By Paul R. La Monica
Megacaps are flying on Donald Trump. So are small-caps, for a fact. But the stocks that hardly anybody is talking about? Mid-caps.
Maybe the S&P 400 needs more attention. Just like a middle kid, mid-caps can get overlooked since they're wedged in between the Magnificent Seven and the Russell 2000.
Apple, Tesla, Amazon, and Alphabet are trading near record highs. And the Russell 2000 is up more than 5% since the Nov. 5 election, also on hopes of more government from the incoming Trump administration and Republican Congress.
Yet the S&P Midcap 400, comprised of midsize companies, is equally impressive, trading at a little more than 16 times earnings estimates for 2025. The multiple is the same as the S&P SmallCap 600.
Stephanie Guild, who heads Robinhood Financial's investment strategy, prefers mid-caps to small-caps because those companies tend to have lower debt loads and might be more compelling merger targets.
With that in mind, Barron's ran a stock screen of the S&P Midcap 400 for mid-cap companies with reasonable valuations, solid earnings growth prospects for 2025 and relatively low levels of leverage that have the potential to outperform.
The exact parameters: companies trading below 20 times earnings estimates that are expected to grow profits next year and have long-term debt to capital ratios below 35%.
Several financial stocks made the cut, including investment banks Jefferies Financial, Evercore and Stifel Financial. All could benefit from the expected increase in M&A activity as well as the possibility of more initial public offerings. Both mergers and acquisitions and IPOs boost bank fees.
"The new year is poised for a resurgence in tech IPOs as lower interest rates and an investor shift to small- and mid-cap companies combine to create a more welcoming market for debuts," wrote S&P Global Market Intelligence analysts.
More interest rate cuts from the Federal Reserve in the coming year could help midsize banks such as East West Bancshares, UMB Financial, Synovus Financial, Valley National Bancorp, and Webster Financial. All made the list.
Housing stocks also should get a lift if rate cuts eventually lead to lower mortgage rates. On the list: builders Toll Brothers, Taylor Morrison, and KB Home.
Midsize consumer stocks are in a good position if Trump and Congress make good on the president-elect's economic promises. Athletic retailers Under Armour and Columbia Sportswear made the list as well as luxury apparel company PVH and cooler maker Yeti Holdings.
"Higher tariffs reduce competition for smaller and midsize consumer companies," said Sumali Sanyal, senior portfolio manager of the systematic global equities platform at Xponance. "Lower taxes are a tailwind and the relaxation of the regulatory environment should help too."
Mid-caps are hiding in plain sight. That's for sure. With the economy still standing on firm ground, now is the time to rethink mid-caps.
Write to Paul R. La Monica at paul.lamonica@barrons.com
This content was created by Barron's, which is operated by Dow Jones & Co. Barron's is published independently from Dow Jones Newswires and The Wall Street Journal.
(END) Dow Jones Newswires
December 17, 2024 14:48 ET (19:48 GMT)
Copyright (c) 2024 Dow Jones & Company, Inc.
Comments