-caps and some suggestions of stocks and exchange-traded funds in the category to consider.

To understand mid-cap stocks—or small- or large-caps, for that matter—start with the concept of market capitalization, often called market cap. It is a way of discussing the size and, therefore, presumed importance of companies.

Market cap is calculated by multiplying the number of outstanding shares of stock a company has by the current share price. As stock prices constantly shift and the number of shares can vary at times with corporate stock buybacks or new share issuances, market cap isn't a fixed number. It changes as do other important financials of companies: revenues, profits, expenses, cash positions and much more.

Typically, a company's market cap will sit in a range. Although not impossible, a company won't generally lose 20% or 50% of its size in a twinkling. But there can be a titanic difference in market caps between companies, like a tiny newly public firm versus something the size of Apple, which has a market cap of $2.8 trillion. That is why analysts and investors put them into groups for more efficient discussion.

The term large-cap typically refers to a company with a market cap of at least $10 billion, although the definition is not set in stone. Small-caps are companies with market caps between $300 million and $2 billion. Mid-caps have market caps between $2 billion and $10 billion.

"Some of the things that draw us to the mid-cap sector is you have companies that have greater flexibility," says Dan VanTimmeren, a managing partner at LaFleur & Godfrey Private Wealth Management. "You get into the large-caps and you’re getting into more bureaucratic situations and things can't move quite as quickly as with a smaller company where decisions are made through fewer layers of management." That can mean a greater ability to quickly innovate and bring new products to market faster. At the same time, a mid-cap has greater resources than a small-cap. It probably has more cash on hand to invest when necessary and a greater ability to get more reasonable rates when borrowing.

"They are well-established companies," adds Brian Jankowski, senior investment analyst and trader at Fort Pitt Capital Group. "They have a couple of hundred if not a few thousand employees." They tend to have a few niche products and services and fewer analysts and investors following them.

But also, "bottom-line results tend to be much less consistent, and a higher degree of operating leverage means a change in sales has a much larger impact on operating profit, both to the upside and downside," says Marc Dizard, chief investment strategist for PNC Asset Management Group at PNC Financial Services.

Mispriced stocks are hiding in plain sight and present great investment opportunities for the remainder of 2023. Forbes’ top investment experts share 7 overlooked stocks in this exclusive report, 7 Best Stocks To Buy For The Second Half of 2023. Click here to download it now.

Mid-caps typically are less volatile than small-caps, and so offer greater stability (although not as much as with large-caps). More proven and established in the market, there is less of a chance that they could flame out without warning.

Because they have a niche, some resources and an established market, there is also a potential for growth. Less than with a small-cap, but with less accompanying risk. And more chance of growth than large-caps that are so big that it becomes difficult to jump ahead and significantly add revenue, profits and share value.

Mid-caps also have room for diversification as they grow. Expansion can come from entirely new product lines, services and geographic territories, although they do run the risk of diluting their brands if they don't carefully move into different markets or expansion of existing ones. Unlike small-caps, they can make more investments to sustain their growth.

Foremost is finding the mid-caps. As they draw less attention from analysts, pundits and the press, you can miss the opportunities. There are two different approaches you can use.

"There are pretty readily available pre-screening tools," Jankowski says. "Yahoo Finance and Google Finance are pretty good sources to screen." Set some criteria like the size range of company or industrial sector and you can build lists to explore. There are more mid-caps than large-caps, but nowhere near the number of small-caps, so it's easier to avoid being overwhelmed by your research.

Another is to look around you, taking the Peter Lynch old advice of considering what products and services you regularly use that impress you. This isn't foolproof, but it can spark some ideas for companies to investigate.

Then there are the common factors that come into play for any investment. First look at the company's financials. Is there a strong balance sheet with plenty of cash thrown off to sustain operations and investment? Are margin levels, revenues and profitability in line with competitors? If not, is there a good explanation of why and a reasonable expectation that things will change?

Look into the industry's trends. If a company is mid-sized and in a mature low-growth industry, don't depend on prospects of the company expanding in size. A large-cap might take notice of a niche and decide to move into it. Size doesn't guarantee success by any means, but it can cause smaller companies to waste resources on defending their markets.

In addition, keep an eye on macroeconomics. Inflation, currency exchange rate for foreign markets, conditions in foreign markets, and other aspects can have impacts, whether bad or good. One mid-cap may be an optimal investment for you at one point when conditions change, and another will take its place.

Mispriced stocks are hiding in plain sight and present great investment opportunities for the remainder of 2023. Forbes’ top investment experts share 7 overlooked stocks in this exclusive report, 7 Best Stocks To Buy For The Second Half of 2023. Click here to download it now.

As always, there is no stock that is a good choice for everyone under every set of conditions. But here are some examples of mid-cap stocks that stand out at the time of writing.

Don't keep all your eggs in one basket, but one stock to consider is Cal-Maine Foods, a big producer, marketer and distributor of eggs under a variety of brands, including Egg-Land's Best, Land O’ Lakes, Farmhouse Eggs and 4-Grain in addition to private label brands.

