It Could Pay to Still Mind Mid-Caps

Mid-cap stocks seemingly never get the adulation they deserve and that’s the case again in 2022. While there’s no denying it’s been a rough year for the broader market, regardless of cap spectrum, mid-caps are providing investors with pleasant surprises.

Well, to be more accurate, mid-cap stocks are performing less poorly than their large- and small-cap counterparts. Year-to-date, the S&P MidCap 400 Index is modestly outpacing the S&P SmallCap 600 Index, but the mid-cap gauge’s advantage over the S&P 500 is a more noteworthy 230 basis points.

Of course, it pays to not get wrapped up in year-to-date statistics because they are short-term, but the fact is mid-caps outperforming larger stocks isn’t a new phenomenon. It’s been happening for decades and often with comparable or less volatility than is displayed by larger equities.

Historically, mid-caps are also significantly less volatile than smaller stocks, but market participants are consistently drawn to the latter over the former owing to the perception of better growth prospects – an assumption that’s not always accurate. In fact, there are a lot of benefits pertaining to mid-caps advisors can highlight to clients.

Mulling Mid-Cap Perks

As noted above, mid-caps are frequently overlooked and that scenario is, unfortunately, exacerbated when it comes to the group’s income and value prospects. Advisors need not fear because mid-caps are credible income generators and the combination with value is potent over the long-term. Speaking of value, mid-caps are offering plenty of that today.

“The Russell Midcap and Russell Midcap Value indexes have seen their price-to-earnings (P/E) and forward P/E values (both excluding negative earners) retrace substantially by mid-summertime, both recently hovering around a 10% to 12% discount to their long-term averages. Despite July’s rally, these are still among the steepest discounts observed for these asset classes dating back to 2002,” writes WisdomTree analyst Brian Manby.

For advisors that haven’t yet broached the subject of mid-cap equities with clients, now is potentially a good time because although stocks in the middle are up handsomely from the lows seen earlier this summer, that rally isn’t noticeably elevating valuations in the group as of yet.

“Compared to U.S. large-cap value, it almost appears as if the July rally didn’t happen. Historically, mid-cap value commanded about a 5% to 7% premium to large-cap value on a price-to-earnings basis, yet it remains deeply discounted compared with its larger brethren through July,” adds Manby.

Mid-Caps Cost of Admission Is Attractive.

One way – an accurate one at that – for advisors to articulate mid-caps to clients is this is a market segment with superior growth prospects relative to large-caps and better balance sheets, broadly speaking, compared to smaller companies.

Undoubtedly, those are attractive traits. Some experts may argue those characteristics are worth paying up for. Fortunately, the current cost of mid-cap admission is rate low and that’s a good thing for clients.

“Current valuations remain about two standard deviations below their longer-term average. This implies that last month’s rally may have disproportionately benefitted large-cap value more than mid-cap value. The latter may be poised to catch an overdue tailwind if historical patterns after such bargains are upheld,” concludes Manby.

Related: Floating Rate Notes Proving Fantastic in 2022