Alpha Teach Yourself Investing in 24 Hours: An Analysis (part 28)

Stocks (part D)

by

Charles Lamson

Mid-Cap Stocks

Mid-Cap stocks often act like the large-cap stocks' adolescent siblings. They are often characterized by growth spurts, followed by periods of adaption.

Because they are usually younger than the large-cap stocks (covered in the last post), they often struggle with growth that strains management and financial resources. In this fast-moving world, it is not uncommon for a mid-cap company to buy technology, market share, and so on, by merging or buying another mid-cap company.

PROCEED WITH CAUTION Market analysts watch mid-cap stocks to see which one looks ready to take off. Among the indicators they look for are steady growth in revenues, increased market shares, increased earnings or decreased losses, and a management structure capable of handling additional growth.

The market watches these deals closely. If the fit seems to make strategic sense and there is management in place to tackle the new structure, the market will look with great favor on the merger.

It is mid-cap stocks that are sought by growth oriented investors and mutual funds.

Mid-cap stocks' characteristics are covered in the following sections.

Heavy Trading Volume

Mid-cap stocks in hot sectors are often the volume leaders, especially on good or bad news. Everyone is looking for a mid-cap stock that is ready to move up in size and market presence.

Media Coverage

As the news media has become more sophisticated about the market, news of mid-cap stocks is now routinely reported along with market-leading large-cap stocks.

This is due in part to the rapid growth of cable television and the Internet where huge information markets have been created.

High-Tech and Other Hot Groups Closely Watched by Analysts

Stock analysts routinely keep watch over the mid-cap stocks in the hot sectors. They have seen too many young startups zoom through the mid-cap range into the large cap section without much attention.

The Internet economy has created whole new breeds of companies that the analysts are having trouble following by traditional means. For example, it is doubtful that too many companies have gone from start up to large-cap stock in a manner of a few years.

Many times, traditional methods of analysis do not work as well for companies with market caps in the billions, but have never made a penny of profit.

High Volatility

To carry the adolescent analogy a little further, mid-cap stocks can be moody and irrational in reacting to market pressures. Consequently, some have wide swings in price each day.

JUST A MINUTE Trying to figure out a volatile mid-cap stock can be frustrating, but it is highly rewarding when you find one ready to move.

This is not categorically true of all mid-cap stocks, but the potential for some wild swings is certainly greater than the large-cap stocks.

Lesser-Known Indexes

The growing importance of mid-cap stocks is revealed by the number of indexes used to follow this group. However, these indexes are not as well known or reported as those that follow the large-cap stocks.

JUST A MINUTE The lesser known indexes usually tell a better story about the stocks they cover than the broader market indexes.

S&P Mid-Cap 400 index is one of the best known, along with the NASDAQ composite and computer and telecommunications indexes. The Wiltshire 5000 is probably the broadest-based of the indexes.

High-Growth Potential

The growth potential of mid-cap stocks is where they really draw a crowd. It is from this group that the new Microsofts and Intels will emerge. Folks who can spot these rising eagles will be handsomely rewarded.

However, it is always easier to spot the winners in retrospect than it is to pick them out of a crowd of wannabes. There will always be many more mid-cap companies that stall at this level or decline than go on to be industry leaders.

JUST A MINUTE Sometimes a mid-cap stock will move up to the big leagues by merging with or buying a competitor. The resulting large-cap stock may solidify its position in the market.

Mid-cap stocks also face the possibility that one of the large-cap stocks will hear the sound of their footsteps behind them, turn around, and gobble up their potential rival. Life is precarious at this level, but the potential rewards are extremely attractive.

*SOURCE: ALPHA TEACH YOURSELF INVESTING IN 24 HOURS, 2000, PGS. 187-189*

END

PROCEED WITH CAUTION

Market analysts watch mid-cap stocks to see which one looks ready to take off. Among the indicators they look for are steady growth in revenues, increased market shares, increased earnings or decreased losses, and a management structure capable of handling additional growth.

JUST A MINUTE

Trying to figure out a volatile mid-cap stock can be frustrating, but it is highly rewarding when you find one ready to move.

JUST A MINUTE

The lesser known indexes usually tell a better story about the stocks they cover than the broader market indexes.

JUST A MINUTE

Sometimes a mid-cap stock will move up to the big leagues by merging with or buying a competitor. The resulting large-cap stock may solidify its position in the market.