Q&A: Mighty Midcaps

4/1/2013


If you don‘t have money in midcap stocks, you should. Midcaps generally offer greater growth potential than large-cap stocks — with less risk than small-company stocks. Importantly, midcaps have delivered superior returns over the last decade. Below, we answer five questions about the stock market's middle child.

Q How do you define midcaps?
A One common way to segment the market is to divide New York Stock Exchange stocks into 10 equal-numbered deciles based on market value, then slot non-NYSE stocks into those deciles. Based on this methodology, the maximum market cap for midcaps (deciles 3 through 5) is nearly $11.3 billon and the minimum is $2.5 billion. For comparison, stocks in the S&P MidCap 400 Index have a median stock-market value of $3.2 billion, versus $13.8 billion for S&P 500 constituents and $858 million for S&P SmallCap 600 stocks.

Q How do midcap stocks stack up in Quadrix?
A The midcap space is fertile ground for uncovering high-potential stocks. Of the 4,594 stocks in our research universe, 790 sport market values between $2.5 billion and $11.3 billion. Among those names, 147 earn Quadrix® Overall scores of at least 80 and above-average Value scores — a typical launching point for our screens. About 22% of S&P 400 stocks have Overall scores above 80, matching the S&P 500 and above the S&P 600.

Q What pockets of midcaps appear attractive?
A That depends. Among the 790 midcaps in Quadrix, those in the industrials, consumer-discretionary, and consumer-staples sectors earn the highest average Overall scores. Standout sectors based on Quadrix Value — the most effective category score — include telecom services, materials, and industrials. While share-price momentum is widespread, the best-performing sectors so far this year are consumer staples (average midcap up 18.9%), financials (15.6%), and industrials (14.7%).

Q With stocks trading near highs, aren't midcaps expensive?
A The typical midcap stock is not cheap. The capitalization-weighted S&P MidCap 400 Index trades at 18.4 times trailing earnings, above the five-year average of 16.8 and 10-year norm of 17.7. When midcaps topped out in mid-2007, the index traded at 19 times earnings. Based on estimated earnings for the next 12 months, the price/earnings ratio is a reasonable 16.4.

 

-- S&P MidCap 400 Index --
Trailing P/E
Forward P/E
Recent
18.4
16.4
     
High (10 Years)
21.2
17.6
Low (10 Years)
9.6
10.1
     
3-Year Avg.
17.4
14.9
5-Year Avg.
16.8
14.6
10-Year Avg.
17.7
15.3

Q What are your favorite midcaps right now?
A The Forecasts follows 11 midcap stocks, with four standouts listed in the table below. Two timely picks are B/E Aerospace ($59; BEAV) and Helmerich & Payne ($61; HP). The table also lists seven attractive midcaps from our sister publication Upside.

11 STANDOUT MIDCAP PICKS
Below are midcaps recommended for purchase, with Forecasts picks in bold and Upside picks in plain text.
------ Quadrix Scores ------
-- Sector Scores --
---- Estimated Current-Year ----
Company (Price; Ticker)
Market
Value
($Bil.)
Momen-
tum
Quality
Overall
12-
Factor
Reranked
Overall
Sales
Chg.
(%)
EPS
($)
EPS
Chg.
(%)
P/E
Ratio
Alliance Data Systems
($158; ADS)
10.42
66
94
84
93
86
17
9.85
13
16.0
Data Processing
AMERCO ($177; UHAL)
3.46
51
90
82
78
57
(7)
12.72
9
13.9
Truck Rental
B/E Aerospace
($59; BEAV)
6.15
69
87
81
63
67
10
3.47
23
17.1
Aerospace
Foot Locker ($34; FL)
5.18
78
90
89
39
77
4
2.80
13
12.1
Retail Apparel
Hanesbrands ($45; HBI)
4.25
84
81
93
70
96
2
3.36
28
13.4
Apparel
Helmerich & Payne
($61; HP)
6.57
93
86
99
89
95
7
5.37
4
11.4
Oil & Gas Drilling
Neustar ($46; NSR)
3.12
97
96
96
95
98
9
3.34
10
13.8
Data Processing
Penske Automotive
($33; PAG)
3.01
88
70
84
85
93
9
2.56
12
13.0
Retail
Automotive
Ryder System ($59; R)
3.06
82
55
93
97
98
4
4.81
19
12.3
Trucking
Trinity Industries
($44; TRN)
3.37
95
65
96
75
100
7
3.78
19
11.6
Heavy
Machinery
Triumph ($78; TGI)
4.08
84
95
97
95
97
7
6.10
22
12.7
Aerospace

 


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