Mid-Cap Stocks Have Reigned in 2009

Andrew Leckey

Mid-cap stocks have been anything but middling in 2009.

They've been the sweet spot for investors still leery of the large-cap stocks that burned them in the recent past. Too many big-name companies also seem to be offering only downsizing as a strategy these days.

With large caps and small caps garnering all the attention, mid caps usually fall between the cracks.

Yet mid-cap growth funds are up 34 percent and mid-cap value funds up 31 percent this year, according to Lipper Inc. Both have surpassed the 26 percent increase of the average diversified stock fund.

"Mid-cap stocks are a neglected part of the market, a well-kept secret not a lot of investors know about," said Patrick Dunkerley, portfolio manager for Scout Mid Cap Fund (UMBMX), which is up 40 percent this year. "It's no surprise they're outperforming this year, since half the time coming out of an economic downturn mid caps outperform and half the time small caps outperform."

Mid-cap (which stands for middle capitalization) stocks are loosely defined as those of companies with capitalizations between $2 billion and $10 billion. It is a squishy term whose parameters can vary considerably from investment firm to investment firm. It basically encompasses companies that aren't either big or small, and that concept is in the eye of the beholder.

"Mid-cap companies can still be nimble like their small-cap counterparts and aren't as bloated as the larger companies," said Scott Grittinger, principal in McCarthy Grittinger Weil Financial Group LLC in Milwaukee. "They have the ability to grow but aren't considered risky start-ups anymore."

With money now heading to more aggressive investments such as junk bonds; emerging market stocks and bonds; and smaller stocks, noted Grittinger, mid-cap stocks offer a modestly aggressive possibility. A mid-cap company typically has a better management team, more financial liquidity and greater opportunity to raise capital through loans and initial public offerings than the small-cap counterparts.

"Mid-cap companies have had good strong earnings and many have beaten the estimates," observed Tom Roseen, senior research analyst with Lipper Inc. in Denver. "Investors are reaching for larger capitalizations but don't seem interested in reaching for the biggest of the big."

Mid-cap portfolio managers sometimes have a blend of mid-cap and small-cap stocks but won't venture into large-cap territory, Roseen said. Only if a portfolio manager has a strong buy-and-hold philosophy will a mid cap that has grown into a large cap be kept.

Here are some mid-cap stocks priced right and worthy of investment, according to Scout Mid Cap's Dunkerley:

-- Cimarex Energy Co. (XEC), a producer of natural gas and oil whose stock is inexpensive, has a long runway ahead of it as it drills its properties, expands production and increases earnings.

-- Priceline.com Inc. (PCLN), a global phenomenon with about 70 percent of its profits coming from Europe, has been increasing revenues at a 30 percent annual clip while taking market share from online sites and travel agents.

-- Terex Corp. (TEX), a maker of road pavers, construction machinery and mining equipment, is a cheap stock that will benefit whenever the world's economy perks up and infrastructure needs are being met.

-- Allegheny Technologies Inc. (ATI), a fabricator of high-strength metals used in the oil and gas industries, deepwater drilling and jet planes, is out of favor now but well-positioned for the long haul.

Scout Mid Cap Fund has 66 stock holdings with average market capitalization of $6.2 billion. This "no-load" (no sales charge) fund requires a $1,000 minimum initial investment and has an annual expense ratio of 1.4 percent.

"We do rigorous fundamental research on companies, and we like a strong liquidity position, strong cash flow, strong balance sheet, good valuation and a strong catalyst to drive growth," said Dunkerley. "We really don't like 'gotchas' like bad management or litigation."

Roseen sees a number of mid caps positioned to do well. In technology, he points out Salesforce.com Inc. (CRM) and Adobe Systems Inc. (ADBE). Among retailers, he notes Urban Outfitters Inc. (URBN), Tiffany & Co. (TIF) and Abercrombie & Fitch (ANF).

Turning to mid-cap funds, Grittinger especially likes T. Rowe Price Mid Cap Growth Fund (RPMGX), up 39 percent this year, because of proven portfolio manager Brian Berghuis who has been with it since 1992. The fund was closed to new investors in 2003 due to rapid asset growth but reopened in 2008 after the market drop had reduced its size.

"Unlike many mid-cap growth mangers, Berghuis does pay attention to valuations, and that appeals to us," said Grittinger, also noting that solid balance sheets and diversity of industries are hallmarks of that fund's holdings. "Growth at any price is a loser's game."

The largest holdings in its 141-stock portfolio include Agnico-Eagle Mines (AEM), Global Payments Inc. (GPN), Marriott International Inc. (MAR), The Western Union Co. (WU), Expedia Inc. (EXPE) and Juniper Networks Inc. (JNPR). T. Rowe Price Mid Cap Growth is a no-load fund with a $2,500 minimum initial investment and an annual expense ratio of 0.82 percent.

Mid caps do not produce boxcar results like 2009 every year. For example, Scout Mid Cap has a three-year annualized return of 3.15 percent, and T. Rowe Price Mid Cap Growth is down a fraction for the three-year period.

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