It is a "mid-cap stock with a ratio of enterprise value to Ebitda less than 10, no debt and that is a consumer staples stock," says Don Kaufman, cofounder of trading education site TheoTrade. "The company has benefited from high egg prices as shown by its revenue nearly doubling from 2022 in the trailing 12 months. That trend isn't expected to continue according to analyst estimates, but its recent decline in price and its relatively high dividend (11%) makes it a compelling opportunity at this price level."

With revenue coming down again, so is the share price, but shares are roughly where they were one-year ago. As earnings numbers come out showing the impact of falling market prices, it may be that share prices will drop an additional amount, which would seem to offer an opportunity for investors.

Many people have mixed feelings about investing in petroleum-based energy. But it isn't disappearing tomorrow for many practical reasons. Crestwood Equity is a midstream company in gas, oil and produced water collection, storage, treatment, transportation and disposal services. The subsector is the middle operator, standing between companies that extract the raw materials and those that refine them into final products. While revenue depends on volume, ultimately, working midstream doesn't expose companies to the same degree of pricing volatility as other aspects might feel. While heavily regulated, it has relatively low capital risk for the overall industry.

Its market cap is about $2.7 billion with shares at the time of writing around $25 and a strong dividend yield of 10.2%. Annual net income for 2022 was $31.3 million, with normalized earnings per share of $0.90 (taking out one-time gains and charges).

Even if the name doesn't immediately strike a chord, you might be familiar with DocuSign. The company has a commonly used system to let businesses and individuals sign documents online, usually through an email exchange.

"As the frontrunner in e-signatures and digital transaction management, DocuSign is experiencing rapid revenue growth, thanks to the rise in remote work and digital processes," says Emil Åkesson, founding partner and chairman at CLC & Partners. "Their scalable business model offers high gross margins and a widening range of digital workflow solutions."

DocuSigns’ revenue in 2017 was $381.5 million. When the company went public in April 2018, which was part of its 2019 fiscal year, revenue hit $701 million. Three years later, fiscal year 2022 ending on January 31, 2022, it was $2.1 billion. According to data in May 2023 from S&P Global Market Intelligence, the 12-month revenue ending on January 31, 2023 was estimated at $2.5 billion (not final figures are not available yet).

But growth costs. Net loss last fiscal year was $70 million. This year, it was on track for $97.5 million, far less than the hundreds of millions from fiscal year 2019 through 2021, but still a loss. Then again, levered free cash flow—what is left after paying all financial obligations for a year—has continuously grown to $705.7 million in fiscal 2022 and likely closer to $750 million this year.

Share prices are down from a high of $308 in 2021 to about $58 but are up 23% over the last six months. That seems likely due to both the overall market slide in the face of inflation and a sign that the heights in 2020 through 2022 might have been a general shift as lockdowns ended and stocks that were pumped up from greater remote work came back down to reality. Still, it seems like a good performer, with analysts’ median stock target price of $67, showing an expected upside of about 29% on shares.

Taesik Yoon, executive editor of Forbes Investor and Forbes Special Situation Survey, says Pilgrim's Pride is, "one of the largest chicken and pork producers in the world." The company says that it employs more than 60,000 people and operates processing plants and prepared-foods facilities in 14 states, Puerto Rico, Mexico, the U.K, the Republic of Ireland and continental Europe. Products include a variety of fresh products, deli products, processed and smoked meats, and more under at least 16 different brands divided between consumer and food-service markets, according to information from S&P Global Market Intelligence.

While public, it is also a division of global food giant JBS S.A. "In total, PPC supplies more than 55,000 customers worldwide, the two largest of which accounted for 12.0% of its net sales in 2021. Its primary competitors are other producers of chicken, pork and other meats such as Tyson Foods, Hormel Foods and Sanderson Farms," Yoon writes.

The company's first quarter in 2023 showed a 1.8% drop in revenue, from $4.25 billion to $4.16 billion, and earnings per share plummeting 98.3% from $1.15 in Q1 of 2022 to $0.02 in Q1 of 2023. And yet, that beat analysts’ consensus.

The company's market cap at time of writing is about $5.6 billion, with 236.7 million shares outstanding. There is a roughly cyclical nature to share prices, over the last 10 years alternating between the mid-$30s on top and mid-teens on the bottom. While there can be no promise, the current share prices in the low $20s will likely head up again, as they seem to every one to two years after a significant dip.

As always, an ETF can be a good way to get into a passive tracking of a stock index, letting you get the benefits of general market growth without the need to actively manage and balance a portfolio of maybe dozens of different stocks to try matching the market. If you want an ETF that will track a mid-cap index—specifically the CRSP US Mid Cap Index—the Vanguard Mid-Cap ETF is a good choice, both from return and cost perspective, says Åkesson.

"The expense ratio of 0.04% is low and the five-year average annualized return of 8.0% is quite high," he says. "VO offers exposure to mid-cap stocks in the U.S. market. This ETF has a diverse mix of value and growth stocks, making it a solid choice for passive investors looking for mid-cap exposure."

Mid-cap stocks have a market value between $2 billion and $10 billion.

They are relatively stable and yet retain a greater ability to grow than large-caps, providing a boost to a portfolio.

Mispriced stocks are hiding in plain sight and present great investment opportunities for the remainder of 2023. Forbes’ top investment experts share 7 overlooked stocks in this exclusive report, 7 Best Stocks To Buy For The Second Half of 2023. Click here to download it now.